<PAGE>
REGISTRATION NOS. 33-27958,811-5797
As filed with the Securities and Exchange Commission
on December 30, 1997
UNITED STATES
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. 27 /X/
-
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
-
Amendment No. 29 /X/
-
NORTH AMERICAN FUNDS
(Exact Name of Registrant as Specified in Charter)
286 Congress Street
Boston, Massachusetts 02210
(800) 872-8037
(Address of Principal Executive Offices)
John I. Fitzgerald, Esq.
General Counsel
North American Funds
286 Congress Street
Boston, MA 02210
(Agent for Service)
___________________
Approximate Date of Proposed Public Offering:
As soon as practicable after this
Registration Statement becomes effective.
Copy to:
Gregory D. Sheehan, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
It is proposed that this filing will become effective December 31, 1997 pursuant
to paragraph (b) of Rule 485.
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
NORTH AMERICAN FUNDS
CROSS-REFERENCE SHEET
REQUIRED BY RULE 481(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. Principal Holders of Securities
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
</TABLE>
N-1A Item of Part C
- -------------------
Part C is arranged by Item number.
<PAGE>
[Front outside cover of Prospectus]
98 PROSPECTUS
J.P. MORGAN INVESTMENT
MANAGEMENT INC.
MANUFACTURERS ADVISER
CORPORATION
SALOMON BROTHERS ASSET
MANAGEMENT INC
STANDISH, AYER & WOOD, INC.
WARBURG PINCUS ASSET MANAGEMENT, INC.
North American Funds December 31, 1997
WELLINGTON MANAGEMENT
COMPANY, LLP
MORGAN STANLEY ASSET
MANAGEMENT INC.
T. ROWE PRICE
ASSOCIATES, INC.
FOUNDERS ASSET
MANAGEMENT, INC.
FRED ALGER
MANAGEMENT, INC.
[LOGO]
<PAGE>
NORTH AMERICAN FUNDS
286 Congress Street, Boston, Massachusetts 02210
(800) 872-8037
North American Funds (the "Fund") is an open-end, management investment
company (mutual fund) providing a range of investment options through fifteen
separate investment portfolios (the "Portfolios"), each of which has a specific
investment objective. All of the Fund's Portfolios, except the Emerging Growth
Fund, are "diversified" for purposes of the Investment Company Act of 1940. This
Prospectus relates to the following portfolios of the Fund:
TAX-SENSITIVE EQUITY FUND
EMERGING GROWTH FUND
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
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 and its
Portfolios 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"
(the "Statement of Additional Information"), dated the date of this Prospectus.
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 NOR HAS THE 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, 1997.
<PAGE>
THE INVESTMENT OBJECTIVES AND CERTAIN POLICIES OF EACH PORTFOLIO ARE SET
FORTH BELOW.
TAX-SENSITIVE EQUITY FUND -- The investment objective of the Tax-Sensitive
Equity Fund is maximum after-tax total return, with an emphasis on long-term
growth of capital, through investment primarily in equity securities of
companies that appear to be undervalued. Standish, Ayer & Wood, Inc. manages the
Tax-Sensitive Equity Fund and will seek to pursue this objective by investing
primarily in publicly traded equity securities of United States companies, and,
to a lesser extent, of foreign issuers.
EMERGING GROWTH FUND -- The investment objective of the Emerging Growth
Fund is maximum capital appreciation Warburg Pincus Asset Management, Inc.
manages the Emerging Growth Fund and will pursue this objective by investing
primarily in a portfolio of equity securities of domestic companies. The
Emerging Growth Fund ordinarily will invest at least 65% of its total assets in
common stocks or warrants of emerging growth companies that represent attractive
opportunities for maximum capital appreciation.
INTERNATIONAL SMALL CAP FUND -- The investment objective of the
International Small Cap Fund is to seek long term capital appreciation. Founders
Asset Management, Inc. 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. Fred Alger Management, Inc. 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 Asset Management Inc. 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 Asset Management, Inc. 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. J.P. Morgan Investment Management Inc. manages the portfolio, which 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 Company, LLP 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
Associates, Inc. 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 Asset Management, Inc. 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, Salomon Brothers Asset Management Inc, broad discretion to deploy
the Strategic Income Fund's assets among certain segments of the fixed-income
market the Salomon Brothers Asset Management Inc. believes will best contribute
to the achievement of the portfolio's objective.
<PAGE>
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 Company, LLP
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.
Salomon Brothers Asset Management Inc manages the National Municipal Bond Fund
and seeks to achieve this objective, 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. Salomon
Brothers Asset Management Inc 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. Manufacturers Adviser Corporation 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>
TABLE OF CONTENTS
<S> <C>
SUMMARY....................................
The Fund..............................
Classes of Shares.....................
Fee Table and Example.................
FINANCIAL HIGHLIGHTS.......................
MULTIPLE PRICING SYSTEM....................
INVESTMENT PORTFOLIOS......................
Tax-Sensitive Equity Fund ............
Emerging Growth Fund .................
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-4
APPENDIX II................................ A-4
</TABLE>
<PAGE>
SUMMARY
THE FUND
The Fund is an open-end, management investment company organized as a
business trust under the laws of the Commonwealth of Massachusetts on September
28, 1988, whose separate Portfolios are "diversified" unless otherwise
indicated.
CypressTree Asset Management Corporation, Inc. ("CAM" or the "Adviser") is
the investment adviser for the Fund, and CypressTree Funds Distributors, Inc.
("CFD" or the "Distributor") serves as distributor for the Fund. CAM and CFD are
wholly-owned subsidiaries of CypressTree Investments, Inc. ("CypressTree"),
which is based in Boston, Massachusetts. CypressTree and its subsidiaries were
formed in 1996 to acquire, advise and distribute mutual funds through broker-
dealers, banks and other intermediaries. CypressTree's principals and equity
investors are experienced financial services and investment professionals with a
track record of building investment and operating companies.
CypressTree is an affiliate of Cypress Holding Company, Inc. ("Cypress
Holdings"), which is controlled by its management and by Berkshire Fund IV, L.P.
Cypress Holdings was founded in November of 1995 to acquire and create
investment management, marketing, distribution and operations enterprises.
The Adviser 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 ten
investment subadvisers which provide portfolio management services to all
Portfolios of the Fund (the "Subadviser(s)"):
<TABLE>
<CAPTION>
SUBADVISER SUBADVISER TO
---------- -------------
<S> <C>
Fred Alger Management, Inc. ("Alger") Small/Mid Cap Fund
Standish, Ayer & Wood, Inc. ("Standish") Tax-Sensitive Equity Fund
Warburg Pincus Asset Management, Inc. ("Warburg") Emerging Growth Fund
Founders Asset Management, Inc. ("Founders") Growth Equity Fund
Balanced Fund
International Small Cap Fund
Wellington Management Company, LLP Growth and Income Fund
("Wellington Management") Investment Quality Bond Fund
Salomon Brothers Asset Management Inc 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
("Morgan Stanley")
T. Rowe Price Associates, Inc. Equity-Income Fund
("T. Rowe Price")
</TABLE>
CFD 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."
1
<PAGE>
Each Portfolio has 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."
CLASSES OF SHARES
The Fund offers 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 are offered for sale at net asset value without a front end
sales charge, but subject to a contingent deferred sales charge (a "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 purchased on or after October 1, 1997 will
automatically convert to Class A shares of the same Portfolio eight 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 are subject to a 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 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.
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."
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:
2
<PAGE>
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 Reinvested Dividends
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 year 5% second year 0% after
............................................... 4% third year first
............................................... 3% fourth year 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.
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>
TAX-SENSITIVE EQUITY FUND
Management fees 0.850% 0.850% 0.850%
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) 1.600% 2.250% 2.250%
EMERGING GROWTH FUND
Management fees.................................... 0.950% 0.950% 0.950%
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)................................. 1.700% 2.350% 2.350%
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>
PORTFOLIO............................................ CLASS A CLASS B CLASS C
<S> <C> <C> <C>
SMALL/MID CAP FUND
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%
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
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
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%
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>
4
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO............................................ CLASS A CLASS B CLASS C
<S> <C> <C> <C>
INVESTMENT QUALITY BOND 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%
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).................. 0.250% 0.250% 0.250%
----- ----- -----
Total fund operating expenses*
(after fee waiver)................................. 1.000% 1.850% 1.850%
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% 0.000% 0.000%
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 Emerging Growth
Fund and the Tax-Sensitive Equity Fund) are based on the application of expense
limitations applicable during the most recent fiscal year. See "Advisory
Arrangements" below. Absent such expense limitations, other expenses and total
fund operating expenses, respectively, for each Portfolio's Class A, B and C
shares would have been: INTERNATIONAL SMALL CAP FUND Class A --1.060% and
2.460%, Class B -- 0.930% and 2.980%, Class C -- 0.910% and 2.960%; SMALL/MID
CAP FUND Class A -- 0.965% and 2.240%, Class B -- 0.865% and 2.790%, Class C --
0.855% and 2.780%; GLOBAL EQUITY FUND Class A -- 0.560% and 1.810%, Class B --
0.570% and 2.470%, Class C -- 0.560% and 2.460%; GROWTH EQUITY FUND Class A --
1.030% and 2.280%, Class B -- 0.880% and 2.780%, Class C 0.850% and 2.750%;
INTERNATIONAL GROWTH AND INCOME FUND Class A -- 0.710% and 1.960%, Class B --
0.640% and 2.540%, Class C -- 0.670% and 2.570%; GROWTH AND INCOME FUND Class
A--0.425% and 1.500%, Class B -- 0.425% and 2.150%, Class C -- 0.405% and
2.130%; EQUITY-INCOME FUND Class A -- 0.400% and 1.550%, Class B -- 0.410% and
2.210%, Class C 0.390% and 2.190%; BALANCED FUND Class A -- 0.465% and 1.590%,
Class B -- 0.455% and 2.230%, and Class C 0.425% and 2.200%; STRATEGIC INCOME
FUND Class A --0.510% and 1.610%, Class B -- 0.480% and 2.230%, Class C --0.490%
and 2.240%; INVESTMENT QUALITY BOND FUND Class A -- 0.670% and 1.620%, Class
B--0.730% and 2.330%, Class C -- 0.690% and 2.290%; NATIONAL MUNICIPAL BOND FUND
Class A --0.480% and 1.230%, Class B -- 0.550% and 2.150%, Class C --0.550% and
2.150%; U. S. GOVERNMENT SECURITIES FUND Class A -- 0.470% and 1.420%, Class
B --0.490% and 2.090%, Class C -- 0.490% and 2.090%; MONEY MARKET FUND Class
A --0.760% and 0.960%, Class B -- 0.850% and 1.050%, Class C --0.800% and
1.000%. Amounts listed under "Other expenses" and "Total fund operating
expenses" for the Emerging Growth Fund and the Tax-Sensitive Equity Fund 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. (the
"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
5
<PAGE>
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, 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:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
TAX-SENSITIVE EQUITY FUND
Class A Shares $63 $ 96
Class B Shares $73 $110
Class B No redemption $23 $ 70
Class C Shares $33 $ 70
Class C No redemption $23 $ 70
EMERGING GROWTH FUND
Class A Shares $64 $ 99
Class B Shares $74 $113
Class B No redemption $24 $ 73
Class C Shares $34 $ 73
EMERGING GROWTH FUND
Class C No redemption $24 $ 73
INTERNATIONAL SMALL CAP FUND
Class A Shares $66 $104 $145 $259
Class B Shares $76 $119 $156 $272
Class B No redemption $26 $ 79 $136 $272
Class C Shares $36 $ 79 $136 $289
Class C No redemption $26 $ 79 $136 $289
SMALL/MIDCAP FUND
Class A Shares $64 $100 $138 $224
Class B Shares $74 $115 $148 $257
Class B No redemption $24 $ 75 $128 $257
Class C Shares $34 $ 75 $128 $274
Class C No redemption $24 $ 75 $128 $274
GLOBAL EQUITY FUND
Class A Shares $64 $100 $138 $244
Class B Shares $74 $115 $148 $257*
Class B No redemption $24 $ 75 $128 $257*
Class C Shares $34 $ 75 $128 $274
Class C No redemption $24 $ 75 $128 $274
GROWTH EQUITY FUND
Class A Shares $63 $ 97 $133 $234
Class B Shares $73 $112 $143 $247
Class B No redemption $23 $ 72 $123 $247
Class C Shares $33 $ 72 $123 $264
Class C No redemption $23 $ 72 $123 $264
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
INTERNATIONAL GROWTH AND INCOME FUND
Class A Shares $64 $100 $138 $244
Class B Shares $74 $115 $148 $257*
Class B No redemption $24 $ 75 $128 $257*
Class C Shares $34 $ 75 $128 $274
Class C No redemption $24 $ 75 $128 $274
GROWTH AND INCOME FUND
Class A Shares $60 $ 88 $117 $201
Class B Shares $70 $102 $127 $215*
Class B No redemption $20 $ 62 $107 $215*
GROWTH AND INCOME FUND
Class C Shares $30 $ 62 $107 $232
Class C No redemption $20 $ 62 $107 $232
EQUITY-INCOME FUND
Class A Shares $61 $ 90 $121 $209
Class B Shares $71 $105 $131 $223*
Class B No redemption $21 $ 65 $111 $223*
Class C Shares $31 $ 65 $111 $239
Class C No redemption $21 $ 65 $111 $239
BALANCED FUND
Class A Shares $61 $ 89 $120 $206
Class B Shares $71 $104 $130 $220*
Class B No redemption $21 $ 64 $110 $220*
Class C Shares $31 $ 64 $110 $237
Class C No redemption $21 $ 64 $110 $237
STRATEGIC INCOME FUND
Class A Shares $62 $ 93 $125 $218
Class B Shares $72 $107 $135 $232*
Class B No redemption $22 $ 67 $115 $232*
Class C Shares $32 $ 67 $115 $248
Class C No redemption $22 $ 67 $115 $248
INVESTMENT QUALITY BOND FUND
Class A Shares $60 $ 85 $113 $191
Class B Shares $69 $100 $123 $205*
Class B No redemption $19 $ 60 $103 $205*
Class C Shares $29 $ 60 $103 $222
Class C No redemption $19 $ 60 $103 $222
NATIONAL MUNICIPAL BOND FUND
Class A Shares $57 $ 78 $100 $164
Class B Shares $69 $ 98 $120 $194*
Class B No redemption $19 $ 58 $100 $194*
Class C Shares $29 $ 58 $100 $217
Class C No redemption $19 $ 58 $100 $217
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES FUND
Class A Shares $60 $ 85 $113 $191
Class B Shares $69 $100 $123 $205*
Class B No redemption $19 $ 60 $103 $205*
Class C Shares $29 $ 60 $103 $222
Class C No redemption $19 $ 60 $103 $222
MONEY MARKET FUND
Class A Shares $ 5 $ 16 $ 28 $ 64
Class B Shares $ 5 $ 16 $ 28 $ 64
Class C Shares $ 5 $ 16 $ 28 $ 64
</TABLE>
* Reflects the conversion to Class A shares eight years after purchase;
therefore years nine and 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 Tax-Sensitive Equity Fund and the
Emerging Growth Fund 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 upon request and
without charge.
FINANCIAL HIGHLIGHTS
The following table presents per share financial information for Class A, B and
C shares. This information has been derived from the financial statements, which
have been audited and reported on by the independent accountants. The "Report of
independent accountants" and financial statements included in the Fund's annual
report to shareholders for the 1997 fiscal year are incorporated by reference
into this prospectus. The Fund's annual report, which contains additional
unaudited performance information, is available without charge upon request.
8
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- ---------------------------------------------------------------------------------------------------------------------------
International Small Cap Fund
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR 03/04/96* Year 03/04/96* Year 03/04/96*
ENDED TO ENDED TO ENDED TO
10/31/97 10/31/96 10/31/97 10/31/96 10/31/97 10/31/96
CLASS A CLASS A CLASS B CLASS B CLASS C CLASS C
-------- --------- -------- -------- -------- --------
Net asset value, beginning of period..................... $13.43 $12.50 $13.37 $12.50 $13.37 $12.50
Income from investment operations:
- ----------------------------------
Net investment income (loss) (B)......................... (0.03) 0.05 (0.11) (0.01) (0.11) (0.01)
Net realized and unrealized gain on investments
and foreign currency transactions...................... 0.46 0.88 0.45 0.88 0.45 0.88
---- ---- ---- ---- ----- -----
Total from investment
operations................................... 0.43 0.93 0.34 0.87 0.34 0.87
Net asset value, end of period........................... $13.86 $13.43 $13.71 $13.37 $13.71 $13.37
====== ====== ====== ====== ====== ======
Total return......................................... 3.20% 7.44%+ 2.54% 6.96%+ 2.54% 6.96%+
Net assets, end of period (000's)........................ $3,225 $2,120 $7,369 $5,068 $7,025 $5,517
Ratio of operating expenses
to average net assets (C).............................. 1.90% 1.90%(A) 2.55% 2.55%(A) 2.55% 2.55%(A)
Ratio of net investment income
(loss) to average net assets........................... (0.19%) 0.50%(A) (0.84%) (0.15%)(A) (0.84%) (0.15%)(A)
Portfolio turnover rate.................................. 75% 67%(A) 75% 67%(A) 75% 67%(A)
Average commission rate per share (D).................... $0.014 $0.016 $0.014 $0.016 $0.014 $0.016
</TABLE>
_____________________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement by the adviser of $0.09, $0.05 and $0.05 per
share for the International Small Cap Fund - Classes A, B and C
respectively, for the year ended October 31, 1997 and $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
2.46%, 2.98% and 2.96% for the International Small Cap Fund, Classes A, B
and C respectively, for the year ended October 31, 1997 and 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.
9
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- ---------------------------------------------------------------------------------------------------------------------------------
SMALL/MID CAP FUND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR 03/04/96* YEAR 03/04/96* YEAR 03/04/96*
ENDED TO ENDED TO ENDED TO
10/31/97 10/31/96 10/31/97** 10/31/96 10/31/97** 10/31/96
CLASS A CLASS A CLASS B CLASS B CLASS C CLASS C
----------- ----------- ------------ ----------- ------------ -----------
Net asset value, beginning of period.. $12.62 $12.50 $12.58 $12.50 $12.59 $12.50
Income from investment operations:
- --------------------------------------
Net investment loss (B)............... (0.14) (0.02) (0.23) (0.05) (0.23) (0.05)
Net realized and unrealized gain
on investments...................... 3.03 0.14 2.98 0.13 2.99 0.14
------ ------ ------ ------ ------ ------
Total from investment
operations................ 2.89 0.12 2.75 0.08 2.76 0.09
Net asset value, end of period........ $15.51 $12.62 $15.33 $12.58 $15.35 $12.59
====== ====== ====== ====== ====== ======
Total return...................... 22.90% 0.96%+ 21.86% 0.64%+ 21.92% 0.72%+
Net assets, end of period (000's)..... $4,170 $2,966 $11,802 $6,659 $13,471 $8,241
Ratio of operating expenses
to average net assets (C)........... 1.675% 1.675%(A) 2.325% 2.325%(A) 2.325% 2.325%(A)
Ratio of net investment loss
to average net assets............... (1.02%) (0.40%)(A) (1.67%) (1.05%)(A) (1.67%) (1.05%)(A)
Portfolio turnover rate............... 145% 92%(A) 145% 92%(A) 145% 92%(A)
Average commission rate per share (D). $0.070 $0.069 $0.070 $0.069 $0.070 $0.069
- -----------------------------
</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 $0.08, $0.06 and $0.06 per
share for the Small/Mid Cap Fund - Classes A, B and C respectively, for the
year ended October 31, 1997 and $0.06, $0.03 and $0.03 per share for the
Small/Mid Cap Fund - Classes A, B and C respectively, for the period March
4, 1996 (commencement of operations) to October 31, 1996 .
(C) The ratio of operating expenses, before reimbursement by the adviser, was
and 2.24%, 2.79% and 2.78% for the Small/Mid Cap Fund, Classes A, B and C
respectively, for the year ended October 31, 1997 and 2.69%, 3.05% and 3.04%
for the Small/Mid Cap Fund, Classes A, B and C respectively, for the period
March 4, 1996 (commencement of operations) to October 31, 1996 on an
annualized basis.
(D) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share of all security trades on
which commissions are charged.
10
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND
(formerly, the Global Growth Fund)
---------------------------------------------------------------------------------------
Year Year Year 04/01/94* Year Year Year 04/01/94*
Ended Ended Ended To Ended Ended Ended To
10/31/97 10/31/96** 10/31/95 10/31/94 10/31/97** 10/31/96** 10/31/95** 10/31/94
Class A Class A Class A Class A Class B Class B Class B Class B
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...$ 14.50 $ 13.84 $ 14.82 $ 14.13 $ 14.36 $ 13.73 $ 14.79 $ 14.13
Income (loss) from investment operations
- ----------------------------------------
Net investment income (loss) (B)....... 0.06 (0.04) ------ (0.01) (0.05) (0.14) (0.09) (0.03)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions....................... 3.45 0.91 (0.54) 0.70 3.47 0.91 (0.53) 0.69
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations................. 3.51 0.87 (0.54) 0.69 3.42 0.77 (0.62) 0.66
Less distributions
- ------------------
Dividends from net investment income... (0.05) (0.21) ------ ------ ------ (0.14) ------ ------
Distributions from capital gains....... (1.64) ------ (0.44) ------ (1.64) ------ (0.44) ------
------- ------- ------- ------- ------- ------- ------- -------
Total distributions.......... (1.69) (0.21) (0.44) ------ (1.64) (0.14) (0.44) ------
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period.........$ 16.32 $ 14.50 $ 13.84 $ 14.82 $ 16.14 $ 14.36 $ 13.73 $ 14.79
======= ======= ======= ======= ======= ======= ======= =======
Total return................. 26.10% 6.33% (3.52%) 9.16%(E) 25.63% 5.64% (4.09%) 8.94%(E)
Net assets, end of period (000's)......$30,960 $25,924 $23,894 $18,152 $31,833 $25,661 $23,317 $13,903
Ratio of operating expenses
to average net assets (C)............ 1.75% 1.75% 1.75% 1.75%(A) 2.40% 2.40% 2.40% 2.40%(A)
Ratio of net investment income
(loss) to average net assets......... 0.33% (0.30%) 0.03% (0.12%)(A) (0.32%) (0.95%) (0.61%) (0.77%)(A)
Portfolio turnover rate................ 28% 165% 57% 54% 28% 165% 57% 54%
Average commission rate per share (D)..$ 0.036 $ 0.016 N/A N/A $ 0.036 $ 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, $0.01, $0.02 and $0.01
per share for the Global Equity Fund - Class A and $0.01, $0.01, $0.02 and
$0.01 per share for the Global Equity Fund - Class B, for the years ended
October 31, 1997, 1996 and 1995 and the period April 1, 1994 to October 31,
1994, respectively.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.81%, 1.83%, 1.92% and 1.97% for the Global Equity Fund - Class A and
2.47%, 2.48%, 2.58% and 2.71% for the Global Equity Fund - Class B, for the
years ended October 31, 1997, 1996 and 1995 and the period April 1, 1994 to
October 31, 1994 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. 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.
11
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND - CLASS C
(formerly, the Global Growth Fund - Class C)
--------------------------------------------------------------------------------------
Years Ended OCTOBER 31,
--------------------------------------------------------------------------------------
1997** 1996** 1995** 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 14.41 $ 13.73 $ 14.79 $ 13.74 $ 10.33 $ 10.76 $10.12
Income (loss) from investment operations
- ----------------------------------------
Net investment income (loss) (A)....... (0.05) (0.14) (0.09) (0.10) (0.01) (0.02) 0.25
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions....................... 3.47 0.92 (0.53) 1.15 3.43 (0.37) 0.63
------- ------- ------- -------- ------- ------- ------
Total from investment
operations................. 3.42 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....... (1.64) -- (0.44) -- -- -- --
Distributions from capital............. -- -- -- -- -- (0.04) --
------- ------- ------- -------- ------- ------- ------
Total distributions.......... (1.64) (0.10) (0.44) -- (0.01) (0.04) (0.24)
------- ------- ------- -------- ------- ------- ------
Net asset value, end of period......... $ 16.19 $ 14.41 $ 13.73 $ 14.79 $ 13.74 $ 10.33 $10.76
======= ======= ======= ======== ======= ======= ======
Total return................. 25.54% 5.70% (4.09%) 8.94% 33.06% (3.57%) 8.80%
Net assets, end of period (000's)...... $61,245 $64,830 $83,340 $101,443 $63,503 $14,291 $8,828
Ratio of operating expenses
to average net assets (B)............ 2.40% 2.40% 2.40% 2.40% 2.40% 2.52% 1.47%
Ratio of net investment income
(loss) to average net assets......... (0.32%) (0.95%) (0.64%) (0.91%) (0.40%) (0.27%) 1.41%
Portfolio turnover rate................ 28% 165% 57% 54% 57% 69% 70%
Average commission rate per share (C) $0.036 $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) After expense reimbursement by the adviser of $0.01, $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, 1997, 1996, 1995, 1994, 1993, 1992 and 1991,
respectively.
(B) The ratio of operating expenses, before reimbursement by the adviser, was
2.46%, 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, 1997, 1996, 1995, 1994, 1993,
1992 and 1991, respectively.
(C) 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.
12
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
GROWTH EQUITY FUND
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR 03/04/96* YEAR 03/04/96* YEAR 03/04/96*
ENDED TO ENDED TO ENDED TO
10/31/97 10/31/96 10/31/97 10/31/96 10/31/97 10/31/96
CLASS A CLASS A CLASS B CLASS B CLASS C CLASS C
Net asset value, beginning of period............. $13.78 $12.50 $13.73 $12.50 $13.73 $12.50
Income from investment operations:
- ---------------------------------
Net investment income (loss) (B)................. (0.03) 0.28 (0.13) 0.24 (0.13) 0.24
Net realized and unrealized gain on investments.. 3.45 1.00 3.46 0.99 3.46 0.99
------ -------- ------ ------- ------- -------
Total from investment
operations........................... 3.42 1.28 3.33 1.23 3.33 1.23
Less Distributions
- ------------------
Dividends from net investment income............. (0.19) ------ (0.16) ------ (0.17) ------
------ ----- -----
Net asset value, end of period................... $17.01 $13.78 $16.90 $13.73 $16.89 $13.73
====== ======== ====== ======= ======= =======
Total return........................... 25.13% 10.24%+ 24.50% 9.84%+ 24.50% 9.84%+
Net assets, end of period (000's)................ $3,053 $2,244 $9,040 $4,748 $12,766 $6,494
Ratio of operating expenses
to average net assets (C)...................... 1.65% 1.65%(A) 2.30% 2.30%(A) 2.30%(A) 2.30%(A)
Ratio of net investment income
(loss) to average net assets................... (0.17%) 4.11%(A) (0.82%) 4.18%(A) (0.82%) 4.13%(A)
Portfolio turnover rate.......................... 181% 450%(A) 181% 450%(A) 181% 450%(A)
Average commission rate per share (D)............ $0.062 $0.043 $0.062 $0.043 $0.062 $0.043
</TABLE>
_____________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement by the adviser of $0.10, $0.07 and $0.07 per
share for the Growth Equity Fund - Classes A, B and C respectively, for the
year ended October 31, 1997 and $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
2.28%, 2.78% and 2.75% for the Growth Equity Fund, Classes A, B and C
respectively, for the year ended October 31, 1997 and 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.
13
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
International Growth and Income Fund
-----------------------------------------------------------------------------------------
Year Year 01/09/95* Year Year 01/09/95* Year Year 01/09/95*
nded Ended To Ended Ended To Ended Ended To
10/31/97 10/31/96** 10/31/95 10/31/97** 10/31/96** 10/31/95 10/31/97** 10/31/96** 10/31/95
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..........................$11.35 $10.11 $ 10.00 $ 11.30 $ 10.10 $ 10.00 $11.31 $10.10 $ 10.00
Income from investment operations:
- ----------------------------------
Net investment income (B)......... 0.06 0.09 0.06 0.03 0.06 0.01 0.03 0.06 0.01
Net realized and unrealized gain on
investments and foreign currency
transactions.................... 0.35 1.33 0.08 0.31 1.30 0.12 0.31 1.30 0.12
------ ------ ------- ------- ------- ------- ------ ------ -------
Total from investment
operations............ 0.41 1.42 0.14 0.34 1.36 0.13 0.34 1.36 0.13
Less distributions
- ----------------------------------
Dividends from net investment
income.......................... (0.19) (0.08) (0.03) (0.13) (0.05) (0.03) (0.13) (0.05) (0.03)
Distributions from capital gains.. (0.76) (0.10) ------ (0.76) (0.11) ------ (0.76) (0.10) ------
------ ------ ------- ------- ------- ------- ------ ------ -------
Total distributions..... (0.95) (0.18) (0.03) (0.89) (0.16) (0.03) (0.89) (0.15) (0.03)
------ ------ ------- ------- ------- ------- ------ ------ -------
Net asset value, end of period....$10.81 $11.35 $ 10.11 $ 10.75 $ 11.30 $ 10.10 $10.76 $11.31 $ 10.10
====== ====== ======= ======= ======= ======= ====== ====== =======
Total return............ 3.55% 14.25% 1.37%+ 2.92% 13.58% 1.28%+ 2.91% 13.63% 1.28%+
Net assets, end of period (000's).$4,461 $4,732 $ 6,897 $16,334 $15,217 $ 8,421 $8,460 $9,076 $ 6,324
Ratio of operating expenses
to average net assets (C)....... 1.75% 1.75% 1.75%(A) 2.40% 2.40% 2.40%(A) 2.40% 2.40% 2.40%(A)
Ratio of net investment income
to average net assets........... 0.97% 0.84% 0.70%(A) 0.32% 0.57% 0.15%(A) 0.32% 0.51% 0.13%(A)
Portfolio turnover rate........... 146% 170% 69%(A) 146% 170% 69%(A) 146% 170% 69%(A)
Average commission rate
per share (D)...................$0.004 $0.022 N/A $0.004 $0.022 N/A $0.004 $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 $0.01, $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, 1997, $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
1.96%, 2.54% and 2.57% for the International Growth and Income Fund, Classes
A, B and C respectively, for the year ended October 31, 1997, 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.
14
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- ---------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR YEAR YEAR 04/01/94* YEAR YEAR YEAR 04/01/94*
ENDED ENDED ENDED TO ENDED ENDED ENDED TO
10/31/97 10/31/96 10/31/95** 10/31/94 10/31/97 10/31/96** 10/31/95** 10/31/94
CLASS A CLASS A CLASS A CLASS A CLASS B CLASS B CLASS B CLASS B
-------- -------- --------- -------- -------- --------- ---------- ---------
Net asset value, beginning of period.. $17.56 $14.72 $13.09 $12.29 $17.50 $14.69 $13.08 $12.29
Income from investment operations
- ---------------------------------
Net investment income (B)............. 0.14 0.18 0.26 0.12 0.01 0.07 0.16 0.10
Net realized and unrealized gain
on investments...................... 5.26 2.99 1.90 0.76 5.23 2.99 1.94 0.77
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ 5.40 3.17 2.16 0.88 5.24 3.06 2.10 0.87
Less distributions
- ------------------
Dividends from net investment income.. (0.15) (0.21) (0.23) (0.08) (0.03) (0.13) (0.19) (0.08)
Distributions from capital gains...... (1.04) (0.12) (0.30) ----- (1.04) (0.12) (0.30) -----
------ ------ ------ ------ ------ ------ ------ ------
Total distributions......... (1.19) (0.33) (0.53) (0.08) (1.07) (0.25) (0.49) (0.08)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period........ $21.77 $17.56 $14.72 $13.09 $21.67 $17.50 $14.69 $13.08
====== ====== ====== ====== ====== ====== ====== ======
Total return................ 31.95% 21.84% 17.28% 5.06%(E) 31.40% 21.08% 16.73% 4.98%(E)
Net assets, end of period (000's)..... $34,186 $18,272 $12,180 $8,134 $54,871 $34,740 $19,052 $3,885
Ratio of operating expenses
to average net assets (C)........... 1.34% 1.34% 1.34% 1.34%(A) 1.99% 1.99% 1.99% 1.99%(A)
Ratio of net investment income
to average net assets............... 0.66% 1.10% 1.91% 1.72%(A) 0.01% 0.45% 1.14% 1.07%(A)
Portfolio turnover rate............... 39% 49% 40% 45% 39% 49% 40% 45%
Average commission rate per share (D). $0.054 $0.055 N/A N/A $0.054 $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, $0.03, $0.05 and $0.05
per share for the Growth and Income Fund - Class A and $0.30, $0.03, $0.05
and $0.12 per share for the Growth and Income Fund - Class B, for the years
ended October 31, 1997, 1996, 1995 and the period April 1, 1994 to October
31, 1994, respectively.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.50%, 1.56%, 1.69% and 2.08% for the Growth and Income Fund - Class A and
2.15%, 2.20%, 2.33% and 3.12% for the Growth and Income Fund - Class B, for
the years ended October 31, 1997, 1996 and 1995 and the period April 1, 1994
to October 31, 1994 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.
(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.
15
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund - Class C
-------------------------------------------------------------
Years Ended October 31, 05/01/91*
------------------------------------------------------ To
1997 1996 1995 1994 1993 1992 10/31/91
------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.. $17.56 $14.71 $13.08 $12.71 $11.21 $10.51 $10.00
Income from investment operations
- ---------------------------------
Net investment income (B)............. 0.01 0.07 0.18 0.15 0.14 0.18 0.11
Net realized and unrealized gain
on investments...................... 5.25 3.00 1.90 0.46 1.48 0.70 0.47
------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ 5.26 3.07 2.08 0.61 1.62 0.88 0.58
Less distributions
- ------------------
Dividends from net investment income.. (0.03) (0.10) (0.15) (0.13) (0.12) (0.18) (0.07)
Distributions from capital gains...... (1.04) (0.12) (0.30) (0.11) ----- ----- -----
------ ------ ------ ------ ------ ------ ------
Total distributions......... (1.07) (0.22) (0.45) (0.24) (0.12) (0.18) (0.07)
------- ------- ------- ------- ------- ------- --------
Net asset value, end of period........ $ 21.75 $ 17.56 $ 14.71 $ 13.08 $ 12.71 $ 11.21 $ 10.51
======= ======= ======= ======= ======= ======= ========
Total return................ 31.37% 21.12% 16.56% 4.85% 14.57% 8.42% 5.88% +
Net assets, end of period (000's)..... $98,250 $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% 1.99% 1.94% 1.85%(A)
Ratio of net investment income
to average net assets............... 0.01% 0.45% 1.26% 1.11% 1.12% 1.51% 2.05%(A)
Portfolio turnover rate............... 39% 49% 40% 45% 37% 48% 111%(A)
Average commission rate per share (D). $ 0.054 $ 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, $0.03,
$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, 1997, 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 2.13%, 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, 1997, 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.
16
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
EQUITY-INCOME FUND
(formerly, the Value Equity Fund, formerly, the Growth Fund)
------------------------------------------------------------------------------------
Year Year Year 04/01/94* Year Year Year 04/01/94*
Ended Ended Ended to Ended Ended Ended to
10/31/97 10/31/96 10/31/95** 10/31/94 10/31/97 10/31/96 10/31/95** 10/31/94
Class A Class A Class A Class A Class B Class B Class B Class B
-------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $17.37 $15.94 14.78 $14.59 $17.22 $15.84 14.77 $14.59
Income from investment operations
- ---------------------------------
Net investment income (loss) (B).......... 0.33 0.16 0.12 0.02 0.23 0.06 0.02 (0.02)
Net realized and unrealized gain
on investments.......................... 3.59 2.69 1.83 0.17 3.54 2.69 1.84 0.20
------ ------ ----- ------ ------ ------ ----- ------
Total from investment
operations.................... 3.92 2.85 1.95 0.19 3.77 2.75 1.86 0.18
Less distributions
- ------------------
Distributions from net investment income.. (0.18) (0.14) ------ ------ (0.08) (0.09) ------ -----
Distributions from capital gains.......... (3.67) (1.28) (0.79) ------ (3.67) (1.28) (0.79) -----
------- ------- ------- ------- ------- ------- ------- ------
Total distributions............. (3.85) (1.42) (0.79) ------ (3.75) (1.37) (0.79) -----
------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of period............ $ 17.44 $ 17.37 $ 15.94 $ 14.78 $ 17.24 $ 17.22 $ 15.84 $14.77
======= ======= ======= ======= ======= ======= ======= ======
Total return.................... 27.24% 19.23% 14.22% 4.82%(E) 26.29% 18.59% 13.58% 4.75%(E)
Net assets, end of period (000's)......... $36,334 $28,470 $22,026 $16,326 $36,191 $27,058 $19,874 $5,054
Ratio of operating expenses
to average net assets (C)............... 1.34% 1.34% 1.34% 1.34%(A) 1.99% 1.99% 1.99% 1.99%(A)
Ratio of net investment income
(loss) to average net assets............ 2.01% 0.98% 0.79% 0.13%(A) 1.36% 0.33% 0.13% (0.52%)(A)
Portfolio turnover rate................... 36% 169% 54% 39% 36% 169% 54% 39%
Average commission rate per share (D)..... $ 0.037 $ 0.053 N/A N/A $ 0.037 $ 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, $0.04, $0.04 and $0.06
per share for the Equity-Income Fund - Class A and $0.04, $0.04, $0.05 and
$0.03 per share for the Equity-Income Fund - Class B, for the years ended
October 31, 1997, 1996 and 1995 and the period April 1, 1994 to October 31,
1994, respectively.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.55%, 1.55%, 1.62% and 1.79% for the Equity-Income Fund - Class A and
2.21%, 2.20%, 2.32% and 2.82% for the Equity-Income Fund - Class B, for the
years ended October 31, 1997, 1996 and 1995 the period April 1, 1994 to
October 31, 1994 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.
(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.
17
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
EQUITY-INCOME FUND - CLASS C
(formerly, the Value Equity Fund - Class C, formerly, the Growth Fund - Class C)
-----------------------------------------------------------------------------------------
Year Ended October 31, 08/28/89*
----------------------------------------------------------------------------- to
1997 1996 1995** 1994 1993 1992 1991 1990 10/31/89
------ ------ ------ ------ ------ ------ ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $17.27 $15.84 $14.77 $14.21 $12.05 $10.70 $ 8.22 $11.19 $12.25
Income (loss) from investment
operations
- -----------------------------
Net investment income (loss) (B).. 0.23 0.06 0.02 (0.07) 0.01 (0.01) 0.02 0.05 0.01
Net realized and unrealized gain
(loss) on investments........... 3.56 2.69 1.84 0.74 2.15 1.37 2.54 (2.39) (1.07)
------- ------- ------- ------- ------- ------- ------- ------- ---------
Total from investment
operations............ 3.79 2.75 1.86 0.67 2.16 1.36 2.56 (2.34) (1.06)
Less distributions
- ------------------
Dividends from net investment
income.......................... (0.06) (0.04) ------ (0.03) ------ ------ (0.03) (0.05) ------
Distributions from capital gains.. (3.67) (1.28) (0.79) (0.08) ------ ------ ------ (0.58) ------
Distributions from capital........ ------ ------ ------ ------ ------ (0.01) (0.05) ------ ------
------- ------- ------- ------- ------- ------- ------- ------- ---------
Total distributions..... (3.73) (1.32) (0.79) (0.11) ------ (0.01) (0.08) (0.63) ------
------- ------- ------- ------- ------- ------- ------- ------- ---------
Net asset value, end of period....$ 17.33 $ 17.27 $ 15.84 $ 14.77 $ 14.21 $ 12.05 $ 10.70 $ 8.22 $ 11.19
======= ======= ======= ======= ======= ======= ======= ======= =========
Total return............ 26.33% 18.53% 13.58% 4.75% 17.93% 12.75% 31.32% (22.16%) (8.65%)+
Net assets, end of period (000's).$94,649 $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% 1.99% 2.47% 2.97% 2.85% 2.57%(A)
Ratio of net investment income
(loss) to average net assets.... 1.36% 0.33% 0.15% (0.49%) 0.27% (0.15%) 0.27% 0.43% 0.37%(A)
Portfolio turnover rate........... 36% 169% 54% 39% 40% 91% 37% 58% 65%(A)
Average commission rate
per share (D)...................$ 0.037 $ 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, $0.03,
$0.04, $0.04, $0.02, $0.05 and $0.01 per share for the Equity-Income Fund -
Class C for the years ended October 31, 1997, 1996, 1995, 1994, 1993, 1992
and 1991, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 2.19%, 2.20%, 2.23%, 2.29%, 2.35%, 3.00% and 3.12% for the
Equity- Income Fund - Class C for the year ended October 31, 1997 and 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.
18
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCED FUND
(formerly, the Asset Allocation Fund)
-----------------------------------------------------------------------------------------------------
YEAR YEAR YEAR 04/01/94* YEAR YEAR YEAR 04/01/94*
ENDED ENDED ENDED TO ENDED ENDED ENDED TO
10/31/97 10/31/96** 10/31/95** 10/31/94 10/31/97** 10/31/96** 10/31/95** 10/31/94
CLASS A CLASS A CLASS A CLASS A CLASS B CLASS B CLASS B CLASS B
-------- --------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $12.33 $12.02 $11.13 $11.06 $12.26 $11.98 $11.12 $11.06
Income (loss) from investment operations
- ------------------------------------------
Net investment income (B)................. 0.34 0.39 0.38 0.17 0.25 0.31 0.30 0.12
Net realized and unrealized gain
(loss) on investments................... 1.52 1.07 1.35 (0.10) 1.53 1.07 1.36 (0.06)
------- ------- ------- ------ ------- ------- ------ ------
Total from investment
operations.................... 1.86 1.46 1.73 0.07 1.78 1.38 1.66 0.06
Less distributions
- ------------------------------------------
Dividends from net investment income...... (0.45) (0.40) (0.32) ----- (0.39) (0.35) (0.28) -----
Distributions from capital gains.......... (1.16) (0.75) (0.52) ----- (1.16) (0.75) (0.52) -----
------- ------- ------- ------ ------- ------- ------ ------
Total distributions............. (1.61) (1.15) (0.84) ----- (1.55) (1.10) (0.80) -----
------- ------- ------- ------ ------- ------- ------ ------
Net asset value, end of period............ $ 12.58 $ 12.33 $ 12.02 $11.13 $ 12.49 $ 12.26 $11.98 $11.12
======= ======= ======= ====== ======= ======= ====== ======
Total return.................... 17.01% 13.10% 16.95% 0.76%(E) 16.27% 12.35% 16.31% 0.67%(E)
Net assets, end of period (000's)......... $12,294 $10,873 $10,033 $7,830 $17,140 $16,219 $9,875 $4,760
Ratio of operating expenses
to average net assets (C)............... 1.34% 1.34% 1.34% 1.34%(A) 1.99% 1.99% 1.99% 1.99%(A)
Ratio of net investment income
to average net assets................... 2.74% 3.32% 3.39% 2.72%(A) 2.09% 2.67% 2.69% 2.07%(A)
Portfolio turnover rate................... 211% 253% 226% 246% 211% 253% 226% 246%
Average commission rate per share (D)..... $ 0.062 $ 0.059 N/A N/A $ 0.062 $ 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 $0.03, $0.02, $0.04 and $0.03
for the Balanced Fund - Class A and $0.03, $0.02, $0.04 and $0.04 for the
Balanced Fund - Class B, for the years ended October 31, 1997, 1996 and 1995
and the period April 1, 1994 to October 31, 1994, respectively.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.59%, 1.55%, 1.69% and 1.86% for the Balanced Fund - Class A and 2.23%,
2.20%, 2.37% and 2.73% for the Balanced Fund - Class B, for the years ended
October 31, 1997, 1996 and 1995 and the period April 1, 1994 to October 31,
1994 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.
(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.
19
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCED FUND - CLASS C
(formerly, the Asset Allocation Fund - Class C)
--------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 08/28/89*
--------------------------------------------------------------------------------- TO
1997** 1996** 1995** 1994 1993 1992 1991 1990 10/31/89
------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $ 12.35 $ 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)................. 0.25 0.32 0.31 0.22 0.21 0.20 0.27 0.32 0.05
Net realized and unrealized gain
(loss) on investments................... 1.54 1.07 1.35 (0.15) 1.30 0.87 1.70 (1.66) (0.38)
------- ------- ------- ------- ------- ------- ------- ------- --------
Total from investment
operations.................... 1.79 1.39 1.66 0.07 1.51 1.07 1.97 (1.34) (0.33)
Less distributions
- ------------------
Dividends from net investment income...... (0.36) (0.31) (0.24) (0.18) (0.09) (0.19) (0.33) (0.26) ------
Distributions from capital gains.......... (1.16) (0.75) (0.52) (0.29) (0.10) (0.44) ------ ------ ------
Distributions from capital................ ------- ------- ------- ------- ------- ------- ------- (0.12) ------
------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions............. (1.52) (1.06) (0.76) (0.47) (0.19) (0.63) (0.33) (0.38) ------
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period............ $ 12.62 $ 12.35 $ 12.02 $ 11.12 $ 11.52 $ 10.20 $ 9.76 $ 8.12 $ 9.84
======= ======= ======= ======= ======= ======= ======= ======= =======
Total return.................... 16.21% 12.41% 16.25% 0.67% 15.02% 11.25% 24.53% (13.97%) (3.24%)+
Net assets, end of period (000's)......... $68,261 $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% 1.99% 2.40% 2.88% 2.63% 2.13%(A)
Ratio of net investment income
to average net assets................... 2.09% 2.67% 2.76% 1.93% 1.96% 1.93% 2.77% 3.34% 3.09%(A)
Portfolio turnover rate................... 211% 253% 226% 246% 196% 171% 84% 73% 84%(A)
Average commission rate per share (D)..... $ 0.062 $ 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 $0.03, $0.01,
$0.03, $0.04, $0.03 and $0.04 for the Balanced Fund - Class C for the years
ended October 31, 1997, 1996, 1995, 1994, 1993 and 1992, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 2.20%, 2.20%, 2.24%, 2.22%, 2.28% and 2.89% for the Balanced
Fund - Class C for the years ended October 31, 1997, 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.
20
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund - Class A
--------------------------------------
Years Ended October 31, 11/01/93*
--------------------------- to
1997 1996 1995 10/31/94
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period...... $ 9.80 $ 9.07 $ 8.90 $ 10.00
Income (loss) from investment operations
- ----------------------------------------
Net investment income (A)................. 0.70 0.80 0.78 0.65
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions.......................... 0.28 0.72 0.18 (1.10)
------- ------- ------- -------
Total from investment
operations.................... 0.98 1.52 0.96 (0.45)
Less distributions
- ------------------
Dividends from net investment income...... (0.84) (0.79) (0.79) (0.65)
Distributions from capital gains.......... (0.18) ------ ------ ------
------- ------- ------- -------
Total distributions.................. (1.02) (0.79) (0.79) (0.65)
------- ------- ------- -------
Net asset value, end of period............ $ 9.76 $ 9.80 $ 9.07 $ 8.90
======= ======= ======= =======
Total return.................... 10.57% 17.35% 11.43% (3.79%)
Net assets, end of period (000's)......... $15,924 $13,382 $10,041 $15,507
Ratio of operating expenses
to average net assets (B)............... 1.50% 1.50% 1.07% 0.41%
Ratio of net investment income
to average net assets................... 7.25% 8.28% 9.08% 8.26%
Portfolio turnover rate................... 193% 68% 180% 136%
</TABLE>
______________________________
* Commencement of operations
(A) After expense reimbursement and waiver by the adviser of $0.01, $0.01, $0.05
and $0.04 per share for the Strategic Income Fund - Class A for the years
ended October 31, 1997, 1996, 1995 and 1994, respectively.
(B) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 1.61%, 1.65%, 1.69% and 0.96% for the Strategic Income Fund -
Class A for the years ended October 31, 1997, 1996, 1995 and 1994,
respectively.
21
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
STRATEGIC INCOME FUND
---------------------------------------------------------------------------------
Year Year Year 04/01/94* Year Year Year 4/1/94*
Ended Ended Ended to Ended Ended Ended to
10/31/97 10/31/96 10/31/95 10/31/94 10/31/97 10/31/96 10/31/95 10/31/94
Class B Class B Class B Class B Class C Class C Class C Class C
-------- -------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period......................... $ 9.80 $ 9.07 $ 8.90 $ 9.31 $ 9.80 $ 9.07 $ 8.90 $ 9.31
Income (loss) from investment
operations
- -----------------------------
Net investment income (B)........... 0.64 0.73 0.73 0.38 0.64 0.73 0.73 0.38
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions....... 0.28 0.73 0.17 (0.41) 0.28 0.73 0.17 (0.41)
------- ------- ------- ------ ------- ------- ------- ------
Total from investment
operations.............. 0.92 1.46 0.90 (0.03) 0.92 1.46 0.90 (0.03)
Less distributions
- ------------------
Dividends from net investment
income............................ (0.78) (0.73) (0.73) (0.38) (0.78) (0.73) (0.73) (0.38)
Distributions from capital
gains............................. (0.18) ------ ------ ----- (0.18) ------ ------ -----
------- ------- ------- ------ ------- ------- ------- ------
Total distributions............ (0.96) (0.73) (0.73) (0.38) (0.96) (0.73) (0.73) (0.38)
------- ------- ------- ------ ------- ------- ------- ------
Net asset value, end of period...... $ 9.76 $ 9.80 $ 9.07 $ 8.90 $ 9.76 $ 9.80 $ 9.07 $ 8.90
======= ======= ======= ====== ======= ======= ======= ======
Total return.............. 9.86% 16.59% 10.72% (4.18%)(D) 9.86% 16.59% 10.72% (4.20%)(D)
Net assets, end of period (000's)... $34,590 $30,890 $20,672 $5,440 $32,683 $22,783 $14,273 $8,439
Ratio of operating expenses
to average net assets (C)......... 2.15% 2.15% 1.95% 1.00%(A) 2.15% 2.15% 1.95% 1.00%(A)
Ratio of net investment income
to average net assets............. 6.60% 7.63% 8.10% 8.59%(A) 6.60% 7.63% 8.25% 8.59%(A)
Portfolio turnover rate............. 193% 68% 180% 136% 193% 68% 180% 136%
</TABLE>
______________________________
* Commencement of operations
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.01, $0.01, $0.04
and $0.05 for the Strategic Income Fund - Class B and $0.01, $0.01, $0.05
and $0.04 for the Strategic Income Fund - Class C, for the years ended
October 31, 1997, 1996 and 1995 and the period April 1, 1994 to October 31,
1994, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 2.23%, 2.27%, 2.38% and 2.04% for the Strategic Income Fund -
Class B and 2.24%, 2.28%, 2.37% and 1.96% for the Strategic Income Fund -
Class C, for the years ended October 31, 1997, 1996 and 1995 and the period
April 1, 1994 to October 31, 1994 on an annualized basis, respectively.
(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.
22
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
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
1997 1996 1995 1994 1993 1992 10/31/91
------ ------ ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $10.34 $10.56 $ 9.74 $ 11.16 $ 10.56 $10.26 $ 10.00
Income (loss) from investment operations
- ------------------------------------------
Net investment income (B)................. 0.67 0.66 0.68 0.60 0.66 0.82 0.40
Net realized and unrealized gain (loss)
on investments.......................... 0.18 (0.20) 0.82 (1.37) 0.64 0.27 0.30
------ ------ ------- ------- ------- ------ -------
Total from investment
operations.................... 0.85 0.46 1.50 (0.77) 1.30 1.09 0.70
Less distributions
- ------------------
Dividends from net investment income...... (0.67) (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............. (0.67) (0.68) (0.68) (0.65) (0.70) (0.79) (0.44)
------ ------ ------- ------- ------- ------ -------
Net asset value, end of period............ $10.52 $10.34 $ 10.56 $ 9.74 $ 11.16 $10.56 $ 10.26
Total return.................... 8.57% 4.52% 15.91% (7.08%) 12.66% 11.00% 7.21%+
Net assets, end of period (000's)......... $7,110 $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% 1.25% 0.98% 0.00% 0.00%(A)
Ratio of net investment income
to average net assets................... 6.54% 6.37% 6.72% 5.86% 5.82% 7.76% 7.08%(A)
Portfolio turnover rate................... 65% 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 $0.04, $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, 1997, 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 1.62%, 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, 1997,
1996, 1995, 1994, 1993 and 1992 and the period May 1, 1991 (commencement of
operations) to October 31, 1991 on an annualized basis, respectively.
23
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- ------------------------------------------------------------------------------------------------------------------------
Investment Quality Bond Fund
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR YEAR YEAR 04/01/94* YEAR YEAR YEAR 04/01/94*
ENDED ENDED ENDED TO ENDED ENDED ENDED TO
10/31/97 10/31/96 10/31/95 10/31/94 10/31/97 10/31/96 10/31/95 10/31/94
CLASS B CLASS B CLASS B CLASS B CLASS C CLASS C CLASS C CLASS C
-------- -------- -------- -------- -------- -------- -------- -------
Net asset value, beginning of period...... $10.33 $10.55 $ 9.74 $10.21 $10.33 $10.55 $ 9.74 $10.21
Income (loss) from investment operations
- ------------------------------------------
Net investment income (B)................. 0.60 0.60 0.61 0.33 0.60 0.60 0.61 0.33
Net realized and unrealized gain (loss)
on investments.......................... 0.20 (0.20) 0.82 (0.51) 0.20 (0.20) 0.82 (0.51)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................... 0.80 0.40 1.43 (0.18) 0.80 0.40 1.43 (0.18)
Less distributions
- ------------------
Dividends from net investment income...... (0.61) (0.62) (0.62) (0.29) (0.61) (0.62) (0.62) (0.29)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period............ $10.52 $10.33 $10.55 $ 9.74 $10.52 $10.33 $10.55 $ 9.74
====== ====== ====== ====== ====== ====== ====== ======
Total return.................... 8.05% 3.92% 15.12% (7.34%)(D) 8.05% 3.92% 15.12% (7.34%)(D)
Net assets, end of period (000's)......... $4,613 $4,678 $3,472 $ 489 $6,109 $7,543 $7,206 $2,406
Ratio of operating expenses
to average net assets (C)............... 1.90% 1.90% 1.90% 1.90%(A) 1.90% 1.90% 1.90% 1.90%(A)
Ratio of net investment income
to average net assets................... 5.89% 5.72% 5.95% 5.70%(A) 5.89% 5.72% 6.00% 5.70%(A)
Portfolio turnover rate................... 65% 56% 132% 186% 65% 56% 132% 186%
</TABLE>
______________________________
* Commencement of operations
(A) Annualized
(B) After expense reimbursement by the adviser of $0.04, $0.03, $0.08 and $0.19
per share for the Investment Quality Bond Fund - Class B and $0.04, $0.03,
$0.06 and $0.07 per share for the Investment Quality Bond Fund - Class C,
for the years ended October 31, 1997, 1996 and 1995 and the period April 1,
1994 to October 31, 1994, respectively.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
2.33%, 2.27%, 2.69%, 4.88% and for the Investment Quality Bond Fund - Class
B and 2.29%, 2.22%, 2.50% and 3.05% for the Investment Quality Bond Fund -
Class C, for the years ended October 31, 1997, 1996 and 1995 and the period
April 1, 1994 to October 31, 1994 on an annualized basis, respectively.
(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.
24
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -----------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund - Class A
---------------------------------------------
<S> <C> <C> <C> <C> <C>
07/06/93*
YEARS ENDED OCTOBER 31, TO
---------------------------------- 10/31/93
1997 1996 1995 1994
------ ------ ------ ------ -------
Net asset value, beginning of period...... $ 9.73 $ 9.62 $ 8.82 $10.25 $ 10.00
Income (loss) from investment operations
- ------------------------------------------
Net investment income (B)................. 0.48 0.48 0.51 0.51 0.17
Net realized and unrealized gain (loss)
on investments.......................... 0.36 0.11 0.80 (1.43) 0.24
------ ------ ------ ------ -------
Total from investment
operations.................... 0.84 0.59 1.31 (0.92) 0.41
Less distributions
- ------------------
Dividends from net investment income...... (0.48) (0.48) (0.51) (0.51) (0.16)
------ ------ ------ ------ -------
Net asset value, end of period............ $10.09 $ 9.73 $ 9.62 $ 8.82 $ 10.25
====== ====== ====== ====== =======
Total return.................... 8.85% 6.31% 15.26% (9.24%) 4.17%+
Net assets, end of period (000's)......... $6,347 $7,710 $7,618 $7,663 $ 9,131
Ratio of operating expenses
to average net assets (C)............... 0.99% 0.99% 0.80% 0.57% 0.23%(A)
Ratio of net investment income
to average net assets................... 4.87% 4.99% 5.55% 5.28% 4.86%(A)
Portfolio turnover rate................... 29% 49% 44% 6% 150%(A)
</TABLE>
______________________________
* Commencement of operations
+ Non-annualized
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.02, $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, 1997, 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 1.23%, 1.25%, 1.34%, 1.26% and 1.10% for the National Municipal
Bond Fund - Class A for the years ended October 31, 1997, 1996, 1995 and
1994 and the period July 6, 1993 (commencement of operations) to October 31,
1993 on an annualized basis, respectively.
25
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund
---------------------------------------------------------------------------
Year Year Year 04/01/94* Year Year Year 04/01/94*
Ended Ended Ended to Ended Ended Ended to
10/31/97 10/31/96 10/31/95 10/31/94 10/31/97 10/31/96 10/31/95 10/31/94
Class B Class B Class B Class B Class C Class C Class C Class C
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $ 9.73 $ 9.62 $ 8.81 $ 9.30 $ 9.73 $ 9.62 $ 8.81 $ 9.30
Income (loss) from investment operations
- ----------------------------------------
Net investment income (B)................. 0.40 0.40 0.43 0.25 0.40 0.40 0.43 0.25
Net realized and unrealized gain (loss)
on investments.......................... 0.36 0.11 0.81 (0.49) 0.36 0.11 0.81 (0.49)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................... 0.76 0.51 1.24 (0.24) 0.76 0.51 1.24 (0.24)
Less distributions
- ------------------
Dividends from net investment income...... (0.40) (0.40) (0.43) (0.25) (0.40) (0.40) (0.43) (0.25)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period............ $10.09 $ 9.73 $ 9.62 $ 8.81 $10.09 $ 9.73 $ 9.62 $ 8.81
====== ====== ====== ====== ====== ====== ====== ======
Total return.................... 7.94% 5.41% 14.42% (9.71%)(D) 7.94% 5.41% 14.42% (9.71%)(D)
Net assets, end of period (000's)......... $6,532 $6,130 $5,876 $2,036 $5,305 $5,693 $6,834 $1,911
Ratio of operating expenses
to average net assets (C)............... 1.84% 1.84% 1.70% 1.24%(A) 1.84% 1.84% 1.70% 1.24%(A)
Ratio of net investment income
to average net assets................... 4.02% 4.14% 4.59% 4.62%(A) 4.02% 4.14% 4.53% 4.62%(A)
Portfolio turnover rate................... 29% 49% 44% 6% 29% 49% 44% 6%
</TABLE>
______________________________
* Commencement of operations
(A) Annualized
(B) After expense reimbursement and waiver by the adviser of $0.03, $0.03, $0.07
and $0.09 per share for the National Municipal Bond Fund - Class B and
$0.03, $0.04, $0.09 and $0.09 per share for the National Municipal Bond Fund
- Class C, for the years ended October 31, 1997, 1996 and 1995 and the
period April 1, 1994 to October 31, 1994, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 2.15%, 2.11%, 2.41% and 2.81% for the National Municipal Bond
Fund - Class B and 2.15%, 2.25%, 2.63% and 2.78% for the National Municipal
Bond Fund - Class C, for the ended October 31, 1997, 1996 and 1995 and the
period April 1, 1994 to October 31, 1994 on an annualized basis,
respectively.
(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.
26
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
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
1997 1996** 1995 1994 1993 1992 1991 1990 10/31/89
------- ------- ------- ------- --------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 9.80 $ 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)...... 0.59 0.56 0.63 0.53 0.51 0.74 0.84 0.75 0.15
Net realized and unrealized
gain (loss)
on investments............... 0.13 (0.12) 0.57 (0.74) 0.34 0.13 0.42 (0.20) 0.01
------- ------- ------- -------- -------- -------- ------- ------- -------
Total from investment
operations......... 0.72 0.44 1.20 (0.21) 0.85 0.87 1.26 0.55 0.16
Less distributions
- ------------------
Dividends from net investment
income........................ (0.58) (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.. (0.58) (0.62) (0.67) (0.69) (0.54) (0.72) (0.84) (0.82) (0.15)
------- ------- ------- -------- -------- -------- ------- ------- -------
Net asset value, end of period. $ 9.94 $ 9.80 $ 9.98 $ 9.45 $ 10.35 $ 10.04 $ 9.89 $ 9.47 $ 9.74
======= ======= ======= ======== ======== ======== ======= ======= =======
Total return......... 7.56% 4.64% 13.15% (2.13%) 8.64% 9.15% 13.86% 5.90% 1.66%+
Net assets, end of period
(000's)....................... $53,235 $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% 1.25% 1.07% 0.24% 0.68% 2.28% 2.18%(A)
Ratio of net investment income
to average net assets........ 6.20% 5.71% 6.54% 5.39% 4.97% 7.21% 8.65% 7.89% 8.54%(A)
Portfolio turnover rate........ 364% 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, $0.02, $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, 1997,
1996, 1995, 1994, 1993, 1992, 1991 and 1990, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 1.42%, 1.41%, 1.45%, 1.47%, 1.42%, 2.13%, 2.61% and 2.57% for
the years ended October 31, 1997, 1996, 1995, 1994, 1993, 1992, 1991 and
1990, respectively.
27
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR YEAR YEAR 04/01/94* YEAR YEAR YEAR 04/01/94*
ENDED ENDED ENDED TO ENDED ENDED ENDED TO
10/31/97 10/31/96** 10/31/95 10/31/94 10/31/97** 10/31/96 10/31/95 10/31/94
CLASS B CLASS B CLASS B CLASS B CLASS C CLASS C CLASS C CLASS C
-------- ---------- -------- -------- ---------- ------- -------- --------
Net asset value, beginning of period.......... $ 9.80 $ 9.98 $ 9.45 $ 9.77 $ 9.80 $ 9.98 $ 9.45 $ 9.77
Income (loss) from investment operations
- ----------------------------------------
Net investment income (B)..................... 0.54 0.50 0.56 0.29 0.54 0.50 0.56 0.26
Net realized and unrealized gain (loss)
on investments.............................. 0.11 (0.12) 0.58 (0.35) 0.11 (0.12) 0.58 (0.32)
------- ------- ------- ------ ------- ------- ------- -------
Total from investment
operations........................ 0.65 0.38 1.14 (0.06) 0.65 0.38 1.14 (0.06)
Less distributions
- ------------------
Dividends from net investment income.......... (0.51) (0.50) (0.61) (0.26) (0.51) (0.50) (0.61) (0.26)
Dividends in excess of net investment income.. ------ (0.06) ------ ----- ------ (0.06) ------ ------
------- ------- ------- ------ ------- ------- ------- -------
Total distributions................. (0.51) (0.56) (0.61) (0.26) (0.51) (0.56) (0.61) (0.26)
------- ------- ------- ------ ------- ------- ------- -------
Net asset value, end of period................ $ 9.94 $ 9.80 $ 9.98 $ 9.45 $ 9.94 $ 9.80 $ 9.98 $ 9.45
======= ======= ======= ====== ------- ======= ======= =======
Total return........................ 6.84% 3.97% 12.45% (2.44%)(D) 6.84% 3.97% 12.45% (2.44%)(D)
Net assets, end of period (000's)............. $16,659 $19,444 $13,993 $2,746 $14,716 $20,009 $20,186 $10,766
Ratio of operating expenses
to average net assets (C)................... 1.90% 1.90% 1.90% 1.90%(A) 1.90% 1.90% 1.90% 1.90%(A)
Ratio of net investment income
to average net assets....................... 5.55% 5.06% 5.53% 5.06%(A) 5.55% 5.06% 5.74% 5.06%(A)
Portfolio turnover rate....................... 364% 477% 469% 279% 364% 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, $0.02, $0.04 and $0.08
per share for the U.S. Government Securities Fund - Class B and $0.02,
$0.02, $0.03 and $0.03 per share for the U.S. Government Securities Fund -
Class C, for the years ended October 31, 1997, 1996 and 1995 and the period
April 1, 1994 to October 31, 1994, respectively.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
2.09%, 2.06%, 2.28% and 3.40% for the U.S. Government Securities Fund -
Class B and 2.09%, 2.06%, 2.15% and 2.44% for the U.S. Government
Securities Fund - Class C, for the years ended October 31, 1997, 1996 and
1995 and the period April 1, 1994 to October 31, 1994 on an annualized
basis, respectively.
(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.
28
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
Money Market Fund - Class A
-----------------------------------------------------------------------------------
Years Ended October 31, 08/28/89*
----------------------------------------------------------------------- to
1997 1996 1995 1994 1993 1992 1991 1990 10/31/89
------- ------ ------- ------ ------- ------ ------ ------ --------
<S> <C> <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 $ 1.00
Income from investment operations
- ---------------------------------
Net investment income (B)............. 0.05 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) (0.05) (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 $ 1.00
======= ====== ======= ====== ======= ====== ====== ====== =======
Total return................ 5.13% 5.16% 5.60% 3.48% 2.80% 3.69% 6.22% 5.76% 0.53%+
Net assets, end of period (000's)..... $11,057 $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% 0.50% 1.00% 2.45% 1.96%(A)
Ratio of net investment income
to average net assets............... 5.02% 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 $0.005, $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, 1997, 1996,
1995, 1994, 1993, 1992, 1991 and 1990, respectively.
(C) The ratio of operating expenses, before reimbursement and waiver by the
adviser, was 0.96%, 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, 1997, 1996,
1995, 1994, 1993, 1992, 1991 and 1990, respectively.
29
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
- -------------------------------------------------------------------------------------------------------------------------------
Money Market Fund
--------------------------------------------------------------------------
Year Year Year 04/01/94* Year Year Year 04/01/94*
Ended Ended Ended to Ended Ended Ended to
10/31/97 10/31/96 10/31/95 10/31/94 10/31/97 10/31/96 10/31/95 10/31/94
Class B Class B Class B Class B Class C Class C Class C Class C
------- ------- ------- -------- -------- -------- -------- --------
<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 0.05 0.02 0.05 0.05 0.05 0.02
Less distributions
- ------------------
Dividends from net investment income.. (0.05) (0.05) (0.05) (0.02) (0.05) (0.05) (0.05) (0.02)
------ ------ ------ ------ ------ ------ ------ -------
Net asset value, end of period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ====== ====== =======
Total return................ 5.13% 5.16% 5.60% 3.48%(D) 5.13% 5.16% 5.60% 3.48%(D)
Net assets, end of period (000's)..... $3,332 $3,062 $1,564 $ 312 $7,539 $9,840 $9,394 $12,170
Ratio of operating expenses
to average net assets (C)........... 0.50% 0.50% 0.50% 0.50%(A) 0.50% 0.50% 0.50% 0.50%(A)
Ratio of net investment income
to average net assets............... 5.02% 5.02% 5.52% 3.96%(A) 5.01% 5.02% 5.46% 3.96%(A)
</TABLE>
______________________________
* Commencement of operations
(A) Annualized
(B) After expense reimbursement by the adviser of $0.005, $0.007, $0.009 and
$0.0228 per share for the Money Market Fund - Class B and $0.005, $0.005,
$0.005 and $0.0037 per share for the Money Market Fund - Class C, for the
years ended October 31, 1997, 1996 and 1995 and the period April 1, 1994 to
October 31, 1994, respectively.
(C) The ratio of operating expenses, before reimbursement by the adviser, was
1.05%, 1.18%, 1.41% and 4.83% for the Money Market Fund - Class B and 1.00%,
0.98%, 0.95% and 1.18% for the Money Market Fund - Class C, for the years
ended October 31, 1997, 1996 and 1995 and the period April 1, 1994 to
October 31, 1994 on an annualized basis, respectively.
(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.
30
<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 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 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). 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 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. 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 purchased on or after October 1, 1997 will
automatically convert to Class A shares eight years after the end of the
calendar month in which the shareholder's order to purchase was accepted. See
"Conversion Feature" below.
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 are
subject to a CDSC of 1% of the dollar amount subject thereto during the first
year after purchase. 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 "Conversion
Feature," below.
CONTINGENT DEFERRED SALES CHARGE. Purchases of $1 million or more of Class
A shares 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 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 (purchased on or after October 1, 1997)
and Class C shares will automatically convert to Class A shares eight 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. (For Class B shares purchased prior to
October 1, 1997 such conversion will take place six years after purchase.) 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 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. 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
31
<PAGE>
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 eight 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 a front end sales
charge is deducted at the time of purchase for purchases of less than $1 million
of Class A shares, 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 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
32
<PAGE>
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."
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.
TAX-SENSITIVE EQUITY FUND
The investment objective of the Tax-Sensitive Equity Fund is maximization
of after-tax total return with emphasis on long-term growth of capital,
primarily through investment in equity securities of companies that appear to be
undervalued.
The Tax-Sensitive Equity Fund is designed for investors in the upper
federal income tax brackets who seek the highest long-term after-tax total
return. Taxable dividends from any source, other than long-term capital gains,
distributed to individuals by mutual funds are currently taxed at federal income
tax rates of up to 39.6%, and the effective tax rate may be higher due to
limitations at higher income levels on allowable deductions and exemptions.
Long-term capital gains distributed to corporations by mutual funds are
currently taxed at federal income tax rates of up to 28%. Taxable dividends from
any source, including long-term capital gains, distributed to corporations by
mutual funds are currently taxed at federal income tax rates of up to 35%.
Additionally, state taxes on mutual fund distributions reduce after-tax returns.
Foreign Securities. The Tax-Sensitive Equity Fund seeks to minimize, to the
extent practicable, taxable dividend income by emphasizing securities with low
dividend yields and minimizing investments in income producing obligations. The
Tax-Sensitive Equity Fund also intends to be substantially fully invested in
equity investments. Under normal circumstances at least 80% of the Tax-Sensitive
Equity Fund's total assets will be invested in equity and equity-related
securities, such as common stocks and preferred stocks. The Tax-Sensitive Equity
Fund may invest in equity securities of foreign issuers that are listed on a
U.S. securities exchange or traded in the U.S. over-the-counter market, but will
not invest more than 10% of its total assets in such securities that are not so
listed or traded. The Tax-Sensitive Equity Fund currently intends to limit its
investments in foreign securities to those that are denominated or quoted in
U.S. dollars. See "RISK FACTORS -- Foreign Securities" in this Prospectus.
When selling portfolio securities, the Tax-Sensitive Equity Fund will
generally select the highest cost shares of the specific security (and/or, if
gains will be realized, shares that will produce long-term capital gains) in
order to reduce, to the extent practicable, the realization of capital gains,
particularly short-term capital gains. Additionally, the Tax-Sensitive Equity
Fund may, in furtherance of its investment objective, sell portfolio securities
in order to realize capital losses. Realized capital losses can be used to
offset realized capital gains, thus reducing the amount of capital gains the
Tax-Sensitive Equity Fund will distribute.
The Tax-Sensitive Equity Fund intends to have relatively low annual
portfolio turnover rates under normal circumstances. For taxpayers in the
highest tax brackets, ordinary income is taxed at a higher tax rate than capital
gains on securities held for more than eighteen months ("long-term capital
gains"). Ordinary income includes dividends from the Tax-Sensitive Equity Fund's
net investment income and net
33
<PAGE>
short-term capital gains. Net long-term capital gains realized and distributed
by the Tax-Sensitive Equity Fund are treated by shareholders as long-term
capital gains for federal income tax purposes. Therefore, the Tax-Sensitive
Equity Fund intends, when practicable and prudent, to hold appreciated portfolio
securities for more than eighteen months in order to reduce the realization and,
therefore, the distribution to shareholders of short-term capital gains which
are taxable to them as ordinary income.
Although the Tax-Sensitive Equity Fund expects generally to use some or all
of the foregoing management techniques in considering the impact of federal and
state income taxes on a shareholder's investment returns, portfolio management
decisions may be made based on other criteria in particular cases, where
warranted by actual or anticipated economic, market or issuer-specific
developments, and the Tax-Sensitive Equity Fund may from time to time employ
investment management techniques that produce taxable ordinary income. For
example, a particular security may be sold, even though the Tax-Sensitive Equity
Fund may realize a short-term capital gain, if the value of that security is
believed to have peaked or is anticipated to decline before the Tax-Sensitive
Equity Fund would have held it for the long-term holding period. Similarly, the
Tax-Sensitive Equity Fund may from time to time be required to sell securities
it would otherwise have continued to hold in order to generate cash to pay
expenses or satisfy shareholder redemption requests. Further, certain equity
securities and debt obligations in which the Tax-Sensitive Equity Fund will
invest will produce ordinary taxable income on a regular basis.
While attempting to reduce the impact of federal and state income taxes
paid by shareholders on Tax-Sensitive Equity Fund distributions, the Tax-
Sensitive Equity Fund will follow a disciplined investment strategy, emphasizing
stocks that Standish believes to offer above-average potential for capital
growth while offering low dividend yields. Although the precise application of
the discipline will vary according to market conditions, Standish intends to use
statistical modeling techniques that utilize stock specific factors, such as
current price/earnings ratios, stability of earnings growth, forecasted changes
in earnings growth, trends in consensus analysts' estimates and measures of
earnings results relative to expectations, to identify equity securities that
are attractive as purchase candidates. Once identified, these securities will be
subject to further fundamental analysis by Standish's professional staff before
they are included in the Tax-Sensitive Equity Fund's holdings. Securities
selected for inclusion in the Tax-Sensitive Equity Fund's portfolio will
represent various industries and sectors.
Although the Tax-Sensitive Equity Fund will prefer long-term capital gains
to taxable dividend income and interest income, the Tax-Sensitive Equity Fund
may to a limited extent invest in debt securities and preferred stocks that are
convertible into, or exchangeable for, common stocks. Generally, such securities
will be rated, at the time of investment, Aaa, Aa or A by Moody's of AAA, AA or
A by S&P or, if not rated, are determined by Standish to be of comparable credit
quality. Up to 5% of the Tax-Sensitive Equity Fund's total assets invested in
convertible debt securities and preferred stocks may be rated, at the time of
investment, Baa by Moody's or BBB by S&P or, if not rated, determined by
Standish to be of comparable credit quality. As a temporary matter and for
defensive purposes, the Tax-Sensitive Equity Fund may purchase investment grade
short-term debt securities, the amount of which will depend on market conditions
and the needs of the Tax-Sensitive Equity Fund. The Tax-Sensitive Equity Fund
will attempt to reduce risk by diversifying its investments within the
investment policy set forth above.
The Tax-Sensitive Equity Fund may, but is not required to, utilize various
investment strategies and techniques to seek to hedge various market risks (such
as broad or specific equity market movements and currency exchange rate risks)
or to seek to enhance potential gain. Such strategies and techniques are
generally accepted as part of modern portfolio management and are regularly
utilized by many mutual funds. In the course of pursuing its investment
objective, the Tax-Sensitive Equity Fund may: (i) purchase and write (sell) put
and call options on securities, equity indices and other financial instruments;
(ii) purchase and sell financial futures contracts on U.S. equity indices and
options thereon; (iii) enter into repurchase agreements; (iv) enter into various
currency transactions, such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency futures (the Tax-
Sensitive Equity Fund has no current intention to engage in such transactions);
and (v) make short sales. These techniques may produce taxable ordinary income
and/or short-term or long-term capital gains. Although the Tax-Sensitive Equity
Fund does not normally invest in equity securities that are restricted as to
disposition by federal securities laws or are otherwise illiquid, the Tax-
Sensitive Equity Fund may so invest up to 15% of its net assets when, in the
opinion of Standish, investment opportunities presented by such securities are
particularly attractive. For further information concerning the securities in
which the Tax-Sensitive Equity Fund may invest and the investment strategies and
techniques it may employ, see "RISK FACTORS" in this Prospectus.
EMERGING GROWTH FUND
The investment objective of the Emerging Growth Fund is maximum capital
appreciation. Warburg manages the Emerging Growth Fund and will pursue this
objective by investing primarily in a portfolio of equity securities of domestic
companies.
The Emerging Growth Fund ordinarily will invest at least 65% of its total
assets in common stocks or warrants of emerging growth companies that represent
attractive opportunities for maximum capital appreciation. Emerging growth
companies are small- or medium-sized companies that have passed their start-up
phase and that show positive earnings and prospects of achieving significant
profit and gain in a relatively short period of time.
34
<PAGE>
The Emerging Growth Fund is classified as a non-diversified series under
the 1940 Act, which means that the Portfolio is not limited by the 1940 Act in
the proportion of its assets that it may invest in the obligations of a single
issuer. As a non-diversified series, the Portfolio may invest a greater
proportion of its assets in the obligations of a small number of issuers and, as
a result, may be subject to greater risk with respect to portfolio securities.
To the extent that the Emerging Growth Fund assumes large positions in the
securities of a small number of issuers, its return may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
Although under current market conditions the Emerging Growth Fund expects
to invest in companies having stock market capitalizations of up to
approximately $500 million, the Portfolio may invest in emerging growth
companies without regard to their market capitalization. Emerging growth
companies generally stand to benefit from new products or services,
technological developments or changes in management and other factors and
include smaller companies experiencing unusual developments affecting their
market value. These "special situation companies" include companies that are
involved in the following: an acquisition or consolidation; a reorganization; a
recapitalization; a merger, liquidation, or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; litigation which, if resolved favorably, would improve the value of the
company's stock; or a change in corporate control.
The Emerging Growth Fund may invest up to 20% of its total assets in
investment grade debt securities (other than money market obligations) and
preferred stocks that are not convertible into common stock for the purpose of
seeking capital appreciation. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by Warburg.
Because the market value of debt obligations can be expected to vary inversely
to changes in prevailing interest rates, investing in debt obligations may
provide an opportunity for capital appreciation when interest rates are expected
to decline. The success of such a strategy is dependent upon Warburg's ability
to accurately forecast changes in interest rates. The market value of debt
obligations may also be expected to vary depending upon, among other factors,
the ability of the issuer to repay principal and interest, any change in
investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by the Portfolio, an issue of securities may cease to be rated or
its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require sale of such securities, although Warburg
will consider such event in its determination of whether the Portfolio should
continue to hold the securities.
When Warburg believes that a defensive posture is warranted, the Emerging
Growth Fund may invest temporarily without limit in investment grade debt
obligations and in domestic and foreign money market obligations, including
repurchase agreements.
The Emerging Growth Fund is authorized to invest, under normal market
conditions, up to 20% of its total assets in domestic and foreign short-term
(one year or less remaining to maturity) money market obligations and for
temporary defensive purposes may invest in these securities without limit.
These instruments consist of obligations issued or guaranteed by the U.S.
Government or a foreign government, their agencies or instrumentalities; bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loans and similar
institutions) that are high quality investments or, if unrated, deemed by
Warburg to be high quality investments; commercial paper rated no lower than A-2
by S&P or Prime-2 by Moody's or the equivalent from another major rating service
or, if unrated of an issuer having an outstanding, unsecured debt issue then
rated within the three highest rating categories; and repurchase agreements with
respect to the foregoing.
Investing in securities of emerging growth and small-sized companies may
involve greater risks since these securities may have limited marketability and,
thus, may be more volatile. Because small and medium-sized companies normally
have fewer shares outstanding than larger companies, it may be more difficult
for the Emerging Growth Fund to buy or sell significant amounts of such shares
without an unfavorable impact on prevailing prices. In addition, small- and
medium-sized companies are typically subject to a greater degree of changes in
earnings and business prospects than are larger, more established companies.
There is typically less publicly available information concerning small- and
medium-sized companies than for larger, more established ones. Companies with
small market capitalizations may also be dependent upon a single proprietary
product or market niche, may have limited product lines, markets or financial
resources, or may depend on a limited management group. Securities of issuers
in "special situations" also may be more volatile, since the market value of
these securities may decline in value if the anticipated benefits do not
materialize. Although investing in securities of emerging growth companies or
"special situations" offers potential for above-average returns if the companies
are successful, the risk exists that the companies will not succeed and the
prices of the companies' shares could significantly decline in value, Therefore
an investment in the Portfolio may involve a greater degree of risk than an
investment in other mutual funds that seek capital appreciation by investing in
better-known, larger companies.
The Emerging Growth Fund will be subject to certain risks as a result of
its ability to invest up to 20% of its total assets in the securities of foreign
issuers. These risks are described under the caption "RISK FACTORS -- Foreign
Securities" in this Prospectus.
35
<PAGE>
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 Emerging Growth Fund
is currently authorized to use all of the investment strategies referred to
under "RISK FACTORS -- Hedging and Other Strategic Transactions" in this
Prospectus. However, it is not presently contemplated that any of these
strategies will be used to a significant degree by the Portfolio.
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.
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. Preferred
stocks are not subject to this 5% limitation. 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. See "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.
36
<PAGE>
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 -- 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.
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.
37
<PAGE>
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 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.
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 80%, under normal circumstances, 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. Preferred
38
<PAGE>
stocks are not subject to this 5% limitation. 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.
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
although it may invest up to 15% of its assets in emerging market securities.
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 and
an emerging market is any country not 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.
39
<PAGE>
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" in this Prospectus.
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."
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 including up to 15% in emerging market securities. These risks are
described under the caption "RISK FACTORS -- Foreign Securities" and
"International Small Cap Trust- 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.
40
<PAGE>
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 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.
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 Stock Index (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
41
<PAGE>
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.
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. Preferred stocks are not
subject to this 5% limitation. 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.
42
<PAGE>
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 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
43
<PAGE>
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 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. See "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.
44
<PAGE>
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 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")."
45
<PAGE>
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 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.
46
<PAGE>
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 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.
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.
47
<PAGE>
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 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;
48
<PAGE>
(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
(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.
49
<PAGE>
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.
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. See "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.
50
<PAGE>
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."
--------------------------------------------
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, except with regard to the
Emerging Growth Fund, 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, other than reverse repurchase agreements,
mortgage dollar rolls and other similar transactions, exceed 5% of total assets)
and except in connection with reverse repurchase agreements, mortgage dollar
rolls and other similar transactions; and (iii) (exept the Emerging Growth Fund)
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 that are not fundamental include
prohibitions on (i) knowingly investing more than 10% (except the Tax-Sensitive
Equity Fund and the Emerging Growth Fund, which may not invest more than 15%) 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
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
51
<PAGE>
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 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
52
<PAGE>
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
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, Tax-
Sensitive Equity, 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-
53
<PAGE>
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 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. Warrants are rights to
purchase securities at specific prices valid for a specific period of time.
Their prices do not necessarily move parallel to the prices of the underlying
securities, and warrant holders receive no dividends and have no voting rights
or rights with respect to the assets of an issuer. Warrants cease to have value
if not exercised prior to the expiration date. It is a non-fundamental
investment restriction of each Portfolio (excepth the Emerging Growth Fund and
the Tax-Sensitive Equity Fund) 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
54
<PAGE>
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
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 or other liquid 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 (except the Tax-Sensitive Equity Fund and the
Emerging Growth Fund, which may not invest more than 15%) is precluded from
investing in excess of 10% of its net assets in securities that are not readily
marketable. Investment in illiquid securities involves the risk that, because of
the lack of consistent market demand for such securities, a Portfolio may be
forced to sell them at a discount from the last offer price. Excluded from the
10% limitation (or 15% with regard to the Tax-Sensitive Equity Fund and the
Emerging Growth Fund) 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
55
<PAGE>
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 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 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. While a reverse
repurchase agreement may be considered a form of leveraging and may, therefore,
increase fluctuations in a Portfolio's net asset value per share, each Portfolio
will cover the transaction as described above.
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. While a mortgage dollar roll may be
considered a form of leveraging and may, therefore, increase fluctuations in a
Portfolio's net asset value per share, each Portfolio will cover the transaction
as described above.
56
<PAGE>
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
CAM is the investment adviser for the Fund and CFD is the distributor for
the Fund. CAM and CFD, each of whose address is 286 Congress Street, Boston,
Massachusetts 02210, were formed in 1996 to acquire, advise and distribute
mutual funds through broker-dealers, banks and other intermediaries. CAM and CFD
are wholly-owned subsidiaries of CypressTree Investments, Inc., an affiliate of
Cypress Holding Company, Inc., which is controlled by its management and
Berkshire Partners IV, L.P. Prior to October 1, 1997, NASL Financial Services,
Inc. was both the investment adviser and the distributor for the Fund (in such
capcity, the "Former Distributor"). Standish, Ayer & Wood, Inc., subadviser to
the Tax-Sensitive Equity Fund Portfolio, owns 20% of Cypress Tree Investments,
Inc.
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.
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 been granted an
order from the Securities and Exchange Commission which permits the Adviser to
appoint a subadviser pursuant to an agreement that is not approved by
shareholders. The Fund, therefore, is able to change subadvisers or the fees
paid to subadvisers from time to time without the expense and delays associated
with obtaining shareholder approval of the new subadviser or subadvisory fee.
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 each Portfolio's advisory fee, or if
necessary to reimburse the Portfolio, in order to prevent the expenses of the
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 fixed limitation contained in the Advisory Agreement, which is the
operative limitation on the Fund's expenses, limits each 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:
EXPENSE
PORTFOLIO LIMITATION
Tax-Sensitive Equity Fund 1.400%
Emerging Growth Fund 1.400%
International Small Cap Fund 1.550%
Small/Mid Cap Fund 1.325%
Global Equity Fund 1.400%
Growth Equity Fund 1.300%
International Growth and Income Fund 1.400%
Growth and Income Fund 0.990%
Equity-Income Fund 1.065%
Balanced Fund 1.040%
Strategic Income Fund 1.150%
Investment Quality Bond 0.900%
U.S. Government Securities Fund 0.900%
National Municipal Bond Fund 0.850%
57
<PAGE>
Money Market Fund 0.500%
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>
Tax-Sensitive Equity Fund............. .850% .800% .775% .700%
Emerging Growth Fund.................. .950% .950% .950% .950%
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>
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 Securities and Exchange Commission
SUBADVISORY ARRANGEMENTS
Wellington Management Company, LLP
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, 1997,
Wellington Management had investment management authority with respect to
approximately $169 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 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, Senior Vice President of Wellington Management, has
served as portfolio manager to the Investment Quality Bond Fund since March
1994. Mr. Pappas has been a portfolio manager with Wellington Management since
1987.
Standish, Ayer & Wood, Inc.
Standish, Ayer & Wood, Inc. ("Standish"), the Subadviser to the Tax-
Sensitive Equity Fund, is a Massachusetts corporation incorporated in 1933 with
offices at One Financial Center, Boston, Massachusetts 02111.
58
<PAGE>
Standish provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. Standish or its affiliate, Standish International Management
Company, L.P., serves as the investment adviser to each of the funds in the
Standish, Ayer & Wood family of funds. Corporate pension funds are the largest
asset under active management by Standish. Standish's clients also include
charitable and educational endowment funds, financial institutions, trusts and
individual investors. As of September 30, 1997, Standish managed approximately
$37 billion in assets.
The Tax-Sensitive Equity Fund's portfolio manager is Laurence A.
Manchester, who has served in such capacity since the Tax-Sensitive Equity
Fund's inception. During the past five years, Mr. Manchester has served as a
Vice President and Director of Standish.
Past performance of Standish. The Tax-Sensitive Equity Fund is a new
----------------------------
Portfolio of the Fund, and therefore has no historical performance record.
However, Standish also manages several other Tax-Sensitive Equity accounts
having the same investment objective as the Tax-Sensitive Equity Fund, and
which use investment policies and strategies substantially similar (although not
necessarily identical) to those of the Tax-Sensitive Equity Fund. The average
annual total returns and cumulative total returns of a composite of such
Standish Tax-Sensitive Equity accounts are shown below for the periods ended
September 30, 1997 and have been adjusted to reflect the expected expense ratio
for the Class A shares of the Tax-Sensitive Equity Fund, and are based on data
supplied by Standish:
<TABLE>
<CAPTION>
One Year Three-Year Five-Year Since Inception (12/89)
-------- ---------- --------- ------------------------
<S> <C> <C> <C> <C>
Standish Tax-Sensitive Equity 45.33% 32.33% 22.44% 17.64%
Composite
Lipper Growth Index 34.61% 25.16% 18.91% 15.39%
S&P 500 Index 40.45% 29.93% 20.77% 16.77%
</TABLE>
STANDISH TAX-SENSITIVE EQUITY COMPOSITE PERFORMANCE
Cumulative Total Return through September 30, 1997
[GRAPH OF STANDISH TAX-SENSITIVE EQUITY COMPOSITE PERFORMANCE APPEARS HERE]
<TABLE>
<CAPTION>
One Year Three-Year Five-Year Life of Fund
-------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Standish Tax-Sensitive 45.33% 140.25% 193.59% 290.98%
Lipper Growth Index 34.61% 96.05% 137.73% 203.29%
S&P 500 Index 40.45% 119.35% 156.92% 232.60%
</TABLE>
Past performance is no assurance of future results. The S&P 500 Index
provides an appropriate broad-based securities index against which to measure
the performance of the Standish Tax-Sensitive Equity composite accounts, while
the Lipper Growth Index provides an additional more narrowly based index
reflecting the market sectors in which the Standish Tax-Sensitive Equity
composite accounts invest.
Warburg Pincus Asset Management, Inc.
Warburg Pincus Asset Management, Inc. ("Warburg"), the Subadviser to the
Emerging Growth Fund, is a wholly owned subsidiary of Warburg Pincus Counsellors
G.P., a New York general
59
<PAGE>
partnership, which is controlled by Warburg, Pincus & Co., also a New York
general partnership. Lionel I. Pincus, the managing partner of Warburg, Pincus &
Co., may be deemed to control both Warburg, Pincus & Co. and Warburg. Warburg
Pincus Counsellors G.P. has no other business than being a holding company of
Warburg and its subsidiaries. Warburg's address is 466 Lexington Ave., New York,
N.Y., 10017-3147.
Warburg is a professional investment counseling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of October 31,
1997, Warburg managed approximately $20 billion of assets, including
approximately $11.6 billion of investment company assets.
The co-portfolio managers of the Emerging Growth Fund are Elizabeth B.
Dater, Stephen J. Lurito and Medha Vora. Ms. Dater, a managing director of
Warburg, has been portfolio manager of the Emerging Growth Fund since its
inception and has been a portfolio manager of Warburg since 1978. Mr. Lurito, a
managing director of Warburg, has been a portfolio manager of the Emerging
Growth Fund since its inception and has been with Warburg since 1987, before
which time he was a research analyst at Sanford C. Bernstein & Company, Inc. Ms.
Vora, a senior president of Warburg, has been a portfolio manager of the
Emerging Growth Fund since its inception. Prior to joining Warburg in January
1997, Ms. Vora was a vice president at Chase Asset Management from April 1996 to
December 1996 and a senior vice president at the Trust Company of the West from
1993 to 1996. She was a senior analyst at the Prudential Special Situations
Fund, L.P. from 1991 to 1993.
J.P. Morgan Investment Management Inc.
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 $245 billion as of September 30, 1997. J.P.
Morgan has managed international securities for institutional investors since
1974. As of September 30, 1997, the non-U.S. securities under J.P. Morgan's
management was approximately $112 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 Massimo Fuggetta, Vice
President (employed by J.P. Morgan since 1988). Mr. Quinsee has been managing
the International Growth and Income Fund since the portfolio's inception
(January 1995), and Dr. Fugetta has been managing the portfolio since January
1996.
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 $5.6 billion of assets.
Since July 1994, Dr. Fuggetta has been responsible for the day-to-day management
(in some cases with another person) of several other institutional and
investment company portfolios that invest primarily in international fixed
income securities, constituting approximately $2.4 billion of assets.
Dr. Fuggetta is Head of the Global Balanced Group in London. He is also
responsible for a number of equity portfolios and for stock selection in Italy.
Dr. Fuggetta joined the International Research Group in London in 1988 and in
1989 became an equity portfolio manager, with responsibility for structured
equity and balanced accounts. Dr. Fuggetta has a B.A. in Economics from LUISS
Rom and both a MPhil and a DPhil in Economics from the University of Oxford.
Salomon Brothers Asset Management Inc
Salomon Brothers Asset Management Inc ("SBAM") is the subadviser to the
U.S. Government Securities Fund, the Strategic Income Fund and the National
Municipal Bond Fund (collectively, the "Funds"). On September 24, 1997,
Travelers Group Inc. ("Travelers") and Salomon, Inc. ("Salomon"), the ultimate
parent company of SBAM, Salomon Brothers Asset Management Limited ("SBAM Ltd."),
and Salomon Brothers Asset Management Asia Pacific Limited, announced their
agreement to merge Salomon with and into Smith Barney Holdings Inc., a
subsidiary of Travelers, to form a new company expected to be called Salomon
Smith Barney Holdings Inc. (the "Transaction"). Upon consummation of the
Transaction, Travelers will become the ultimate parent of SBAM and SBAM Ltd.,
which will continue to serve as the subadvisers to the Funds. Travelers is a
diversified financial services company engaged in investment services, asset
management, consumer finance and life and property casualty insurance services.
SBAM was incorporated in 1987 and,
60
<PAGE>
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 located throughout the world, and serves as investment
adviser to various investment companies. In providing such investment advisory
services, SBAM and it affiliates have access to Salomon's more than 40
economists, mortgage, bond, sovereign and equity analysts. As of September 30,
1997, SBAM and its worldwide investment advisory affiliates managed
approximately $25 billion in assets. SBAM's business offices are located at 7
World Trade Center, New York, New York 10048.
Under certain interpretations, the Transaction might be deemed to create an
"assignment," as defined in the Investment Company Act of 1940, as amended, of
the Subadvisory Agreements between SBAM and SBAM Ltd. with regard to the Funds,
which, if so interpreted, would result in the termination of such agreements.
Accordingly, at a Special Meeting of the Board of Trustees held on November 24,
1997, the Board approved new subadvisory agreements for the Funds (and, with
respect to the Strategic Income Fund, a new consulting agreement) identical in
all material respects to the existing contracts and agreements.
The Transaction was completed by the end of November 1997, subject to a
number of conditions, including the receipt of U.S. and foreign regulatory
approvals and the approval of Salomon stockholders.
In connection with SBAM's service as subadviser to the Strategic Income
Fund, SBAM's London-based affiliate, SBAM Ltd., 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 Income Fund. SBAM Ltd. is compensated by SBAM at no additional expense
to the Strategic Bond Fund. SBAM Ltd. is an indirect, wholly-owned subsidiary of
Salomon Brothers Europe Limited, which in turn is owned by Salomon
(International) Finance A G ("SIF") and SBH. SIF is wholly owned by SBH. SBAM
Ltd. 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 have been 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 its inception in
November 1993. Mr. Guterman, who joined SBAM in 1990, is a Managing Director of
Salomon Brothers Inc and SBAM, 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. In addition
to other registered investment companies for which Mr. Guterman serves as
portfolio manager, Mr. Guterman also serves as portfolio manager for two
offshore mortgage funds and a number of institutional clients.
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. government securities.
Prior to joining SBAM, Mr. Lavan spent four years analyzing portfolios for
Salomon Brothers' Fixed Income Sales Group and Product Support Divisions.
Peter Wilby is primarily responsible for the day-to-day management of the
high yield and sovereign bond portions of the Strategic Income Fund. 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 portfolios which invest in high yield U.S. and non-U.S. corporate
debt securities and high yield foreign sovereign debt securities. In addition
to other registered investment companies for which Mr. Wilby serves as portfolio
manager, he also serves as portfolio manager for a number of offshore and
institutional clients.
David Scott is primarily responsible for a portion of the Strategic Income
Fund relating to currency transactions and investments in non-dollar denominated
securities. David Scott is a Senior Portfolio Manager with SBAM Ltd. in London
with primary responsibility for managing long-term global bond portfolios. He
also plays an integral role in developing strategy. Prior to joining SBAM
Limited in April 1994, Mr. Scott worked at J.P. Morgan from 1990 to 1994 where
he had responsibility for global and non-dollar portfolios.
Marybeth Whyte is primarily responsible for the day-to-day management of
the National Municipal Bond Fund. Ms. Whyte is a Senior Portfolio Manager at
SBAM. In addition to serving as portfolio manager to other registered investment
companies, Ms. Whyte also serves as portfolio manager for a number of
institutional clients. Prior to joining SBAM in 1994, Ms. Whyte was a Senior
Vice President and head of the Municipal Bond Area at Fiduciary Trust Company
International, where her responsibilities included managing and advising
portfolios with assets of approximately $1.3 billion.
61
<PAGE>
Fred Alger Management, 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, 1997 had approximately $9.2 billion
under management, including $5.8 billion in mutual fund accounts and $3.4
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, has been 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 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 September 30,
1997, Founders had over $6.7 billion of assets under management, including
approximately $4.5 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. 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, has been the lead portfolio manager for
the Balanced Fund since October 1996. 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
$100 billion for over 4.5 million individual and institutional investor accounts
as of September 30, 1997.
62
<PAGE>
The investment advisory committee for the Equity-Income Fund is comprised
of the following members: Brian C. Rogers, Chairman, Stephen W. Boesel, 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,
Dean Witter, Discover & Co. conducts a worldwide portfolio management business,
providing a broad range of portfolio management services to customers in the
United States and abroad. At June 30, 1997, Morgan Stanley, together with its
affiliated institutional asset management companies (including MAS), managed
investments totaling approximately $130.0 billion, including approximately
$110.4 billion under active management and $19.6 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.,
Morgan Stanley Universal Funds, Inc. and the Morgan Stanley 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 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 September 30, 1997,
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.
* * *
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 BY THE ADVISER
AND ARE NOT ADDITIONAL CHARGES TO THE PORTFOLIOS OR THEIR SHAREHOLDERS.
63
<PAGE>
<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>
Tax-Sensitive Equity Fund............. .450% .400% .375% .300%
Emerging Growth Fund.................. .550% .550% .550% .550%
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.
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 Securities and Exchange Commission.
All or a portion of Fund brokerage commissions may be paid to affiliates of
SBAM, J.P. Morgan, Alger, and Morgan Stanley. 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: (1) those expenses the Adviser has agreed to bear pursuant to the
Advisory Agreement, (2) those expenses the Distributor has agreed to bear
pursuant to its Distribution Agreement with the Fund, or (3) those expenses 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 or Distributor, as described above, are the expense of the advisory
and distribution fees; 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.
The portfolio turnover rates for the EmergingGrowth Fund and the Tax-
Sensitive Equity Fund are not anticipated to exceed 100% and 15-20%,
respectively, under normal market conditions. Each other Portfolio's 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
64
<PAGE>
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,
Martin Luther King 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.
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 long-term capital
gain over its net 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
65
<PAGE>
Funds 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 income 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. The ability of the shareholders to utilize such a foreign tax credit
is subject to a holding period requirement. 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 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. Pursuant to the Taxpayer Relief Act of 1997,
long-term capital gains generally are subject to a maximum tax rate of 28% or
20% depending on the shareholder's holding period in shares of a Portfolio. 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 on which the shares are disposed.
Generally, 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 withholding 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
66
<PAGE>
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 or railroad retirement 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 with respect to the specific tax
consequences to it of an investment in a Portfolio, including the effect and
applicability of state, local, foreign, and other tax laws and the possible
effects of changes in federal or other tax laws. This discussion is not
intended as a substitute for careful tax planning.
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 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.
67
<PAGE>
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 (formerly Value Equity), 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 (formerly the Global Growth 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 preemptive or
conversion rights. The Fund's Declaration of Trust permits the issuance of
multiple classes of shares pursuant to the Multiple Pricing System. 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
investment objectives and policies.
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
68
<PAGE>
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 Fund's Declaration of Trust 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 Fund's
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. serve as the Fund's independent accountants. The
audited financial statements of the Fund at October 31, 1997, incorporated by
reference into the Statement of Additional Information and the Financial
Highlights for the period from the commencement of operations through October
31, 1997, 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 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 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
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
69
<PAGE>
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."
<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 CDSC may apply. See "PURCHASES OF SHARES - Contingent Deferred Sales
Charge."
70
<PAGE>
**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 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.
71
<PAGE>
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 CypressTree or any of its affiliates, the Subadvisers or Wood Logan, or
to a director, officer, full-time employee or sales representative of
CypressTree 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."
CLASS B CDSC TABLE
CDSC AS A PERCENTAGE OF
YEAR(S) SINCE PURCHASE ORDER DOLLAR AMOUNT SUBJECT TO CHARGE
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%
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 are subject to a CDSC of 1% of the dollar amount
subject thereto during the first year after purchase. 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 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
72
<PAGE>
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 accounts opened after
May 1, 1995,] 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. 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
Securities and Exchange Commission has indicated that dealers who receive more
than 90% of the sales charge may be considered underwriters.
73
<PAGE>
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 2830 of
the Conduct Rules 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
(and the Former Distributor with respect to shares purchased before October 1,
1997) 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.
Each of the Distributor and, with respect to shares purchased before
October 1, 1997, the Former 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 and, with respect to shares purchased before October 1,
1997, the Former 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
74
<PAGE>
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 Former Distributor also currently pays 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.
Each of the Distributor and, with respect to shares purchased before
October 1, 1997, the Former 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 or the Former Distributor as applicable. Each Plan also
provides that to the extent that any payments by any class of any Portfolio of
the Fund to [the Former Distributor in its capacity as former 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 CypressTree Investments,
Inc., 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. 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 the Manufacturers Life Insurance Company and approximately 15% owned by
principals of Wood Logan. 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.
75
<PAGE>
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 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.
76
<PAGE>
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.
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.
77
<PAGE>
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.
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; and all telephone transactions will be
followed by a confirmation statement of the transaction.
78
<PAGE>
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 promptly in the form of an account confirmation
statement which will be mailed to the account address of record.
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.
79
<PAGE>
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.
Moody's Investors Service, Inc. ("Moody's")
- -------------------------------
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
A-1
<PAGE>
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
Bonds:
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.
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.
Fitch Investors Service, Inc. ("Fitch")
- -----------------------------
Commercial Paper:
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".
A-2
<PAGE>
Bonds:
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 bonds
are extremely speculative and should be valued on
and D 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.
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.
ADDITIONAL MOODY'S AND S&P MUNICIPAL BOND RATINGS
MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES
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.
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, 1997, 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% 42.5%
Aa AA 0% 0%
A A 0% 4.8%
Baa BBB 0% 3.5%
Ba BB 0% 17.5%
B B 0% 26.3%
Caa CCC 0% 1.2%
Ca CC 0% 0%
C C 0% 0%
D 0% 0%
Unrated as a Group: 4.2%
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.
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, 1997, 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% 58.0%
Aa AA 0% 1.0%
A A 0% 16.0%
Baa BBB 0% *12.0%
Ba BB 0% 6.0%
B B 0% 7.0%
Caa CCC 0% 0%
Ca CC 0% 0%
C C 0% 0%
</TABLE>
A-4
<PAGE>
D 0% 0%
Unrated as a Group: 0%
U.S. Government Securities** 55.0%
Total 100%
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.
* 4% of these securities were split-rated; such securities are accounted
for in this table using the lower assigned rating.
** Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
A-5
<PAGE>
[Back outside cover of Prospectus]
NORTH AMERICAN FUNDS
PORTFOLIO SUBADVISERS
J.P. Morgan Investment Management Inc.
Manufacturers Adviser Corporation
Salomon Brothers Asset Management Inc
Wellington Management Company, LLP
Morgan Stanley Asset Management Inc.
T. Rowe Price Associates, Inc.
Founders Asset Management, Inc.
Fred Alger Management, Inc.
Standish, Ayer & Wood, Inc.
Warburg Pincus Asset Management, Inc.
ADVISER DISTRIBUTOR
CypressTree Asset Management Corporation, Inc. CypressTree Funds
Distributors, Inc.
286 Congress Street 286 Congress Street
Boston, MA 02210 Boston, MA 02210
TRANSFER AND DIVIDEND AGENT PROMOTIONAL AGENT
State Street Bank and Trust Company Wood Logan Associates, Inc.
P.O. Box 8505 1455 East Putnam Avenue
Boston, MA 02266-8505 Old Greenwich, CT 06870-1367
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
CUSTOMER SERVICE
800-872-8037
[LOGO]
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NORTH AMERICAN FUNDS
North American Funds (the "Fund") is a professionally managed open-end
investment company that currently has fifteen investment portfolios: the Tax-
Sensitive Equity Fund, the Emerging Growth Fund, 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, 1997 (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, 286 Congress Street, Boston, Massachusetts, 02210.
The date of this Statement of Additional Information is December 31, 1997.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES......................................................................................
MONEY MARKET INSTRUMENTS.................................................................................
OTHER INSTRUMENTS........................................................................................
Mortgage Securities......................................................................................
Asset-Backed Securities..................................................................................
Zero Coupon Securities and Pay-in-Kind Bonds.............................................................
High Yield/High Risk Domestic Corporate Debt Securities..................................................
High Yield/High Risk Foreign Sovereign Debt Securities...................................................
Municipal Lease Obligations..............................................................................
Hybrid Instruments.......................................................................................
HEDGING AND OTHER STRATEGIC TRANSACTIONS.................................................................
General Characteristics of Options.......................................................................
General Characteristics of Futures Contracts and Options on Futures Contracts............................
Options on Securities Indices and Other Financial Indices................................................
Currency Transactions....................................................................................
Combined Transactions....................................................................................
Swaps, Caps, Floors and Collars..........................................................................
Eurodollar Instruments...................................................................................
Municipal Bond Index Futures Contracts...................................................................
Risk Factors.............................................................................................
Risks of Hedging and Other Strategic Transactions Outside the United States..............................
Use of Segregated and Other Special Accounts.............................................................
Other Limitations........................................................................................
Warrant Transactions and Risks...........................................................................
INVESTMENT RESTRICTIONS..................................................................................
PORTFOLIO TURNOVER.......................................................................................
MANAGEMENT OF THE FUND...................................................................................
Compensation of Trustees.................................................................................
Principal Holders of Securities..........................................................................
INVESTMENT MANAGEMENT ARRANGEMENTS.......................................................................
Advisory and Subadvisory Agreements......................................................................
DISTRIBUTION PLANS.......................................................................................
Underwriters.............................................................................................
PORTFOLIO BROKERAGE......................................................................................
DETERMINATION OF NET ASSET VALUE.........................................................................
PERFORMANCE INFORMATION..................................................................................
TAXES....................................................................................................
National Municipal Bond Fund - Taxation Issues...........................................................
SHAREHOLDER SERVICES.....................................................................................
GENERAL..................................................................................................
Adviser's Rationale for Multi-Manager Fund...............................................................
Fund Shares..............................................................................................
Redemption in Kind.......................................................................................
Repurchase of Shares.....................................................................................
Payment for the Shares Presented.........................................................................
Transfer Agent...........................................................................................
Reports to Shareholders..................................................................................
Independent Accountants..................................................................................
</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 S&P 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. 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.
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
4
<PAGE>
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. PREFERRED STOCK AND CONVERTIBLE 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.
2. 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 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
5
<PAGE>
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% (or 15% with respect to the Emerging Growth
Fund and the Tax-Sensitive Equity Fund) 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 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
6
<PAGE>
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 or IOs. 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 the 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.
3. 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.
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
7
<PAGE>
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.
4. 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.
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.
5. 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
8
<PAGE>
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).
6. 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 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.
7. 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
9
<PAGE>
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.
8. 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 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
10
<PAGE>
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 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 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
11
<PAGE>
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 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
12
<PAGE>
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.
All Portfolios of the Fund intend to comply with guidelines of eligibility
for exclusion from the definition of the term "commodity pool operator" adopted
by the CFTC and the National Futures Association, which regulate trading in the
futures markets. A Portfolio will use futures contracts and related options, to
the extent otherwise permitted, primarily for bona fide hedging purposes within
the meaning of CFTC regulations. To the extent that a Portfolio holds positions
in futures contracts and related options that do not fall within the definition
of bona fide hedging transactions, the aggregate initial margins and premiums
required to establish such positions will not exceed 5% of the fair market value
of the Portfolio's net assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into.
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.
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
13
<PAGE>
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 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
14
<PAGE>
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% (or 15% with respect to the Emerging Growth Fund
and the Tax-Sensitive Equity Fund) restriction on investments in securities that
are not readily marketable.
Each Portfolio will maintain cash and appropriate liquid assets 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.
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.
15
<PAGE>
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 or other liquid
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 other liquid assets equal to the current amount of the obligation
must be segregated with the custodian or sub-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
assets 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 assets 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 assets 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 assets 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,
16
<PAGE>
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 assets
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 transactions entail certain risks. 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. 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. 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.
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.
Restrictions (1) through (8) are fundamental, and restrictions (9) through
(11) are nonfundamental.
17
<PAGE>
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 (except with regard to the Emerging Growth Fund), 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. This restriction does not
apply to the Emerging Growth Fund as a non-diversified portfolio.
(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.
(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. The Tax-Sensitive Equity, Emerging Growth,
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, except that the Tax-Sensitive Equity Fund and the Emerging Growth
Fund may so invest up to 15% its net assets.
(10) Purchase securities for the purpose of exercising control or
management.*
(11) Purchase securities of foreign issuers, except that (A) the Tax-
Sensitive Equity Fund, 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
18
<PAGE>
by foreign entities and/or denominated in foreign currencies, (B) the Balanced
Fund and Growth Equity Fund may each invest up to 30% of its assets in such
securities, (C) the Emerging Growth Fund and 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.)*
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 October 31,
1997 for the periods shown below were as follows:
<TABLE>
<CAPTION>
11/1/95 11/1/96
TO TO
10/31/96 10/31/97
<S> <C> <C>
Small/Mid Cap.................... 92%** 145%
International Small Cap.......... 67%** 75%
Growth Equity.................... 450%** 181%
Global Equity.................... 165% 28%
Equity-Income.................... 169% 36%
Growth and Income................ 49% 39%
Balanced......................... 253% 211%
Strategic Income................. 68% 193%
Investment Quality Bond.......... 56% 65%
U.S. Govt. Securities............ 477% 364%
National Municipal Bond.......... 49% 29%
International Growth and Income.. 170% 146%
</TABLE>
19
<PAGE>
*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 until its first tax year
beginning after August 5, 1997, 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>
Principal Occupation
Name, Position with the Fund During Past Five Years
---- ---------------------- ----------------------
Address and Age
---------------
<S> <C> <C>
William F. Achtmeyer Trustee Co-founder, President and Chief
c/o Cypress Holding Executive Officer of The Parthenon
Company, Inc. Group, a strategic advisory consulting
125 High Street and investment firm.
Boston, MA 02110
Age: 42
William F. Devin Trustee Member of the Board of Governors of
c/o Cypress Holding the Boston Stock Exchange. Retired
Company, Inc. Executive Vice President of Fidelity
125 High Street Capital Markets, a division of National
Boston, MA 02110 Financial Services Corporation in
Age: 58 Boston.
Bradford K. Gallagher* Chairman of the Board President of CypressTree Investments,
c/o Cypress Holding & President Inc. and President and Chief Executive
Company, Inc. Officer of Cypress Holding Company
125 High Street Inc. Past President of Allmerica
Boston, MA 02110 Financial Services.
Age: 53
Kenneth J. Lavery Trustee Vice President of Massachusetts Capita
c/o Cypress Holding Resource Company.
Company, Inc.
125 High Street
Boston, MA 02110
Age: 47
Don B. Allen Trustee Senior Lecturer,
c/o Cypress Holding William E. Simon
Company, Inc. Graduate School of
125 High Street Business Admin.,
Boston, MA 02110 University of
Age: 68 Rochester.
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Joseph T. Grause, Jr. Treasurer Executive Vice President of Cypress
c/o Cypress Holding Holdings, November 1995 to date;
Company, Inc. Senior Vice President of Sales and
125 High Street Marketing, The Shareholder Services
Boston, MA 02110 Group, a subsidiary of First Data
Age: 45 Corporation, May 1993 to November
1995; Prior to joining First Data, Mr.
Grause was associated with Fidelity
Institutional Services Company from
June 1976 through May 1993 where he
attained the position of Senior Vice
President.
John I. Fitzgerald Secretary Counsel to CypressTree Funds
c/o Cypress Holding Distributors, Inc., ("CFD") April, 1997
Company, Inc. to date; Prior to joining CFD, Mr.
125 High Street Fitzgerald was Executive Vice
Boston, MA 02110 President--Legal Affairs and
Age: 49 Government Relations at the Boston
Stock Exchange.
Thomas J. Brown Assistant Treasurer Principal of Cypress Holdings, July
c/o Cypress Holding 1997 to date; consultant to financial
Company, Inc. services industry, October 1995 to June
125 High Street 1997; Executive Vice President, Boston
Boston, MA 02110 Company Advisors, August 1994 to
Age: 51 October 1995.
Paul Foley Assistant Secretary Principal of Cypress Holding, July 1996
c/o Cypress Holding to date; Financial Analyst with Fleet
Company, Inc. Group, June 1995 to July 1996,
125 High Street Financial Analyst with Allmerica
Boston, MA 02110 Financial Services, April 1987 to June
Age 34 1995.
</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 $3,000, a fee of $750 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.
21
<PAGE>
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
=====================================================================================================
AGGREGATE PENSION OR TOTAL COMPENSATION
TRUSTEE COMPENSATION FROM RETIREMENT FROM REGISTRANT AND
FUND FOR FISCAL YEAR BENEFITS ACCRUED FUND COMPLEX PAID
ENDED OCTOBER 31, AS PART OF FUND FOR FISCAL YEAR ENDED
1997* EXPENSES FOR FISCAL OCTOBER 31, 1997*
YEAR ENDED
OCTOBER 31, 1997*
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bradford K. Gallagher 0 0 0
-----------------------------------------------------------------------------------------------------
Don B. Allen 8,250 0 54,950
-----------------------------------------------------------------------------------------------------
William F. Achtmeyer 1,500 0 1,500
-----------------------------------------------------------------------------------------------------
William F. Devin 1,500 0 1,500
-----------------------------------------------------------------------------------------------------
Kenneth J. Lavery 1,500 0 1,500
-----------------------------------------------------------------------------------------------------
Charles L. Bardelis** 6,750 0 53,450
-----------------------------------------------------------------------------------------------------
Samuel Hoar** 6,750 0 53,450
-----------------------------------------------------------------------------------------------------
Robert J. Myers** 6,750 0 53,450
-----------------------------------------------------------------------------------------------------
F. David Rowling** 4,500 0 42,500
=====================================================================================================
</TABLE>
*COMPENSATION RECEIVED FOR SERVICES AS TRUSTEE.
**RESIGNED AS A TRUSTEE EFFECTIVE OCTOBER 1, 1997
PRINCIPAL HOLDERS OF SECURITIES
As of December 18, 1997, the following persons owned, of record or
beneficially, five percent or more of the outstanding securities of the
indicated portfolio classes:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
RECORD OR
BENEFICIAL OWNER PORTFOLIOS
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frontier Trust Company Trustee Money Market Fund Global Equity Fund
for beneficial owner Saia Motor Class A Shares Class A Shares
Freight Line Inc. 401(k) Plan 2,125,937.873 shares 468,529.860 shares
Springhouse Corporate Center II 26% of the fund class 24% of the fund class
323 Norristown Road ----------------------------------------------------------
Ambler, Pennsylvania 19002-2756
Growth & Income Fund Investment Quality Bond Fund
Class A Shares Class A Shares
471,885.935 shares 172,074.789 shares
29% of the fund class 26% of the fund class
---------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
RECORD OR
BENEFICIAL OWNER PORTFOLIOS
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Income Fund Balanced Fund
Class A Shares Class A Shares
499,352.586 shares 475,149.668 shares
23% of the fund class 48% of the fund class
--------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund
Class A Shares
417,066.322 shares
7% of the fund class
--------------------------------------------------------------------------------------------------------
Concord-Diablo Federal Credit Union Money Market Fund
1855 Second Street Class A Shares
Concord, CA 94519-2623 1,088,958.360 shares
13% of the fund class
--------------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. Cust. Money Market Fund Investment Quality Bond Fund
for IRA Rollover of James D. Holtz Class C Shares Class C Shares
299 E. Oaksbury Lane 603,195.83 shares 29,130.628 shares
Palatine, Illinois 60067-7545 8% of the fund class 5% of the fund class
--------------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. Cust. Small/Mid Cap Fund
for the IRA of A R Whittemore Class A Shares
c/o Clark Capital Management Group 18,870.203 shares
1735 Market Street, 34th Floor 6% of the fund class
Philadelphia, PA 19103-7501
--------------------------------------------------------------------------------------------------------
D& F Corporation 401(k) Plan Trust Money Market Fund
Co. of America TTEE TCA 22393 Class C Shares
P.O. Box 6580 418,581.067 shares
Englewood, California 80155-6580 5% of the fund class
--------------------------------------------------------------------------------------------------------
NALACO Pension Plan for Global Equity Fund Equity Income Fund
U.S. Members Class A Shares Class A Shares
Elliott & Page 549,608.528 shares 356,623.168 shares
120 Adelaide Street West, Suite 1120 28% of the fund class 16% of the fund class
Toronto, Ontario M5H1V1
--------------------------------------------------------------------------------------------------------
North American Life Assurance Co. Global Equity Fund
116 Huntington Avenue Class A Shares
Boston, Massachusetts 02116-5749 119,045.908 shares
6% of the fund class
--------------------------------------------------------------------------------------------------------
Farmers State Bank Empls. Pension Growth Equity Fund
Farmers State Bank Trustee U/A Class A Shares
P.O. Box 538, 108 E. Adams Street 11,378.801 shares
Pittsfield, Illinois 62363-0538 6% of the fund class
--------------------------------------------------------------------------------------------------------
Young Life Strategic Income Fund
P.O. Box 520 Class A Shares
Colorado Springs, Colorado 80901- 224,982.450 shares
0520 13% of the fund class
--------------------------------------------------------------------------------------------------------
Raymond James & Associates Inc. National Municipal Bond Fund
for Margin Acct. # 82349377 Class C Shares
for account owner Mark A. Kielar 31,101.572 shares
and Tammy Keilar JT WROS 5% of the fund class
2251 NW 4th Avenue
Boca Raton, Florida 33431-7434
--------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
RECORD OR
BENEFICIAL OWNER PORTFOLIOS
--------------------------------------------------------------------------------------------------------
<S> <C>
BT Alex Brown Inc. National Municipal Bond Fund
for beneficial owner 711-02901-16 Class C Shares
P.O. Box 1346 30,000.000 shares
Baltimore, Maryland 21203-1346 5% of the fund class
--------------------------------------------------------------------------------------------------------
Claire Koh National Municipal Bond Fund
963C Heritage Hills Drive Class C Shares
Somers, New York 10589-1913 92,587.128 shares
17% of the fund class
--------------------------------------------------------------------------------------------------------
Edwin Marshall Ludlow TTEE Money Market Fund
LTD. Contracting Class B Shares
P.O. Box 3354-A 127,753.650
Davidsonville, MD 21635 5% of the fund class
--------------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. Cust. Investment Quality Bond Fund
for IRA Shirley Einhorn Class C Shares
10662 SW 79 Terr. 6% of the fund class
Miami, FL 33173
--------------------------------------------------------------------------------------------------------
</TABLE>
As of December 18, 1997, the officers and Trustees of the Fund as a group
owned less than 1% of the outstanding shares of each class 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 and the Salomon Brothers
Asset Management Limited Consulting Agreement, each dated October 1, 1997, were
approved by the Trustees on June 27, 1997 and by the shareholders of the
Portfolios on September 24, 1997, in connection with the acquisition (the
"Acquisition") of the business of NASL Financial Services, Inc. relating to
acting as investment adviser and distributor of the Fund by CypressTree
Investments, Inc. ("CypressTree"), with the exceptions of the Subadvisory
Agreements for the Tax-Sensitive Equity Fund and the Emerging Growth Fund which
are dated and were approved December 16, 1997. CypressTree is a subsidiary of
Cypress Holding Company, Inc., which is controlled by its management and by
Berkshire Partners IV, L.P. CypressTree and its affiliates, CypressTree Asset
Management Corporation, Inc. ("CAM") and CypressTree Funds Distributors, Inc.
("CFD"), were formed in 1996 to acquire, advise and distribute mutual funds
through broker dealers, banks and other intermediaries. CAM acts as the Fund's
investment adviser (the "Adviser"), while CFD acts as the Fund's distributor
(the "Distributor").
The advisory fees charged to each Portfolio series of the Fund have not
changed as a result of its Acquisition, and CAM has advised the Trustees that it
has no plans to recommend any changes in the current subadvisers to the
Portfolios.
Subadvisory Agreements between the Adviser and Standish, Ayer & Wood, Inc.
and Warburg Pincus Asset Management, Inc. were approved by the Trustees on
December 16, 1997 in conjunction with the addition of the Tax-Sensitive Equity
Fund and Emerging Growth Fund portfolios, respectively.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Fund paid
total advisory fees to the Adviser of $4,324,695, $5,398,787 and 6,327,793
respectively. The amounts represented by each of the Portfolios are as follows:
<TABLE>
<CAPTION>
PORTFOLIO 11/1/94 TO 10/31/95 11/1/95 TO 10/31/96 11/1/96 TO 10/31/97
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap NA *63,467 217,083
International Small Cap NA *47,966 175,637
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C>
Growth Equity NA *40,762 178,839
Global Equity $1,185,949 1,174,747 1,106,316
Equity-Income $ 758,694 936,036 1,128,276
Growth and Income $ 521,769 784,990 1,112,269
International Growth and Income **$102,022 236,517 280,663
Strategic Income $ 195,046 415,019 561,512
Investment Quality Bond $ 99,260 127,602 113,993
U.S. Government $ 661,449 693,407 567,391
National Municipal Bond $ 68,638 121,407 109,842
Money Market $ 44,306 38,258 40,088
Balanced $ 687,562 718,609 735,884
</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 information concerning waivers of advisory fees and expense
reimbursements, see note 5 to the financial statements dated October 31, 1997
included in this Statement of Additional Information.
For the same periods, the Adviser paid total subadvisory fees of
$2,060,667, $2,533,101 and 2,949,885 respectively. The amounts represented by
each of the Portfolios are as follows:
<TABLE>
<CAPTION>
PORTFOLIO 11/1/94 TO 10/31/95 11/1/95 TO 10/31/96 11/1/96 TO 10/31/97
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap N/A $ 36,022* 123,209
International Small Cap N/A $ 29,693* 108,728
Growth Equity N/A $ 22,646* 99,355
Global Equity $724,749 $709,960 578,158
Equity-Income $323,912 $396,204 506,265
Growth and Income $227,367 $334,666 467,961
International Growth and **$56,679 $131,398 155,924
Income
Strategic Income #$91,022 $192,079 254,934
Investment Quality Bond $ 37,223 $ 47,851 42,747
U.S. Government $248,043 $260,027 212,772
National Municipal Bond $ 40,125 $ 50,586 45,768
Money Market $ 16,615 $ 14,347 15,033
Balanced $294,932 $307,622 339,031
</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.
#Of these amounts, $29,730 and $48,019.75 respectively, were paid by Salomon
Brothers Asset Management Inc ("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
25
<PAGE>
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.
For the year ended October 31, 1997 the net investment advisory fees
retained by the Adviser after payment of subadvisory fees was $3,377,908,
allocated among the portfolios as follows:
<TABLE>
<CAPTION>
Annual Percentage of
-------------------
Dollar Amount Portfolio Net Assets
------------- --------------------
<S> <C> <C>
Small/Mid Cap Fund* 93,874 .32%
International Small Cap Fund* 66,909 .38%
Growth Equity Fund* 79,484 .32%
Global Equity Fund 528,158 .43%
International Growth and Income Fund 124,739 .43%
Growth and Income Fund 644,308 .34%
Equity-Income Fund 622,011 .37%
Balanced Fund 396,853 .41%
Strategic Income Fund 306,578 .37%
Investment Quality Bond Fund 71,246 .40%
National Municipal Bond Fund 64,074 .35%
U.S. Government Securities Fund 354,619 .42%
Money Market Fund 25,055 .11%
</TABLE>
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, the compensation received 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.
Each Subadvisory Agreement, except 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
26
<PAGE>
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 J.P. Morgan
Subadvisory Agreement each provide that the subadviser will not be liable to the
Fund or CAM 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 2830 of the Conduct
Rules 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.
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
27
<PAGE>
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 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. 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 Manufacturers Life Insurance Company 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.
The Plans will continue in effect only so long as their continuance is
specifically approved at least annually by the Trustees in the manner. The
Trustees will receive quarterly and annual statements concerning distribution
and shareholder servicing expenditures. In such statements, only expenditures
properly attributable to the 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, 1996 to October 31, 1997, the Fund paid
distribution and service fees pursuant to the Class A Plan to the Distributor of
$706,061 comprised of:
$ 12,744 from the Small/Mid Cap Fund*,
$ 10,099 from the International Small Cap Fund*,
$ 9,600 from the Growth Equity Fund*,
$ 102,730 from the Global Equity Fund,
$ 114,372 from the Equity-Income Fund,
$ 89,748 from the Growth and Income Fund,
$ 55,049 from the Strategic Income Fund,
$ 40,665 from the Balanced Fund,
$ 27,000 from the Investment Quality Bond Fund,
$ 216,152 from the U.S. Government Securities Fund,
$ 18,100 from the International Growth and Income Fund, and
$ 9,802 from the National Municipal Bond Fund.
28
<PAGE>
Of the total, $33,488 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, $487,181 of the total distribution fees
for Class A were paid to securities dealers, comprised of:
$ 8,873 from the Small/Mid Cap Fund,
$ 6,819 from the International Small Cap Fund,
$ 6,517 from the Growth Equity Fund,
$ 47,728 from the Global Equity Fund,
$ 64,892 from the Equity-Income Fund,
$ 64,434 from the Growth and Income Fund,
$ 43,773 from the Strategic Income Fund,
$ 28,910 from the Balanced Fund,
$ 20,833 from the Investment Quality Bond Fund
$ 170,297 from the U.S. Government Securities Fund
$ 14,575 from the International Growth and Income Fund and
$ 9,530 from the National Municipal Bond Fund.
For the period November 1, 1996 to October 31, 1997, the Fund paid
distribution and service fees pursuant to the Class B Plan to the Distributor of
$2,250,764 comprised of:
$ 88,342 from the Small/Mid Cap Fund*,
$ 69,411 from the International Small Cap Fund*,
$ 72,054 from the Growth Equity Fund*,
$ 287,886 from the Global Equity Fund,
$ 319,396 from the Equity-Income Fund,
$ 461,666 from the Growth and Income Fund,
$ 332,169 from the Strategic Income Fund,
$ 168,870 from the Balanced Fund,
$ 45,985 from the Investment Quality Bond Fund,
$ 175,346 from the U.S. Government Securities Fund,
$ 166,177 from International Growth and Income Fund and
$ 63,462 from the National Municipal Bond Fund.
Of the total, none was paid by the Distributor to Wood Logan for
providing promotional and shareholder services. 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. $402,121 of
the total distribution fees for Class B were paid to securities dealers,
comprised of:
$ 8,277 from the Small/Mid Cap Fund,
$ 6,187 from the International Small Cap Fund,
$ 4,794 from the Growth Equity Fund,
$ 60,269 from the Global Equity Fund,
$ 63,853 from the Equity-Income Fund,
$ 84,456 from the Growth and Income Fund,
$ 63,598 from the Strategic Income Fund,
$ 31,013 from the Balanced Fund,
$ 8,970 from the Investment Quality Bond Fund,
$ 33,213 from the U.S. Government Securities Fund,
$ 30,209 from the International Growth and Income Fund and
$ 7,282 from the National Municipal Bond Fund.
For the period November 1, 1996 to October 31, 1997, the Fund paid
distribution and service fees pursuant to the Class C Plan to the Distributor of
4,079,415, comprised of:
29
<PAGE>
$ 109,928 from the Small/Mid Cap Fund*,
$ 69,008 from the International Small Cap Fund*,
$ 99,227 from the Growth Equity Fund*,
$ 647,840 from the Global Equity Fund,
$ 908,852 from the Equity-Income Fund,
$ 892,681 from the Growth and Income Fund,
$ 276,993 from the Strategic Income Fund,
$ 707,078 from the Balanced Fund,
$ 66,860 from the Investment Quality Bond Fund,
$ 152,729 from the U.S. Government Securities Fund,
$ 93,956 from the International Growth and Income Fund and
$ 54,263 from the National Municipal Bond Fund.
Of the total, $333,262 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, $3,229,170 of the total distribution fees
for Class C were paid to securities dealers, comprised of:
$ 41,692 from the Small/Mid Cap Fund,
$ 29,310 from the International Small Cap Fund,
$ 46,490 from the Growth Equity Fund,
$ 561,541 from the Global Equity Fund,
$ 771,626 from the Equity-Income Fund,
$ 724,245 from the Growth and Income Fund,
$ 182,419 from the Strategic Income Fund,
$ 609,578 from the Balanced Fund,
$ 48,509 from the Investment Quality Bond Fund,
$ 103,534 from the U.S. Government Securities Fund,
$ 66,731 from the International Growth and Income Fund and
$ 43,495 from the National Municipal Bond Fund.
UNDERWRITERS
For the periods November 1, 1994 to October 31, 1995, November 1,
1995 to October 31, 1996 and November 1, 1996 to October 31, 1997, the
Distributor received underwriting commissions of $960,690, $1,046,375 and
$880,600, respectively. The amounts were comprised as reflected below, with
respect to shares of the following Portfolios:
<TABLE>
<CAPTION>
PORTFOLIO 11/1/94 TO 10/31/95 11/1/95 TO 11/31/96 11/1/96 TO 10/31/97
<S> <C> <C> <C>
Small/Mid Cap NA *$77,609 49,974
International Small Cap NA *$47,504 33,696
Growth Equity NA *$51,483 36,270
Global Equity $172,487 $ 93,621 36,504
Equity-Income $138,334 $137,617 110,319
Growth and Income $123,745 $141,037 256,762
International Growth and Income **$100,890 $ 64,345 33,761
Strategic Income $ 65,693 $114,585 104,745
Investment Quality Bond $ 19,367 $ 23,097 16,552
U.S. Government $223,721 $218,181 120,538
National Municipal Bond $ 31,612 $ 32,640 7,803
Balanced $ 84,841 $ 44,656 46,676
</TABLE>
30
<PAGE>
*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.
Of the total underwriting commissions received during the three fiscal year
periods, $0, $0 and [ -0- ], respectively, were 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 difficulty of
execution; 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, subject to best execution 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.
31
<PAGE>
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 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 and any other accounts
over which that Subadviser exercises investment discretion, 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 fiscal years ended October 31, 1995, 1996 and 1997, the Fund paid
brokerage commissions in connection with portfolio transactions of $1,039,631,
$1,768,058, and 1,102,121, respectively. The amounts represented by each of the
Portfolios are as follows:
<TABLE>
<CAPTION>
PORTFOLIO 11/1/94 TO 10/31/95 11/1/95 TO 10/31/96 11/1/96 TO 10/31/97
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap N/A *****$ 24,367 70,946
International Small Cap N/A *****$ 47,513 64,279
Growth Equity N/A *****$ 65,354 62,974
Global Equity* $509,668 $542,895 185,238
Equity-Income** $211,194 $605,408 98,858
Growth and Income $ 97,836 $141,134 135,545
International Growth and Income ***$ 12,558 $173,403 108,863
Balanced**** $208,375 $167,984 375,418
</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"), 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, J.P. Morgan and
Morgan Stanley, respectively, as Subadvisers to Fund portfolios.
32
<PAGE>
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 10/31/96 % OF PORTFOLIO'S BROKERAGE % OF AGGREGATE $
COMMISSIONS REPRESENTED AMOUNT OF
FOR THE PERIOD TRANSACTIONS FOR THE
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 $ 1,744 1.01% 1.79%
and Income
Balanced $ 9,195 5.47% 0.28%
</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 10/31/95 % OF PORTFOLIO'S % OF AGGREGATE $
BROKERAGE AMOUNT OF TRANSACTIONS
COMMISSIONS FOR THE PERIOD
REPRESENTED FOR THE
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 10/31/96 % OF PORTFOLIO'S BROKERAGE % OF AGGREGATE $
COMMISSIONS REPRESENTED AMOUNT OF
FOR THE PERIOD TRANSACTIONS FOR THE
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>
33
<PAGE>
From November 1, 1996 to October 31, 1997, brokerage commissions were paid to
Salomon Brothers Inc as follows:
- --------------------
<TABLE>
<CAPTION>
PORTFOLIO 11/1/95 TO 10/31/96 % OF PORTFOLIO'S BROKERAGE % OF AGGREGATE $
COMMISSIONS REPRESENTED AMOUNT OF
FOR THE PERIOD TRANSACTIONS FOR THE
PERIOD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity 1,444 .78% 1.02%
Equity-Income 1,452 1.47% 1.06%
Growth & Income 3,780 2.75% 2.27%
Balanced 5,414 1.44% 2.07%
Investment Quality 0 N/A N/A
Bond
U.S. Government 0 N/A N/A
Money Market 0 N/A N/A
</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 10/31/96 % OF PORTFOLIO'S BROKERAGE % OF AGGREGATE $
COMMISSIONS REPRESENTED AMOUNT OF
FOR THE PERIOD TRANSACTIONS FOR 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 10/31/96 % OF PORTFOLIO'S BROKERAGE % OF AGGREGATE $
COMMISSIONS REPRESENTED AMOUNT OF
FOR THE PERIOD TRANSACTIONS FOR 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 January 1, 1996 to October 31, 1997, brokerage commissions were paid to
J.P.Morgan Securities as follows:
- ---------------------
34
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO 11/1/95 TO 10/31/96 % OF PORTFOLIO'S BROKERAGE % OF AGGREGATE $
COMMISSIONS REPRESENTED AMOUNT OF
FOR THE PERIOD TRANSACTIONS FOR THE
PERIOD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity 2,448 1.32% 1.73%
Equity-Income 1,698 1.72% 1.15%
Growth & Income 4,516 3.33% 2.95%
Balanced 2,294 .61% .59%
</TABLE>
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 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
35
<PAGE>
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 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
36
<PAGE>
.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,
1997, 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:
<TABLE>
<CAPTION>
CLASS A SHARES
THROUGH
10/31/97 ONE YEAR % FIVE YEARS % SINCE INCEPTION % INCEPTION DATE
<S> <C> <C> <C> <C>
Small/Mid Cap 17.06 N/A 10.59 (03-04-96)*
International Small Cap (1.70) N/A 3.34 (03-04-96)*
Growth Equity 19.19 N/A 17.87 (03-04-96)*
Global Equity 20.11 12.35 9.45 (11-07-90)
Equity-Income 21.19 15.33 9.81 (08-28-89)
Growth & Income 25.68 16.67 15.01 (05-01-91)
International Growth and Income (1.37) N/A 4.86 (01-09-95)
Strategic Income 5.32 N/A 7.30 (11-01-93)
Balanced 11.45 11.31 8.65 (08-28-89)
Investment Quality Bond 3.41 5.57 7.09 (05-01-91)
U.S. Government Securities 2.45 5.22 6.90 (08-28-89)
National Municipal Bond 3.68 N/A 4.34 (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1997.
<TABLE>
<CAPTION>
CLASS B SHARES
THROUGH
10/31/97 ONE YEAR % FIVE YEARS % SINCE INCEPTION % INCEPTION DATE
<S> <C> <C> <C> <C>
Small/Mid Cap 16.86 N/A 10.28 (03-04-96)*
International Small Cap (2.46) N/A 2.79 (03-04-96)*
Growth Equity 19.50 N/A 18.07 (03-04-96)*
Global Equity 20.63 12.79 9.92 (11-07-90)
Equity-Income 21.29 15.79 10.19 (08-28-89)
Growth & Income 26.40 17.23 15.57 (05-01-91)
International Growth and Income (2.08) N/A 4.90 (01-09-95)
Strategic Income 4.86 N/A 7.37 (11-01-93)
Balanced 11.27 11.71 9.03 (08-28-89)
Investment Quality Bond 3.05 5.86 7.55 (05-01-91)
U.S. Government Securities 1.84 5.45 7.24 (08-28-89)
National Municipal Bond 2.94 N/A 4.40 (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1997.
37
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES
THROUGH
<S> <C> <C> <C> <C>
10/31/97 ONE YEAR FIVE YEARS SINCE INCEPTION INCEPTION DATE
Small/Mid Cap 20.92 N/A 13.17 (03-04-96)*
International Small Cap 1.54 N/A 5.72 (03-04-96)*
Growth Equity 23.50 N/A 20.75 (03-04-96)*
Global Equity 25.54 13.03 9.91 (11-07-90)
Equity-Income 25.33 16.01 10.19 (08-28-89)
Growth & Income 30.37 17.38 15.53 (05-01-91)
International Growth and Income 1.91 N/A 6.20 (01-09-95)
Strategic Income 8.86 N/A 7.96 (11-01-93)
Balanced 15.21 11.95 9.03 (08-28-89)
Investment Quality Bond 7.05 6.18 7.55 (05-01-91)
U.S. Government Securities 5.84 5.77 7.24 (08-28-89)
National Municipal Bond 6.94 N/A 4.80 (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1997.
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.
38
<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, 1997
were 5.58%, 5.20% and 5.20%, respectively. The yields for Classes A, B and C of
the U.S. Government Securities Fund for the thirty day period ended October 31,
1997 were 4.65%, 4.23% and 4.23%, respectively. The yields for Classes A, B and
C of the Strategic Income Fund for the thirty day period ended October 31, 1997
were 6.54%, 6.20% and 6.20%, 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, 1997 were 4.17%, 3.53% and 3.53%,
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, 1997, yields for Classes A, B
and C of the Money Market Fund were 5.15%, 5.15% and 5.15%, 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 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.
39
<PAGE>
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 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 shares of each Portfolio for the one and five
year periods ended October 31, 1997 and since inception to October 31, 1997 are
as follows:
<TABLE>
<CAPTION>
CLASS A SHARES
THROUGH
10/31/97 ONE YEAR % FIVE YEARS % SINCE INCEPTION % INCEPTION DATE
<S> <C> <C> <C> <C>
Small/Mid Cap 22.90 N/A 13.88 (03-04-96)
International Small Cap 3.20 N/A 6.42 (03-04-96)
Growth Equity 25.13 N/A 21.38 (03-04-96)
Global Equity 26.10 13.44 10.20 (11-07-90)
Equity-Income 27.24 16.45 10.45 (08-28-89)
Growth & Income 31.95 17.80 15.86 (05-01-91)
International Growth and Income 3.55 N/A 6.68 (01-09-95)
Strategic Income 10.57 N/A 8.60 (11-01-93)
Balanced 17.01 12.39 9.29 (08-28-89)
Investment Quality Bond 8.57 6.60 7.89 (05-01-91)
U.S. Government Securities 7.56 6.25 7.53 (08-28-89)
National Municipal Bond 8.85 N/A 5.51 (07-06-93)
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES
THROUGH
10/31/97 ONE YEAR % FIVE YEARS % SINCE INCEPTION % INCEPTION DATE
<S> <C> <C> <C> <C>
Small/Mid Cap 21.86 N/A 13.08 (03-04-96)
International Small Cap 2.54 N/A 5.72 (03-04-96)
Growth Equity 24.50 N/A 20.75 (03-04-96)
Global Equity 25.63 13.03 9.92 (11-07-90)
Equity-Income 26.29 16.00 10.19 (08-28-89)
Growth & Income 31.40 17.43 15.57 (05-01-91)
International Growth and Income 2.92 N/A 6.19 (01-09-95)
Strategic Income 9.86 N/A 7.97 (11-01-93)
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Balanced 16.27 11.95 9.03 (08-28-89)
Investment Quality Bond 8.05 6.17 7.55 (05-01-91)
U.S. Government Securities 6.84 5.77 7.24 (08-28-89)
National Municipal Bond 7.94 N/A 4.80 (07-06-93)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES
THROUGH
10/31/97 ONE YEAR % FIVE YEARS % SINCE INCEPTION % INCEPTION DATE
<S> <C> <C> <C> <C>
Small/Mid Cap 21.92 N/A 13.17 (03-04-96)*
International Small Cap 2.54 N/A 5.72 (03-04-96)*
Growth Equity 24.50 N/A 20.75 (03-04-96)*
Global Equity 25.54 13.02 9.91 (11-07-90)
Equity-Income 26.33 16.00 10.19 (08-28-89)
Growth & Income 31.37 17.37 15.53 (05-01-91)
International Growth and Income 2.91 N/A 6.20 (01-09-95)
Strategic Income 9.86 N/A 7.99 (11-01-93)
Balanced 16.21 11.94 9.03 (08-28-89)
Investment Quality Bond 8.05 6.17 7.55 (05-01-91)
U.S. Government Securities 6.84 5.77 7.24 (08-28-89)
National Municipal Bond 7.94 N/A 4.80 (07-06-93)
</TABLE>
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) diversify its holdings so that, at the end of
each quarter of each taxable year, (i) at least 50% of the total 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 total value of a Portfolio's assets and 10% of
the outstanding voting
41
<PAGE>
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. In
addition, until the start of a Portfolio's first tax year beginning after August
5, 1997, the Portfolio must derive less than 30% of its gross income from the
sale or other disposition of certain assets (including stock or securities and
certain options, futures contracts, forward contracts and foreign currencies)
held for less than three months in order to qualify as a regulated investment
company.
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 with respect to
each taxable year at least 90% of the sum of its net investment income, its net
tax-exempt income and the excess, if any, of net short term capital gains over
net long-term capital losses for such 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 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.
Special Rules for Certain Foreign Currency Transactions.
Investments in Passive Foreign Investment Companies. Investment by a
Portfolio in certain "passive foreign investment companies" could subject the
Portfolio to a U.S. federal income tax (including interest charges) on
distributions received from the company or on proceeds received from the
disposition of shares in the company, which tax cannot be eliminated by making
distributions to Portfolio shareholders. However, the Portfolio may elect to
treat a passive foreign investment company as a "qualified electing fund," in
which case the Portfolio will be required to include its share of the company's
income and net capital gain annually, regardless of whether it receives any
distribution from the company. The Portfolio also may make an election to mark
the gains (and to a limited extent losses) in such holdings "to the market" as
though it had sold and repurchased its holdings in those PFICs on the last day
of the Portfolio's taxable year. Such gains and losses are treated as ordinary
income and loss. The qualified electing fund and mark-to-market elections may
have the effect of accelerating the recognition of income (without the receipt
of cash) and increase the amount required to be distributed for the Portfolio to
avoid taxation. Making either of these elections therefore may require a
Portfolio to liquidate other investments (including when it is not advantageous
to do so) to meet its distribution requirement, which also may accelerate the
recognition of gain and affect a Portfolio's total return.
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)
42
<PAGE>
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). A shareholder's ability to
claim a foreign tax credit or deduction in respect of eligible foreign taxes
paid by a Portfolio may be subject to certain limitations imposed by the Code,
as a result of which a shareholder may not get a full credit or deduction for
the amount of such taxes (including a holding period requirement). 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.
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 withholding 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 securities may not be entitled to the exemptions from state and
local income taxes that would be available if the shareholders had purchased
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 shares
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.
43
<PAGE>
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 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.
In addition, 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. 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 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.
44
<PAGE>
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.
TAX-SENSITIVE EQUITY FUND. Standish, Ayer & Wood, Inc. manages the Tax-
Sensitive Equity Fund to maximize after-tax total return with emphasis on long-
term growth of capital, primarily through investment in equity securities of
companies that appear to be undervalued.
The Tax-Sensitive Equity Fund is designed for investors in the upper
federal income tax brackets who seek the highest long-term after-tax total
return. Taxable dividends from any source, other than long-term capital gains,
distributed to individuals by mutual funds are currently taxed at federal income
tax rates of up to 39.6%, and the effective tax rate may be higher due to
limitations at higher income levels on allowable deductions and exemptions.
Long-term capital gains distributed to corporations by mutual funds are
currently taxed at federal income tax rates of up to 28%. Taxable dividends
from any source, including long-term capital gains, distributed to corporations
by mutual funds are currently taxed at federal income tax rates of up to 35%.
Additionally, state taxes on mutual fund distributions reduce after-tax returns.
The Tax-Sensitive Equity Fund seeks to minimize, to the extent practicable,
taxable dividend income by emphasizing securities with low dividend yields and
minimizing investments in income producing obligations. The Tax-Sensitive
Equity Fund also intends to be substantially fully invested in equity
investments. Under normal circumstances at least 80% of the Tax-Sensitive
Equity Fund's total assets will be invested in equity and equity-related
securities, such as common stocks and preferred stocks. The Tax-Sensitive
Equity Fund may invest in equity securities of foreign issuers that are listed
on a U.S. securities exchange or traded in the U.S. over-the-counter market, but
will not invest more than 10% of its total assets in such securities that are
not so listed or traded.
When selling portfolio securities, the Tax-Sensitive Equity Fund will
generally select the highest cost shares of the specific security (and/or, if
gains will be realized, shares that will produce long-term capital gains) in
order to reduce, to the extent practicable, the realization of capital gains,
particularly short-term capital gains. Additionally, the Tax-Sensitive Equity
Fund may, in furtherance of its investment objective, sell portfolio securities
in order to realize capital losses. Realized capital losses can be used to
offset realized capital gains, thus reducing the amount of capital gains the
Tax-Sensitive Equity Fund will distribute.
The Tax-Sensitive Equity Fund intends to have relatively low annual
portfolio turnover rates under normal circumstances. For taxpayers in the
highest tax brackets, ordinary income is taxed at a higher tax rate than capital
gains on securities held for more than eighteen months ("long-term capital
gains"). Ordinary income includes dividends from the Tax-Sensitive Equity
Fund's net investment income and net short-term capital gains. Net long-term
capital gains realized and distributed by the Tax-Sensitive Equity Fund are
treated by shareholders as long-term capital gains for federal income tax
purposes. Therefore, the Tax-Sensitive Equity Fund intends, when practicable
and prudent, to hold appreciated portfolio securities for more than eighteen
months in order to reduce the realization and, therefore, the distribution to
shareholders of short-term capital gains which are taxable to them as ordinary
income.
45
<PAGE>
EMERGING GROWTH FUND. The investment objective of the Emerging Growth Fund
is maximum capital appreciation. Warburg manages the Emerging Growth Fund and
will pursue this objective by investing primarily in a portfolio of equity
securities of domestic companies.
The Emerging Growth Fund ordinarily will invest at least 65% of its total
assets in common stocks or warrants of emerging growth companies that represent
attractive opportunities for maximum capital appreciation. Emerging growth
companies are small or medium-sized companies that have passed their start-up
phase and that show positive earnings and prospects of achieving significant
profit and agin in a relatively short period of time.
The Emerging Growth Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Emerging Growth Fund is not
limited by the 1940 Act in the proportion of its assets that it may invest in
the obligations of a single issuer. As a non-diversified investment company, the
portfolio may invest a greater proportion of its assets in the obligations of a
small number of issuers and, as a result, may be subject to greater risk with
respect to portfolio securities. To the extent that the Emerging Growth Fund
assumes large positions in the securities of a small number of issuers, its
return may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
Although under current market conditions the Emerging Growth Fund expects
to invest in companies having stock market capitalizations of up to
approximately $500 million, the portfolio may invest in emerging growth
companies without regard to their market capitalization. Emerging growth
companies generally stand to benefit from new products or services,
technological developments or changes in management and other factors and
include smaller companies experiencing unusual developments affecting their
market value. These "special situation companies" include companies that are
involved in the following: an acquisition or consolidation; a reorganization; a
recapitalization; a merger, liquidation, or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; litigation which, if resolved favorably, would improve the value of the
company's stock; or a change in corporate control.
Investing in securities of emerging growth and small-sized companies may
involve greater risks since these securities may have limited marketability and,
thus, may be more volatile. Because small and medium-sized companies normally
have fewer shares outstanding than larger companies, it may be more difficult
for the Emerging Growth Fund to buy or sell significant amounts of such shares
without an unfavorable impact on prevailing prices. In addition, small- and
medium-sized companies are typically subject to a greater degree of changes in
earnings and business prospects than are larger, more established companies.
There is typically less publicly available information concerning small- and
medium-sized companies than for larger, more established ones. Securities of
issuer in "special situations" also ma be more volatile, since the market value
of these securities may decline in value if the anticipated benefits do not
materialize. Although investing in securities of emerging growth companies or
"special situations" offers potential for above-average returns if the companies
are successful, the risk exists that the companies will no succeed and the
prices of the companies' shares could significantly decline in value, Therefore
an investment in the portfolio may involve a greater degree of risk than an
investment in other mutual funds that seek capital appreciation by investing in
better-known, larger companies.
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.
46
<PAGE>
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.
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 -- 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.
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.
GLOBAL EQUITY FUND. The investment objective of the Global Equity 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.
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
47
<PAGE>
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 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.
EQUITY-INCOME FUND. The investment objective of the Equity-Income 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.
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
48
<PAGE>
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
including, for example, up to 25% of total assets in 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.
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.
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.
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.
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.
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
49
<PAGE>
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.
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 1997 federal tax rates (in effect as of December 31, 1997.)
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.
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.
50
<PAGE>
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-$263,750 36% 4.69, 6.25, 7.81, 9.38, 10.94, 12.50
------------------------------------------------------------------------------------------------
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.
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
51
<PAGE>
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, 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, 225 Franklin Street, Boston,
Massachusetts 02110, 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, 1997 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, 1997, 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>
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Highlights.
(b) Exhibits
(1) (a) Amended and Restated Agreement and Declaration of Trust dated
February 18, 1994 -- previously filed as Exhibit (b)(1)(c) to
North American Funds' Post-Effective Amendment No. 25 on Form N-
1A (File No. 33-27958) dated December 30, 1996 -- filed herewith.
(b) Declaration of Trust Amendment -- Establishment and Designation
of Additional Series of Shares for the International Growth and
Income Fund, dated December 28, 1994 -- previously filed as
Exhibit (b)(1)(d) to North American Funds' Post-Effective
Amendment No. 25 on Form N-1A (File No. 33-27958) dated December
30, 1996 -- filed herewith.
(c) Declaration of Trust Amendment - Establishment and Designation of
Classes A, B and C, dated March 17, 1994 -- previously filed as
Exhibit (b)(1)(e) to North American Funds' Post-Effective
Amendment No. 25 on Form N-1A (File No. 33-27958) dated December
30, 1996 -- filed herewith.
(d) 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. --
previously filed as Exhibit (b)(1)(f) to North American Funds'
Post-Effective Amendment No. 25 on Form N-1A dated December 30,
1996 -- filed herewith.
(e) Declaration of Trust Amendment - Redesignation of Series of
Shares of Beneficial Interest known as the Growth Fund dated
February 28, 1996. -- previously filed as Exhibit (b)(1)(g) to
North American Funds' Post-Effective Amendment No. 25 on Form N-
1A dated December 30, 1996 -- filed herewith.
(f) 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. -- previously
filed as Exhibit (b)(1)(h) to North American Funds' Post-
Effective Amendment No. 25 on Form N-1A dated December 30, 1996.
(g) Declaration of Trust Amendment - Establishment of the Tax-
Sensitive Equity Fund and Emerging Growth Fund series -- filed
herewith.
1
<PAGE>
(2) By-laws of North American Funds -- previously filed as Exhibit (b)(2)
to North American Funds initial registration statement on Form N-1A
(File No. 33-27958) dated April 5, 1989 -- filed herewith.
(3) Not applicable.
(4) (a) See Articles 4 and 5 of the North American Funds Amended and
Restated Declaration of Trust, filed as Exhibit (b)(1)(a)
herewith; and see Articles 2 and 9 of the By-laws of North
American Funds, filed as Exhibit (b)(2) herewith.
(5) (a) Advisory Agreement dated October 1, 1997 between North American
Funds and CypressTree Asset Management Corporation, Inc. ----
previously filed as Funds Post-Effective Amendment No. 26 on Form
N-1A (File No. 33-27958) dated October 17, 1997.
(b) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Fred Alger Management, Inc., dated October
1, 1997 --previously filed as Exhibit (b)(5)(f) to North American
Funds Post-Effective Amendment No. 26 on Form N-1A (File No. 33-
27958) dated October 17, 1997.
(c) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Founders Asset Management, Inc., dated
October 1, 1997 -- previously filed as Exhibit (b)(5)(g) to North
American Funds Post-Effective Amendment No. 26 on Form N-1A (File
No. 33-27958) dated October 17, 1997.
(d) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Morgan Stanley Asset Management Inc. dated
October 1, 1997 -- previously filed as Exhibit (b)(5)(h) to North
American Funds Post-Effective Amendment No. 26 on Form N-1A (File
No. 33-27958) dated October 17, 1997.
(e) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and T. Rowe Price Associates Inc. dated October
1, 1997 -- previously filed as Exhibit (b)(5)(i) to North
American Funds Post-Effective Amendment No. 26 on Form N-1A (File
No. 33-27958) dated October 17, 1997.
(f) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Manufacturers Adviser Corporation dated
October 1, 1997 -- previously filed as Exhibit (b)(5)(j) to North
2
<PAGE>
American Funds Post-Effective Amendment No. 26 on Form N-1A
(File No. 33-27958) dated October 17, 1997.
(g) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Founders Asset Management, Inc., dated
October 1, 1997 -- previously filed as Exhibit (b)(5)(g) to
North American Funds Post-Effective Amendment No. 26 on Form N-
1A (File No. 33-27958) dated October 17, 1997.
(h) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Morgan Stanley Asset Management Inc.
dated October 1, 1997 -- previously filed as Exhibit (b)(5)(h)
to North American Funds Post-Effective Amendment No. 26 on Form
N-1A (File No. 33-27958) dated October 17, 1997.
(i) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and T. Rowe Price Associates Inc. dated
October 1, 1997 -- previously filed as Exhibit (b)(5)(i) to
North American Funds Post-Effective Amendment No. 26 on Form N-
1A (File No. 33-27958) dated October 17, 1997.
(j) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Manufacturers Adviser Corporation dated
October 1, 1997 -- previously filed as Exhibit (b)(5)(j) to
North American Funds Post-Effective Amendment No. 26 on Form N-
1A (File No. 33-27958) dated October 17, 1997.
(k) Amendment to Advisory Agreement between North American Funds
and CypressTree Asset Management Corporation, Inc. dated
December 31, 1997 --filed herewith.
(l) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Standish, Ayer & Wood, Inc. dated January
1, 1998 --filed herewith.
(m) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Warburg, Pincus Asset Management, Inc.
dated January 1, 1998 -- filed herewith.
(6) (a)(i) 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.
3
<PAGE>
(a)(ii) Amendment dated September 30, 1997 to Distribution Agreement
between North American Funds and NASL Financial Services,
Inc. dated as of January 1, 1996 -- previously filed as
Exhibit (b)(6)(a)(ii) to North American Funds Post-Effective
Amendment No. 26 on Form N-1A (File No. 33-27958) dated
October 17, 1997.
(a)(iii) Distribution Agreement Between North American Funds and
CypressTree Funds Distributors, Inc. dated October 1, 1997 --
previously filed as Exhibit (b)(6)(a)(iii) to North American
Funds Post-Effective Amendment No. 26 on Form N-1A (File No.
33-27958) dated October 17, 1997.
(b)(i) Amended and Restated Promotional Agent Agreement Among NASL
Financial Services, Inc., Wood Logan Associates, Inc., and
North American 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) Promotional Agreement among CypressTree Funds Distributors,
Inc., Wood Logan Associates, Inc., and North American
Security Life Insurance Company dated October 1, 1997 --
previously filed as Exhibit (b)(6)(b)(iii) to North American
Funds Post-Effective Amendment No. 26 on Form N-1A (File No.
33-27958) dated October 17, 1997.
(c)(i) Most Recent Form of Dealer Agreement Among NASL Financial
Services, Inc., Wood Logan Associates, Inc. and Selected
Broker-Dealer --filed herewith.
(c)(ii) Assignment of Dealer Agreement among CypressTree Funds
Distributors, Inc. Wood Logan Associates, Inc. and
Manufacturers Securities Services, LLC dated October 1,
1997 -- previously filed as Exhibit (b)(6)(c)(iv) to North
American Funds Post-Effective Amendment No. 26 on Form N-1A
(File No. 33-27958) dated October 17, 1997.
(c)(iii) Form of Notice of Assignment of Dealer Agreement among
CypressTree Funds Distributors, Inc., Wood Logan Associates,
Inc. and Manufacturers Securities Services, LLC -- previously
filed as Exhibit (b)(6)(c)(v) to North American Funds Post-
Effective Amendment No. 26 on Form N-1A (File No. 33-27958)
dated October 17, 1997.
4
<PAGE>
(7) Not applicable.
(8) (a) Custodian Agreement Between North American Funds and Boston Safe
Deposit and Trust Company -- previously filed as Exhibit
(b)(8)(a) to North American Fund's initial registration statement
on Form N-1A No. 33-27958) dated November 1, 1991.
(b) Custodian Agreement Between North American Funds and State Street
Bank and Trust Company -- previously filed as Exhibit (b)(8)(a)
to North American Fund's initial registration statement on Form
N-1A (No. 33-27958) dated April 5, 1989 -- filed herewith.
(c) Transfer and Shareholder Services Contract Between North American
Funds and State Street Bank and Trust Company -- previously filed
as Exhibit (b)(8)(b) to North American Fund's initial
registration statement on Form N-1A (File No. 33-27958) dated
April 5, 1989 -- filed herewith.
(d) Forms of Sub-Custodian Agreements Between State Street Bank and
Trust Company and the Bank of New York, Chemical Bank and Bankers
Trust --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 Fund's Post-Effective Amendment No. 2
on Form N-1A (File No. 33-27958) dated August 29, 1990 -- filed
herewith.
(b) Opinion of Christina M. Perrino, Esq. -- previously filed as
Exhibit (b)(10)(b) to North American Fund's Post-Effective
Amendment No. 6 on Form N-1A (File No. 33-27958) dated April 22,
1991 -- filed herewith.
(c) Opinion of Christina M. Perrino, Esq. -- previously filed as
Exhibit (b)(10)(c) to North American Fund'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 Fund's Post-Effective
Amendment No.9 on Form N-1A (File No. 33-27958) dated July 7,
1992 -- filed herewith.
5
<PAGE>
(e) Opinion of Jeffrey M. Ulness, Esq. -- previously filed as Exhibit
(b)(10)(e) to North American Fund's Post-Effective Amendment No.
13 on Form N-1A (File No. 33-27958) dated June 29, 1993 -- filed
herewith.
(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 -- filed
herewith.
(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 --filed herewith.
(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.
(i) Opinion of Ropes & Gray dated December 18, 1997 regarding the
Tax-Sensitive Equity Fund and the Emerging Growth Fund -- filed
herewith.
(11) Consent of Coopers & Lybrand, L.L.P. -- filed herewith.
(12) Not applicable.
(13) Letter Containing Investment Undertaking of North American Life
Assurance Company -- previously filed as Exhibit (b)(13) to North
American Funds' 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 Fund's Post-Effective Amendment No.
1 on Form N-1A (File No. 33-27958) dated December 29, 1989.
(15) (a) Amended and Restated Rule 12b-1 Distribution Plan for Class A
shares dated September 26, 1997 -- previously filed as Exhibit
(b)(15)(a) to North American Funds Post-Effective Amendment No.
26 on Form N-1A (File No. 33-27958) dated October 17, 1997.
(b) Amended and Restated Rule 12b-1 Distribution Plan for Class B `
shares dated September 26, 1997 -- previously filed as Exhibit
(b)(15)(b) to North American Funds Post-Effective Amendment No.
26 on Form N-1A (File No. 33-27958) dated October 17, 1997.
6
<PAGE>
(c) Amended and Restated Rule 12b-1 Distribution plan for Class C
shares dated September 26, 1997 -- previously filed as Exhibit
(b)(15) to North American Funds Post-Effective Amendment No. 26
on Form N-1A (File No. 33-27958) dated October 17, 1997.
(16) Schedule of Computations -- filed herewith.
(17) Financial Data Schedule -- filed herewith.
(18) Amended and Restated Rule 18f-3 plan dated October 1, 1997 --
previously filed as Exhibit (b)(18) to North American Funds Post-
Effective Amendment No. 26 on Form N-1A (File No. 33-27958) dated
October 17, 1997.
(19) (a) Power of Attorney of Bradford K. Gallagher -- previously filed as
Exhibit (b)(19)(a) to North American Funds Post-Effective
Amendment No. 26 on Form N-1A (File No. 33-27958) dated October
17, 1997.
(b) Power of Attorney of William F. Achtmeyer -- previously filed as
Exhibit (b)(18)(b) to North American Funds Post-Effective
Amendment No. 26 on Form N-1A (File No. 33-27958) dated October
17, 1997.
(c) Power of Attorney of Don B. Allen -- previously filed as Exhibit
(b)(19)(c) to North American Funds Post-Effective Amendment No.
26 on Form N-1A (File No. 33-27958) dated October 17, 1997.
(d) Power of Attorney of William F. Devin -- previously filed as
Exhibit (b)(19)(d) to North American Funds Post-Effective
Amendment No. 26 on Form N-1A (File No. 33-27958) dated October
17, 1997.
(e) Power of Attorney of Kenneth J. Lavery -- previously filed as
Exhibit (b)(19)(e) to North American Funds Post-Effective
Amendment No. 26 on Form N-1A (File No. 33-27958) dated October
17, 1997.
(f) Power of Attorney of Joseph T. Grause, Jr.-- previously filed as
Exhibit (b)(19)(f) to North American Funds Post-Effective
Amendment No. 26 on Form N-1A (File No. 33-27958) dated October
17, 1997.
(g) Power of Attorney of Thomas J. Brown -- previously filed as
Exhibit (b)(19)(g) to North American Funds Post-Effective
Amendment No. 26 on Form N-1A (File No. 33-27958) dated October
17, 1997.
7
<PAGE>
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 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, CypressTree Asset
Management Corporation, Inc. ("CAM"), a Delaware corporation, may be deemed to
be under common control of the adviser's parent corporation. CAM is a wholly-
owned subsidiary of CypressTree Investments, Inc. ("CypressTree"), a Delaware
corporation which is based in Boston, Massachusetts. CypressTree is also the
parent company of CypressTree Funds Distributors, Inc, a Delaware corporation
and the Registrant's distributor. CypressTree is an affiliate of Cypress
Holding Company, Inc., a Delaware corporation, which is controlled by its
management and by Berkshire Fund IV, L.P. Berkshire Fund IV, L.P., a
Massachusetts Investment Partnership, is sponsored by Berkshire Partners, LLC, a
private equity investor based in Boston; the general partner of Berkshire Fund
IV, L.P. is Berkshire Investors, LLC.
The following is a list of the equity ownership interests in CypressTree as
of October 17, 1997:
1. Cypress Holding Company, Inc. 20.26%
2. Berkshire Fund IV, L.P. 56.03%
3. Berkshire Investors, LLC 2.61%
4. Standish, Ayer & Wood, Inc. 20.0%
Item 26. Number of Holders of Securities
-------------------------------
As of, 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 1188 2759 4654
Shares of Beneficial Interest
Equity-Income Fund Shares of 1478 2939 6042
Beneficial Interest
Growth and Income Fund 1403 3425 4944
Shares of Beneficial Interest
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
--------------- -------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Strategic Income Fund 635 1568 1072
Shares of Beneficial Interest
Balanced Fund Shares of 502 1166 3913
Beneficial Interest
Investment Quality Bond Fund 412 367 427
Shares of Beneficial Interest
U.S. Government Securities Fund 2250 825 768
Shares of Beneficial Interest
National Municipal Bond Fund 109 128 131
Shares of Beneficial Interest
Money Market Fund Shares of 721 307 765
Beneficial Interest
International Growth and Income 563 1562 1141
Fund Shares of Beneficial Interest
Small/Mid Cap Fund Shares of 669 1265 1367
Beneficial Interest
International Small Cap Fund 430 862 857
Shares of Beneficial Interest
Growth Equity Fund Shares of 484 845 1037
Beneficial Interest
</TABLE>
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
9
<PAGE>
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.
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. CypressTree Funds Distributors, Inc., the Registrant's principal
underwriter, does not serve as principal underwriter, depositor or
investment adviser to any other investment company.
b. Officers and Directors of Principal Underwriter
<TABLE>
<CAPTION>
Positions And
Name and Principal Positions and Offices Offices with
Business Address with Underwriter Registrant
---------------- ---------------- ----------
<S> <C> <C>
Bradford K.Gallagher* President Chairman &
President
Joseph T. Grause, Jr.* Vice President & Treasurer
Treasurer
John I. Fitzgerald* General Counsel & Secretary
Chief Financial Officer
Paul Foley* Vice President Assistant Secretary
Leana D. Vacirca* Secretary None
</TABLE>
10
<PAGE>
* c/o Cypress Holding Company, Inc.
125 High Street
Boston, MA 02110
c. Not applicable.
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 CypressTree
Asset Management Corporation, Inc., the Registrant's investment adviser, at its
offices at 286 Congress Street, Boston, Massachusetts 02210; by Standish, Ayer
& Wood, Inc., the investment subadviser to the Tax-Sensitive Equity Fund, at
its offices at One Financial Center, Boston, Massachusetts 02111; by Warburg,
Pincus Asset Management, Inc. the investment subadviser to the Emerging Growth
Fund, at its offices at 466 Lexington Avenue., New York, New York, 10017-3147;
by Wellington Management Company, LLP, 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.
("SBAM"), 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, which 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
286 Contgress Street, Boston, Massachusetts 02110; by T. Rowe Price Associates,
Inc., the investment subadviser to the Equity-Income Fund, at its offices at 100
East Pratt Street, Baltimore, Maryland 21202; by Morgan Stanley Asset
Management Inc., the investment subadviser of the Global Equity Fund, 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, custodian for the Global Growth
Fund's assets, at its offices at One Boston Place, Boston, Massachusetts 02108;
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.
Item 31. Not applicable.
11
<PAGE>
Item 32. The Registrant undertakes to furnish to each person to whom a
prospectus of the Registrant is delivered a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
12
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
b(1)(a) Amended and Restated Agreement and Declaration of Trust.
b(1)(b) Declaration of Trust Amendment -- Establishment and Designation
of Additional Series of Shares for the International Growth and
Income Fund.
b(1)(c) Declaration of Trust Amendment - Establishment and Designation
of Classes A, B and C.
b(1)(d) Declaration of Trust Amendment - Establishment and Designation
of Additional Series of Shares for the Growth Equity, International
Small Cap, and Small/Mid Cap Funds.
b(1)(e) Declaration of Trust Amendment - Redesignation of Series of
Shares of Beneficial Interest known as the Growth Fund.
(b)(1)(g) Declaration of Trust Amendment
(b)(2) By-laws of North American Funds
(b)(5)(k) Amendment to Advisory Agreement
(b)(5)(l) Standish, Ayer & Wood, Inc. Subadvisory Agreement
(b)(5)(m) Warburg Pincus Asset Management, Inc. Subadvisory Agreement
(b)(6)(c)(i) Most Recent Form of Dealer Agreement among NASL, Wood
Logan and Selected Broker-Dealer
(b)(8)(b) Custodian Agreement with State Street Bank and Trust Company
(b)(8)(c) Transfer and Shareholder Services Contract with State Street
Bank and Trust Company
(b)(10)(a) Opinion of Ruth Ann Fleming, Esq.
(b)(10)(b) Opinion of Christina M. Perrino, Esq.
(b)(10)(d) Opinion of Christina M. Perrino, Esq.
(b)(10)(e) Opinion of Jeffrey M. Ulness, Esq.
(b)(10)(f) Opinion of Tracy A. Kane, Esq.
(b)(10)(g) Opinion of Counsel Betsy Ann Seel, Esq.
(b)(10)(i) Opinion of Ropes & Gray
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
(b)(11) Consent of Coopers & Lybrand L.L.P.
(b)(16) Schedule of Computations
(b)17) Financial Data Schedule
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant, North American Funds, 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 22nd day of December, 1997.
NORTH AMERICAN FUNDS
--------------------
Registrant
By: /s/ Bradford K. Gallagher
--------------------------
Bradford K. Gallagher, President
Attest:
/s/ Paul F. Foley
- -------------------
Paul F. Foley
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.
/s/ William F. Achtmeyer
- ------------------------------
William F. Achtmeyer, Trustee
December 22, 1997
/s/ Don B. Allen
- ------------------------------
Don B. Allen, Trustee
December 22, 1997
/s/Thomas J. Brown
- ------------------------------
Thomas J. Brown, Assistant Treasurer
(Principal Accounting Officer)
December 22, 1997
/s/ William F. Devin
- ------------------------------
William F. Devin, Trustee
December 22, 1997
/s/ Bradford K. Gallagher
- ------------------------------
Bradford K. Gallagher, Trustee, Chairman and President
December 22, 1997
/s/ Joseph T. Grause
- ------------------------------
Joseph T. Grause, Jr., Vice President and Treasurer
(Principal Financial Officer)
December 22, 1997
<PAGE>
/s/ Kenneth J. Lavery
- ------------------------------
Kenneth J. Lavery, Trustee
December 22, 1997
<PAGE>
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
-----------------
<TABLE>
<S> <C>
ARTICLE I
Name and DefinitionsPage............................................................. 1.1
Name................................................................................. 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.
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
(w) Indemnification
(x) Insurance
(y) Pensions, etc.
(z) Minimum Total Investment........................................................ 3.3
Certain Contracts
(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................................................................. 3.5
Payment of Trust Expenses and Compensation of Trustees............................... 3.6
Ownership of Assets of the Trust
ARTICLE IV
Shares............................................................................... 4.1
Description of Shares
(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
(a) Assets Belonging to Sub-Trusts
(b) Liabilities Belonging to Sub-Trusts
(d) Dividends and Distributions
(e) Liquidation
(f) Voting
(g) Redemption by Shareholder
(h) Redemption by Trust
(i) Net Asset Value
(j) Transfer
(k) Equality
(m) Conversion and Exchange Rights................................................... 4.3
Ownership of Shares.................................................................. 4.4
Investments in the Trust............................................................. 4.5
No Preemptive Rights................................................................. 4.6
Trust Only........................................................................... 4.7
Status of Shares and Limitation of Personal Liability
ARTICLE V
Shareholders' Voting Powers and Meetings............................................. 5.1
Voting Powers........................................................................ 5.2
Proxies.............................................................................. 5.3
Meetings............................................................................. 5.4
Place of Meetings.................................................................... 5.5
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C>
Record Dates......................................................................... 5.6
Quorum and Required Vote............................................................. 5.7
Action by Written Consent............................................................ 5.8
Inspection of Records................................................................ 5.9
Additional Provisions
ARTICLE VI
Limitation of Liability; Indemnification............................................. 6.1
Trustees, Shareholders, etc. Not PersonallyLiable; Notice........................... 6.2
Trustee's Good Faith Action; Expert Advice;No Bond or Surety......................... 6.3
Indemnification of Shareholders...................................................... 6.4
Indemnification of Trustees, Officers, etc........................................... 6.5
Exceptions to Indemnification........................................................ 6.6
Indemnification Not Exclusive, etc................................................... 6.7
Liability of Third Persons Dealing with Trustee......................................
ARTICLE VII
Miscellaneous........................................................................ 7.1
Duration and Termination of Trust................................................... 7.2
Reorganization....................................................................... 7.3
Amendments........................................................................... 7.4
Resident Agent....................................................................... 7.5
Filing of Copies; References; Headings............................................... 7.6
Applicable Law....................................................................... 7.7
Reliance by Third Parties............................................................ 7.8
Provisions in Conflict with Law or Regulations....................................... 7.9
Use of the Name "North American".....................................................
</TABLE>
-4-
<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.
<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.
<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
<PAGE>
purpose of recording the conveyance to the remaining Trustees or the Trust of
any trust property held in the name of that individual.
(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
<PAGE>
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 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;
<PAGE>
(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 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
<PAGE>
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;
(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;
<PAGE>
(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;
(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.
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
(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 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,
<PAGE>
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, 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
<PAGE>
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 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
<PAGE>
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 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 ____
day of February, 1994.
_____________________
William J. Atherton
Trustee
<PAGE>
Commonwealth of Massachusetts )
) ss: Suffolk
City of Boston )
I HEREBY CERTIFY, that on this ____ day of February, 1994, before me, the
subscriber, a Notary Public of The Commonwealth of Massachusetts, in and for the
City of Boston, personally appeared _______________________________, to me known
to be the person described in and who executed the foregoing Declaration of
Trust and acknowledged that he executed the same of his own free act and deed.
WITNESS my hand and notarial seal this ____ day of February, 1994.
______________________________
Notary Public
My Commission expires:
<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 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
<PAGE>
information of the Trust or the International Growth and Income Fund, as
amended from time to time.
-2-
<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 17th day of March, 1994.
Don B. Allen __________________________
- ---------------------------
Don B. Allen William J. Atherton
Charles L. Bardelis Frederick W. Gorbet
- --------------------------- --------------------------
Charles L. Bardelis Frederick W. Gorbet
Samuel Hoar __________________________
- ---------------------------
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.
-3-
<PAGE>
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.
/s/ Don B. Allen
- --------------------------------- ________________________________
DON B. ALLEN WILLIAM J. ATHERTON
/s/ Charles L. Bardelis /s/ Frederick W. Gorbet
- --------------------------------- --------------------------------
Charles L. Bardelis Frederick W. Gorbet
/s/ Samuel Hoar
- --------------------------------- ________________________________
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.
-2-
<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 "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 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.
/s/ Don B. Allen
- --------------------------
Don B. Allen
/s/ Charles L. Bardelis
- --------------------------
Charles L. Bardelis
/s/ Samuel Hoar
- --------------------------
Samuel Hoar
/s/ Robert J. Myers
- --------------------------
Robert J. Myers
/s/ 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.
-2-
<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 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.
-3-
<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.
/s/ Don B. Allen
- --------------------------
Don B. Allen
/s/ Charles L. Bardelis
- --------------------------
Charles L. Bardelis
/s/ Samuel Hoar
- --------------------------
Samuel Hoar
/s/ Robert J. Myers
- --------------------------
Robert J. Myers
/s/ 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.
-4-
<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 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.
-5-
<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
/s/ Don B. Allen
- --------------------------
Don B. Allen
/s/ Charles L. Bardelis
- --------------------------
Charles L. Bardelis
/s/ Samuel Hoar
- --------------------------
Samuel Hoar
/s/ Robert J. Myers
- --------------------------
Robert J. Myers
/s/ 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.
-6-
<PAGE>
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.
-2-
<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 two new Series of Shares (as defined in
the Declaration of Trust), such Series to have the following special and
relative rights:
The two new Series of Shares shall be designated the "Emerging Growth Fund" and
the "Tax-Sensitive Equity Fund".
The two new Series of Shares shall have the relative rights and preferences
described in Section 4.2 of the Declarations 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 both the Emerging Growth Fund and the Tax-Sensitive Equity
Fund, within the meaning of Section 4.1(b), as follows:
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.
Class A, Class B and Class C shares of beneficial interest shall be entitled to
all the rights and preferences accorded to Shares under the Declaration of
Trust.
The rights and preferences of Class A, Class B and Class C shares 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
Emerging Growth Fund or Tax-Sensitive Equity 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 ____ day of _________________, 1997.
_____________________________ ______________________________
Don B. Allen William F. Devin
_____________________________ ______________________________
William F. Achtmeyer Bradford K. Gallagher
______________________________
Kenneth J. Lavery
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.
-2-
<PAGE>
NORTH AMERICAN SECURITY TRUST
BY-LAWS
<PAGE>
BY-LAWS
OF
NORTH AMERICAN SECURITY TRUST
Table of Contents
-----------------
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 1 Agreement and Declaration of Trust and Principal Office.......1
ARTICLE 2 Shareholders..................................................1
ARTICLE 3 Trustees......................................................2
ARTICLE 4 Officers......................................................3
ARTICLE 5 Resignations and Removals.....................................4
ARTICLE 6 Reports.......................................................5
ARTICLE 7 Seal..........................................................5
ARTICLE 8 Execution of Papers...........................................5
ARTICLE 9 Issuance of Share Certificates................................5
ARTICLE 10 Custody of Securities and Cash................................6
ARTICLE 11 Dealings with Trustees and Officers...........................7
ARTICLE 12 Amendments to the By-Laws.....................................8
ARTICLE 13 Declaration of Trust..........................................8
</TABLE>
-2-
<PAGE>
BY-LAWS
OF
NORTH AMERICAN SECURITY TRUST
ARTICLE 1
Agreement and Declaration of Trust
and Principal Office
--------------------
1.1 Agreement and Declaration of Trust. These By-Laws shall be subject to
----------------------------------
the Declaration of Trust, as from time to time in effect, of North American
Security Trust, the Massachusetts business trust established by the Declaration
of Trust. Unless otherwise required by the context or specifically provided,
the terms used in these By-Laws shall have the meanings given in the Declaration
of Trust.
1.2 Principal Office of the Trust. The principal office of the Trust
-----------------------------
shall be located in Boston, Massachusetts.
ARTICLE 2
Shareholders
------------
2.1 Meetings. Meetings of the Shareholders of the Trust or of any Series
--------
of Shares may be called at any time by the Trustees, by the President or, if
Trustees and the President shall fail to call any meeting of Shareholders for a
period of 30 days after written application of one or more Shareholders who hold
at least 25% of all shares issued and outstanding and entitled to vote at the
meeting, then such Shareholders may call such meeting. If the meeting is a
meeting of the Shareholders of the Trust, then only the Shareholders of such one
or more Series of Shares shall be entitled to notice of and to vote at the
meeting.
2.2 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.
2.3 Notice of Meetings. A written notice of each meeting of Shareholders,
------------------
stating the place, date and hour and the purposes of the meeting, shall be given
at least seven days before the meeting to each Shareholder entitled to vote
thereat by leaving such notice with him or at his residence or usual place of
business or by mailing it, postage prepaid, and addressed to such Shareholder at
his address as it appears in the records of the Trust. Such notice shall be
given by the Secretary or an Assistant Secretary or by an officer designated by
the Trustees. No notice of any meeting of Shareholders need be given to a
Shareholder if a written waiver of notice, executed before or after the meeting
by such Shareholder or his attorney thereunto duly authorized, is filed with the
records of the meeting.
-3-
<PAGE>
2.4 Ballots. No ballot shall be required for any election unless
-------
requested by a Shareholder present or represented at the meeting and entitled to
vote in the election.
2.5 Proxies. Proxies must be in writing and dated not more than six
-------
months before the meeting named therein. Unless otherwise specifically limited
by their terms, such proxies shall entitle the holders thereof to vote at any
adjournment of such meeting but shall not be valid after the final adjournment
of such meeting.
ARTICLE 3
Trustees
--------
3.1 Regular Meetings. Regular meetings of the Trustees may be held
----------------
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
3.2 Special Meetings. Special meetings of the Trustees may be held at any
----------------
time and at any place designated in the call of the meeting when called by the
Chairman of the Trustees, the President or the Secretary or by two or more
Trustees, sufficient notice thereof being given to each Trustee by the Secretary
or an Assistant Secretary or by the officer or the Trustees calling the meeting.
3.3 Notice. It shall be sufficient notice to a Trustee of a special
------
meeting to send notice by mail at least forty-eight hours or by telegram at
least twenty-four hour before the meeting addressed to the Trustee at his usual
or last known business or residence address or to give notice to him in person
or by telephone at least twenty-four hours before the meeting. Notice of a
meeting need not be given to any Trustee if a written waiver of notice, executed
by him before or after the meeting, is filed with records of the meeting, or to
any Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. Neither notice of a meeting nor a
waiver of a notice need specify the purposes of the meeting.
3.4 Quorum. At any meeting of the Trustees a majority of the Trustees
------
then in office shall constitute a quorum. Any meeting may be adjourned from
time to time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice.
3.5 Participation by Telephone. One or more of the Trustees or of any
--------------------------
committee of the Trustees may participate in a meeting thereof by means of a
conference telephone or similar communications equipment allowing all persons
participation by such means shall constitute presence in person at a meeting.
3.6 Action by Written Consent. Any action by the Trustees may be taken
-------------------------
without a meeting if a written consent thereto is signed by a majority of the
Trustees and filed with the records of the Trustees' meetings. Such consent
shall be treated as a vote of the Trustees for all purposes. If any action is
taken by the Trustees by a written consent of less than all of the Trustees,
then prompt notice of any such action shall be furnished to each Trustee who did
not execute such written consent, provided that the effectiveness of such action
shall not be impaired by any delay or failure to furnish such notice.
-4-
<PAGE>
3.7 Committees. The Trustees, by action of a majority of the Trustees
----------
then in office, may elect from their number an Executive Committee or other
committees and may delegate thereto some or all of their powers except those
which by law, by the Declaration of Trust, or by these By-Laws may not be
delegated. Except as the Trustees may otherwise determine, any such committee
may make rules for the conduct of its business, but unless otherwise provided by
the Trustees or in such rules, its business shall be conducted so far as
possible in the same manner as is provided by these By-Laws for the Trustees
themselves. All members such committees shall hold such offices at the pleasure
of the Trustees. The Trustees may abolish any such committee at any time. Any
committee to which the Trustees delegate any of their powers or duties shall
keep records of its meetings and shall report its action to the Trustees. The
Trustees shall have power to rescind any action of any committee, but no such
rescission shall have retroactive effect.
ARTICLE 4
Officers
--------
4.1 Enumeration; Qualification. The officers of the Trust shall be a
--------------------------
Chairman of the Trustees, a President, a Treasurer, a Secretary and such other
officers, including Vice Presidents, if any, as the Trustees from time to time
may in their discretion elect. The Trust may also have such agents as the
Trustees from time to time in their discretion may appoint. The chairman of the
Trustees shall be a Trustee and may but need not be a Shareholder. Any other
officer may but need not be a Trustee or a Shareholder. Any two or more offices
may be held by the same person.
4.2 Election. The Chairman of the Trustees, the President, the Treasurer,
--------
the Secretary and other officers, if any, may be elected or appointed by the
Trustees at any time. Vacancies in any office may be filled at any time.
4.3 Tenure. The Chairman of the Trustees, the President, the Treasurer
------
and the Secretary shall hold office in each case until their respective
successors are chosen and qualified, or in each case until he sooner dies,
resigns, is removed or becomes disqualified. Each other officer shall hold
office and each agent shall retain authority at the pleasure of the Trustees.
4.4 Powers. Subject to the other provisions of these By-Laws, each
------
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to the office occupied by him as if the Trust were organized as a Massachusetts
business corporation and such other duties and powers as the Trustees may from
time to time designate.
4.5 Chairman; President. Unless the Trustees otherwise provide, the
-------------------
Chairman, the President shall preside at all meetings of the Shareholders and of
the Trustees. The President shall be the chief executive officer of the Trust
and, subject to the Trustees, shall have general supervision over the business
and policies of the Trust.
4.6 Treasurer. The Treasurer shall be the chief financial and accounting
---------
officer of the Trust, and shall, subject to the provisions of the Declaration of
Trust and to any arrangement made by the Trustees with a custodian, investment
adviser or management, or transfer,
-5-
<PAGE>
shareholder servicing or similar agent, be in charge of the valuable papers,
books of account and accounting records of the Trust, and shall have such other
duties and powers as may be designated from time to time by the Trustees or by
the President.
4.7 Secretary. The Secretary shall record all proceedings of the
---------
Shareholders and the Trustees in books to be kept therefor, which books or a
copy thereof shall be kept at the principal office of the Trust. In the absence
of the Secretary from any meeting of the Shareholders or Trustees, an Assistant
Secretary, or if there be none or if he is absent, a temporary secretary chosen
at such meeting, shall record the proceedings thereof in the aforesaid books.
ARTICLE 5
Resignations and Removals
-------------------------
Any Trustee or officer may resign at any time by written instrument signed
by him and delivered to the Chairman, the President or the Secretary or to a
meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. The Trustees, by action of
a majority of the Trustees then in office, may remove any officer with or
without cause. Except to the extent expressly provided in a written agreement
with the Trust, no Trustee or officer resigning and no officer removed shall
have any right to any compensation for any period following his resignation or
removal, or any right to damages on account of such removal.
ARTICLE 6
Reports
-------
The Trustees and officers shall render reports at the time and in the
manner required by the Declaration of Trust or any applicable law. Officers and
committees shall render such additional reports as they may deem desirable or as
may from time to time be required by the Trustees.
ARTICLE 7
Seal
----
The seal of the Trust shall consist of a flat-faced die with the word
"Massachusetts," together with the name of the Trust and the year of its
organization cut or engraved thereon, but, unless otherwise required by the
Trustees, the seal shall not be necessary to be placed on, and its absence shall
not impair the validity of, any document, instrument or other paper executed and
delivered by or on behalf of the Trust.
ARTICLE 8
Execution of Papers
-------------------
-6-
<PAGE>
Except as the Trustees may generally or in particular cases authorize the
execution thereof in some other manner, all deeds, leases, contracts, notes and
other obligations made by the Trustees shall be signed by the President, any
Vice President, the Secretary or the Treasurer and need not bear the seal of the
Trust.
ARTICLE 9
Issuance of Share Certificates
------------------------------
9.1 Share Certificates. In lieu of issuing certificates for Shares, the
------------------
Trustees or the transfer agent may either issue receipts therefor or may keep
accounts upon the books of the Trust for the record holders of such Shares, who
shall in either case be deemed, for all purposes hereunder, to be the holders of
certificates for such Shares as if they had accepted such certificates and shall
be held to have expressly assented and agreed to the terms hereof.
The Trustees may at any time authorize the issuance of share certificates.
In that event, each Shareholder of record of any Series of Shares shall be
entitled to a certificate stating the number of Shares of the Series of Shares
owned by him, in such form as shall be prescribed from time to time by the
Trustees. Such certificates shall be signed by the President or a Vice
President and by the Treasurer or any Assistant Treasurer of the Trust. Such
signatures may be facsimiles if the certificate is signed by a transfer agent or
a registrar. In case any officer who has signed or whose facsimile signature
has been placed on such certificate shall cease to be such officer before such
certificate is issued, it may be issued by the Trust with the same effect as if
he were such officer at the time of its issue.
9.2 Issuance of New Certificate to Pledgee. If the Trustees shall have
--------------------------------------
authorized the issuance of certificates, a pledgee of Shares transferred as
collateral security shall be entitled to a new certificate if the instrument of
transfer substantially describes the debt or duty that is intended to be secured
thereby. Such new certificate shall express on its face that it is held as
collateral security, and the name of the pledgor shall be stated thereon, who
alone shall be liable as a Shareholder, and entitled to vote thereon.
ARTICLE 10
Custody of Securities and Cash
------------------------------
10.1 Employment of a Custodian. The Trust shall place and at all times
-------------------------
maintain in the custody of a Custodian (including any subcustodian for the
Custodian) all funds, securities, and similar investments owned by the Trust for
the benefit of any of its SubTrusts. The Custodian shall be a bank that meets
the qualifications for custodians for portfolio securities contained in the 1940
Act. subject to the 1940 Act, the Trust's Custodian may deposit all or a part
of the securities, cash or other property owned by the Trust for the benefit of
any of its Series of Shares in a sub-custodian or sub-custodians situated within
or without the United States. The Custodian shall be appointed and its
remuneration fixed by the Trustees.
-7-
<PAGE>
10.2 Central Certificate Service. Subject to the 1940 Act, the Trust's
---------------------------
Custodian and sub-custodians may deposit all or any part of the securities owned
by the Trust for the benefit of any of its Series of Shares in a system for the
central handling of securities established by a national securities exchange or
national securities association registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, or such other person,
domestic or foreign, as may be permitted by the Commission, or otherwise in
accordance with the 1940 Act, pursuant of any issuer deposited within the system
are treated as fungible and may be transferred or pledged by bookkeeping entry
without physical delivery of such securities.
10.3 Cash Assets. The cash proceeds from the sale of securities and
-----------
similar investments and other cash assets of the Trust for the benefit of any of
its Series of Shares shall be kept in the custody of a bank or banks appointed
pursuant to Section 10.1 hereof, or in accordance with such rules and
regulations or orders as the Securities and Exchange Commission may from time to
time prescribe for the protection of investors, except that the Trust may
maintain a checking account or accounts in a bank or banks, of not less than
$10,000,000, provided that the balance of such account or the aggregate balances
of such accounts shall at no time exceed the amount of the fidelity bond,
maintained pursuant to the requirements of the 1940 Act, covering the officers
or employees authorized to draw on such account or accounts.
10.4 Free Cash Accounts. The Trust may, upon resolution of its Trustees,
------------------
maintain a petty cash account free of the foregoing requirements of this Article
10 in an amount not to exceed $500, provided that such account is operated under
the imprest system and is maintained subject to adequate controls approved by
the Trustees over disbursements and reimbursements including, but not limited
to, fidelity bond coverage for persons having access to such funds.
10.5 Action Upon Termination of Custodian Agreement. Upon resignation of a
----------------------------------------------
Custodian of the Trust or inability of a Custodian to continue to serve, the
Trustees shall promptly appoint a successor Custodian, but in the event no
successor Custodian can be found who has the required qualifications and is
willing to serve, the Trustees shall call as promptly as possible a special
meeting of the Shareholders to determine whether the Trust shall function
without a Custodian or shall be liquidated. If so directed by vote of the
holders of a majority of the outstanding Shares of the Trust, held by it as
specified in such vote
ARTICLE 11
Dealings with Trustees and Officers
-----------------------------------
Any Trustee, officer or other agent of the Trust may acquire, own and
dispose of Shares of the Trust to the same extent as if he were not a Trustee,
officer or agent; and the Trustees may accept subscriptions to Shares or
repurchase or redeem Shares from any firm or company in which he is interested.
ARTICLE 12
Amendments to the By-Laws
-------------------------
These By-Laws may be amended or repealed, in whole or in part, by the
Trustees.
-8-
<PAGE>
ARTICLE 13
Declaration of Trust
--------------------
The Agreement and Declaration of Trust establishing North American Security
Trust dated September ___, 1988, 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 the name "North American Security Trust" refers to
the Trustees under the Declaration of Trust collectively as Trustees, but not as
individuals or personally; and no Trustee, Shareholder, officer, employee or
agent of North American Security 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 or otherwise, in connection with the affairs of North
American Security Trust or any Series of Shares thereof, but only the assets
belonging to the Trust, or to the particular Series of Shares with which the
obligee or claimant dealt, shall be liable.
-9-
<PAGE>
NORTH AMERICAN FUNDS
AMENDMENT TO ADVISORY AGREEMENT
AMENDMENT made this 31st day December, 1997, to the Advisory Agreement
dated October 1, 1997 between The North American Funds, a Massachusetts business
trust (the "Trust") and CypressTree Asset Management Corporation, Inc., a
Delaware corporation ("CAM" or the "Adviser"). In consideration of the mutual
covenants contained herein, the parties agree as follows:
CHANGE IN APPENDIX A
Appendix A to this Agreement is revised to reflect the appointment and
compensation of CAM as investment adviser for the additional portfolios
(the "Portfolios") as set forth in Appendix A to this Amendment.
CHANGE IN APPENDIX B
Appendix B to this Agreement is revised to include the Portfolios as set
forth in Appendix B to this Amendment.
EFFECTIVE DATE
This Amendment shall become effective with respect to each Portfolio
on the later of (I) the date of its execution, (ii) the effective date of
the post-effective amendment to the registration statement of the North
American Funds under the Securities Act of 1933 that incorporates with
respect to the Portfolio the terms of the Agreement as amended herein and
(iii) the date of the meeting of shareholders (or sole shareholder if
applicable) of the Portfolio called for the purpose of voting on this
Amendment, at which meeting this Amendment shall have been approved by the
vote of a majority of the outstanding voting securities (as defined in the
Investment Company Act of 1940, as amended) of the Portfolio.
NORTH AMERICAN FUNDS
BY:_______________________
CYPRESSTREE ASSET MANAGEMENT CORPORATION, INC.
BY:_______________________
<PAGE>
The Percentage Fee for each Portfolio shall be accrued for each calendar
day and the sum of the daily fee accruals shall be payable monthly to the
Adviser. 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 Fund's prospectus
and statement of additional information as of the close of business on the
previous business day on which the Fund was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee 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 proporation which such period bears to
the full month in which such effectiveness or termination occurs.
-2-
<PAGE>
APPENDIX B
THE FIXED LIMIT FOR EACH PORTFOLIO FOR PURPOSES OF PARAGRAPH 4.2.(3) SHALL BE:
<TABLE>
<CAPTION>
PORTFOLIO PERCENT
--------- -------
<S> <C>
Money Market Fund......................................... .500%
Investment quality Bond Fund.............................. .900%
U.S. Government Securities Fund........................... .900%
Equity-Income Fund........................................ 1.065%
Growth and Income Fund.................................... .990%
Balanced Fund............................................. 1.040%
Global Equity Fund........................................ 1.400%
National Municipal Bond Fund.............................. .850%
Strategic Income Fund..................................... 1.150%
International Growth and Income Fund...................... 1.400%
Small/Mid Cap Fund........................................ 1.325%
International Small Cap Fund.............................. 1.550%
Growth Equity Fund........................................ 1.300%
Emerging Growth Fund...................................... 1.400%
Tax-Sensitive Equity Fund................................. 1.400%
</TABLE>
-3-
<PAGE>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made as of January 1, 1998 , between CypressTree Asset Management
Corporation, Inc., a Delaware corporation ("Cypress" or the "Adviser"), and
Standish, Ayer & Wood, Inc. (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 Portfolio or Portfolios specified in Appendix A to this
Agreement as it shall be amended by the Adviser and the Subadviser from time to
time (each, a "Portfolio"). 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, supervision and control of the
Trustees of the Trust and the Adviser, the Subadviser shall have full
discretionary authority to, and shall, manage the investments and
determine the composition of the assets of the Portfolios in
accordance with the Portfolio's registration statement, as amended. In
fulfilling its obligations to manage the investments and reinvestments
of the assets of the Portfolio, 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 Portfolio or are under consideration for inclusion in
the Portfolio;
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 steps reasonably necessary to implement these
investments 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
<PAGE>
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 assisting the Trustees, the Adviser
and the Trust's Custodian to calculate the fair value of such
securities and the Portfolio's net asset value.
The Subadviser, at its own expense, shall furnish all necessary
investment, management, administrative and clerical facilities,
and personnel necessary for the performance of its duties
hereunder. The Subadviser shall not be responsible, however, for
shareholder, custodian, administration and transfer agency
services and expenses, or for brokerage commissions, transfer
fees, taxes, federal or state registration fees and other
expenses of the Trust or Adviser.
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 Portfolio in accordance with such policies or practices
as may be established by the Trustees and described in the
Trust's registration statement as amended. In selecting brokers
and dealers to effect transactions with respect to a Portfolio,
the Subadviser may take into account research and brokerage
services supplied by brokers and dealers to the Subadviser. The
Subadviser also 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.
The Subadviser will maintain all accounts, books and records with
respect to the Portfolio 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. The Adviser will maintain its own accounts
books and records with respect to the Trust and Portfolio as are
required of an investment adviser to a registered investment
company pursuant
-2-
<PAGE>
to the Investment Company Act and the Investment Advisers Act and
rules thereunder.
The Subadviser shall have no responsibility for the custody or
safekeeping of assets of the Portfolio, or for the settlement of
transactions, the collection of income or dividends, the
withholding of taxes or other functions incident to the role of
custodian.
The Subadviser shall be responsible for the voting of all proxies, the
giving or withholding of all consents and the exercise of all
other rights and privileges with respect to securities of the
Portfolio as the Trustees or the Adviser may from time to time
request, in each case in accordance with such policies or
guidelines as the Trustees or Adviser shall provide to the
Subadviser. The Adviser shall cause the Trust's custodian to
transmit promptly to the Subadviser all materials received with
respect to proxies, consents and other rights and privileges
concerning securities of the Portfolio, and the Subadviser shall
not be responsible for not acting upon materials not timely
received;
The Adviser shall notify the Subadviser in writing of any change in
the Portfolio's investment objectives, policies and restrictions,
whether appearing in the Trust's registration statement or
otherwise. The Subadviser shall have not responsibility for
complying with any objective, policy or restriction for which it
has not been so notified.
The Adviser shall not cause, and shall prevent any of its affiliates
from causing, any marketing material or sales literature relating
to the Portfolio or Trust that makes reference to the Subadviser
to be released unless the Subadviser has first consented to such
release, which consent shall not unreasonably be withheld.
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 shareholders, directors, 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 directors, officers or employees; and neither the
Subadviser nor any of
-3-
<PAGE>
its shareholders, directors, 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 or 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
shareholders, directors, officers or otherwise; that
shareholders, directors, officers, and agents 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 Articles of
Organization of the Subadviser, respectively, or by specific
provision of applicable law.
The services to be rendered by the Subadviser shall not be considered
exclusive. Nothing in this Agreement will in any way limit or
restrict the Subadviser, its affiliates or its or their officers,
directors, or employees from buying, selling or trading in any
securities for its or their own accounts or other accounts. The
Subadviser may act as an investment adviser to any other person,
firm or corporation, and may perform investment management and
any other services for any other person, association,
corporation, firm or other entity pursuant to any contract or
otherwise, and take any action or do any thing in connection
therewith or related thereto; and no such performance of
management or other services or taking of any such action or
doing of any such thing shall be in any manner restricted or
otherwise affected by any aspect of any relationship of the
Subadviser to or with the Trust or Adviser or deemed to violate
or give rise to any duty or obligation of the Subadviser to the
Trust except as otherwise imposed by law. The Adviser and the
Trust recognize that Subadviser, in effecting transactions for
its various accounts, may not always be able to take or liquidate
investment positions in the same security at the same time and at
the same price.
c. 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, the Subadviser, to the extent permitted by
applicable laws and regulations, may
-4-
<PAGE>
aggregate the securities to be sold or purchased in order to
obtain the best execution and lower brokerage commissions, if
any. 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 it considers to be the
most equitable and consistent with its fiduciary obligations to
the Portfolio and to such clients.
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) 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.
In the event the termination of this Agreement as to a Portfolio, the
Subadviser may continue to act as investment subadviser to the Portfolio pending
the requisite approval of a new agreement to the extent permitted by Rule 15a-4
under the Investment Company Act or any successor rule, as either may be amended
from time to time.
This Agreement may be terminated by the Trustees of the Trust at any time,
without the payment of any penalty, 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,
-5-
<PAGE>
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 or qualified 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 or qualified 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 assignment (as defined in the Investment Company Act) of this
Agreement or any change in actual control or management of the
Subadviser or the portfolio manager of any Portfolio.
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.
-6-
<PAGE>
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, without regard to
the conflict of law principles thereof, 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 of the
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
CYPRESSTREE ASSET MANAGEMENT
CORPORATION, INC.
By:_________________________________
STANDISH, AYER & WOOD, INC.
-7-
<PAGE>
By:__________________________________
-8-
<PAGE>
APPENDIX A
The Subadviser shall serve as investment subadviser for the following
Portfolio or Porfolios 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"):
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.
-9-
<PAGE>
SUBADVISORY AGREEMENT
---------------------
THIS AGREEMENT is made and entered into on this day of January 1,
1998, between CYPRESSTREE ASSET MANAGEMENT CORPORATION, INC. (the "Adviser"), a
Delaware corporation registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), and WARBURG PINCUS ASSET MANAGEMENT, INC. (the
"Subadviser"), a Delaware corporation also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the
North American Funds, a Massachusetts business trust (the "Trust"), dated as of
October 1, 1997 (the "Advisory Agreement"), been retained to act as investment
adviser for the Emerging Growth Fund (the "Fund"), one of the Trust's series of
shares;
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Advisory Agreement permits the Adviser to delegate
certain of its duties under the Advisory Agreement to other investment advisers;
and
WHEREAS, the Adviser desires to retain the Subadviser to assist it in
the provision of a continuous investment program for that portion of the Fund's
assets which the Adviser, from time to time, assigns to the Subadviser (the
"Subadviser Assets"), and the Subadviser is willing to render such services
subject to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Investment Description; Appointment as Subadviser. The Fund
-------------------------------------------------
desires to employ its capital by investing and reinvesting in securities of the
kind and in accordance with the limitations specified in the Trust's Prospectus
and Statement of Additional Information relating to the Fund as may be in effect
from time to time (collectively, the "Prospectus") and which are filed with the
SEC as part of the Trust's Registration Statement on Form N-1A, as amended from
time to time, and in such manner
<PAGE>
and to such extent as may be approved by the Board of Trustees of the Trust. A
copy of the Prospectus, as currently in effect, has been provided to the
Subadviser. The Adviser hereby retains the Subadviser to act as investment
adviser for and to manage the Subadviser Assets subject to the supervision of
the Adviser and the Board of Trustees of the Trust and subject to the terms of
this Agreement; and the Subadviser hereby accepts such employment. In such
capacity, the Subadviser shall be responsible for the investment management of
the Subadviser Assets. It is recognized that the Subadviser now acts, and that
from time to time hereafter may act, as investment adviser to one or more other
investment companies and to fiduciary or other managed accounts and that the
Adviser and the Trust have no objection to such activities.
2. Duties of the Subadviser
(a) Investments. The Subadviser is hereby authorized and
-----------
directed and hereby agrees, subject to the stated investment
policies and restrictions of the Fund as set forth in the
Prospectus and subject to the directions of the Adviser and the
Trust's Board of Trustees, to purchase, hold and sell investments
for the Subadviser Assets ("Fund Investments") and to monitor on
a continuous basis the performance of such Fund Investments.
Subject to the supervision of the Board of Trustees and the
Adviser and the terms and conditions hereof, including without
limitation Section 2(b), the Subadviser will: (1) manage the
Subadviser Assets in accordance with the Fund's investment
objective, policies and limitations as stated in the Prospectus
as they apply to the Subadviser Assets; (2) make investment
decisions for the Fund; (3) place purchase and sale orders for
portfolio transactions for the Fund; and (4) manage otherwise
uninvested cash assets included in the Subadviser Assets. In
providing these services, the Subadviser will formulate and
implement a continuous program of investment, evaluation and, if
appropriate, sale and reinvestment of the Subadviser Assets. The
Adviser agrees to provide to the Subadviser such assistance as
may be reasonably requested by the Subadviser in connection with
its activities under this Agreement, including, without
limitation, information concerning the Fund, its funds available,
or to become available, for investment and generally as to the
conditions of the Fund's affairs.
-2-
<PAGE>
(b) Compliance with Applicable Laws and Governing
---------------------------------------------
Documents. In the performance of its duties and obligations under this
---------
Agreement, the Subadviser shall act in conformity with the Prospectus
and with the instructions and directions received in writing from the
Adviser or the Board of Trustees of the Trust and will comply with the
requirements of the 1940 Act, the Advisers Act, the Internal Revenue
Code of 1986, as amended (the "Code") (including the requirements for
qualification as a regulated investment company) and all other federal
and state laws and regulations applicable to its services hereunder.
Notwithstanding the foregoing, the Adviser shall remain responsible
for ensuring the Fund's overall compliance with the 1940 Act, the
Advisers Act, the Code and all other applicable federal and state laws
and regulations and the Subadviser is only obligated to comply with
subsection (b) with respect to the Subadviser Assets.
The Adviser will provide the Subadviser with reasonable advance
notice of any change in the Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in
the performance of its duties and obligations under this Agreement,
manage the Fund Investments consistent with such changes. The Adviser
acknowledges and agrees that the Prospectus will at all times be in
compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or the
Fund, including, without limitation, the 1940 Act and the rules and
regulations thereunder, and that the Subadviser shall have no
liability in connection therewith, except as to the accuracy of
material information furnished in writing by the Subadviser to the
Fund or to the Adviser specifically for inclusion in the Prospectus.
The Subadviser hereby agrees to provide to the Adviser in a timely
manner such information relating to the Subadviser and its
relationship to, and actions for, the Fund as may be required to be
contained in the Prospectus.
In fulfilling these requirements and its other requirements and
obligations hereunder, the Subadviser shall be entitled to rely on and
act in accordance with (1) information, which is not clearly
inaccurate on its face, provided to it by the Trust's administrator,
fund accountant, custodian or other service provider and (2)
instructions, which may be standing instructions, from
-3-
<PAGE>
the Adviser. The Adviser agrees to provide or cause to be provided to
the Subadviser on an ongoing basis upon request by the Subadviser,
such information as is requested by the Subadviser for the performance
of its obligations under this Agreement, and the Subadviser shall not
be in breach of any term of this Agreement or be deemed to have acted
negligently if the Adviser fails to provide or cause to be provided
such information and the Subadviser relies on the information most
recently provided to it.
(c) Voting of Proxies. The Subadviser shall have the power to
-----------------
vote, either in person or by proxy, all securities in which the
Subadviser Assets may be invested from time to time, and shall not be
required to seek instructions from, the Adviser or the Fund.
(d) Agent. Subject to any other written instructions of the
-----
Adviser or the Trust, the Subadviser is hereby appointed the Adviser's
and the Trust's agent and attorney-in-fact for the limited purposes of
executing account documentation, agreements, contracts and other
documents as the Subadviser shall be requested by brokers, dealers,
counterparties and other persons in connection with its management of
the assets of the Fund. The Subadviser agrees to provide the Adviser
and the Trust with copies of any such agreements executed on behalf of
the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
---------
supervision of the Adviser and the Trust's Board of Trustees and in
accordance with the Prospectus or such other policies or practices as
may be established by the Trustees, to establish and maintain accounts
on behalf of the Fund with, and place orders for the purchase and sale
of the Fund Investments with or through, such persons, brokers or
dealers ("brokers") as Subadviser may elect and negotiate commissions
to be paid on such transactions. The Subadviser, however, is not
required to obtain the consent of the Adviser or the Trust's Board of
Trustees prior to establishing any such brokerage account. The
Subadviser shall place all orders for the purchase and sale of
portfolio investments for the Fund's account with brokers selected by
the Subadviser. In the selection of such brokers and the placing of
such orders, the Subadviser shall use its best efforts to
-4-
<PAGE>
seek to obtain for the Fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions or spreads for brokerage and research services,
as provided below. In using its best efforts to obtain for the Fund
the most favorable price and execution available, the Subadviser,
bearing in mind the Fund's best interests at all times, shall consider
all factors it deems relevant, including price, the size of the
transaction, the breadth and nature of the market for the security,
the difficulty of the execution, the amount of the commission or
spreads, if any, the timing of the transaction, market prices and
trends, the reputation, experience and financial stability of the
broker involved, and the quality of service rendered by the broker or
dealer in other transactions. Subject to such policies as the Trustees
may determine, including, without limitation, policies contained in
the Prospectus, or as may be mutually agreed to by the Adviser and the
Subadviser, and to the extent permitted by applicable law, the
Subadviser shall be allowed to select a broker that provides brokerage
and research services to the Subadviser who charges a commission or
spread for effecting a Fund investment transaction that is in excess
of the amount of commission or spread that another broker would have
charged for effecting that transaction.
It is recognized that the services provided by such brokers may
be useful to the Subadviser in connection with the Subadviser's
services to other clients. On occasions when the Subadviser deems the
purchase or sale of a security to be in the best interests of the Fund
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 sold or
purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event,
allocation of securities so sold or purchased, 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 Fund and to such
other clients over time. It is recognized that in some cases, this
procedure may adversely affect the price paid or received by the Fund
-5-
<PAGE>
or the size of the position obtainable for, or disposed of by, the
Fund.
(f) Securities Transactions. The Subadviser and any
-----------------------
affiliated person of the Subadviser will not purchase securities or
other instruments from or sell securities or other instruments to the
Fund; provided, however, the Subadviser may purchase securities or
-------- -------
other instruments from or sell securities or other instruments to the
Fund if such transaction is permissible under applicable laws and
regulations, including, without limitation, the 1940 Act and the
Advisers Act and the rules and regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j-l under the 1940 Act), agrees to observe
and comply with Rule 17j-l and its Code of Ethics (which shall comply
in all material respects with Rule 17j-l, as the same may be amended
from time to time). On a quarterly basis, the Subadviser will either
(i) certify to the Adviser that the Subadviser and its Access Persons
have complied with the Subadviser's Code of Ethics with respect to the
Subadviser Assets or (ii) identify any material violations which have
occurred with respect to the Subadviser Assets. In addition, the
Subadviser will report at least annually to the Adviser concerning any
other violations of the Subadviser's Code of Ethics which required
significant remedial action and which were not previously reported.
(g) Books and Records. Pursuant both to the 1940 Act and the
-----------------
Advisers Act and the rules and regulations promulgated thereunder, the
Subadviser shall maintain separate books and records of all matters
pertaining to the Subadviser Assets. The Fund's books and records
(relating to the Subadviser Assets) shall be available to the Adviser
at any time upon reasonable request during normal business hours and
shall be available for telecopying without unreasonable delay to the
Adviser during any day that the Fund is open for business.
(h) Information Concerning Fund Investments and Subadviser.
------------------------------------------------------
From time to time (but no less often than quarterly) as the Adviser or
the Fund may reasonably request, the Subadviser will furnish the
requesting party reports on portfolio transactions and reports on
-6-
<PAGE>
Fund Investments held in the portfolio, all in such detail as the
Adviser or the Fund may reasonably request. The Subadviser will also
inform the Adviser promptly of changes in portfolio managers
responsible for Subadviser Assets or of changes in the control of the
Subadviser. The Subadviser will make available its officers and
employees to meet with the Trust's Board of Trustees in person
annually on reasonable notice to review the Fund Investments and the
Subadviser will report to the Board of Trustees in writing on the Fund
Investments quarterly. Under normal circumstances, employees of the
Subadviser shall not be obligated to attend in person more than one
Board meeting per year.
(i) Custody Arrangements. The Subadviser shall on each
--------------------
business day provide the Adviser and the Trust's custodian such
information as the Adviser and the Trust's custodian may reasonably
request relating to all transactions concerning the Fund Investments
including, without limitation, recommendations, in accordance with
policies and procedures established by the Trustees, of the fair value
of securities for which market quotes are not available.
3. Independent Contractor. In the performance of its duties
----------------------
hereunder, the Subadviser is and shall be an independent contractor and unless
otherwise expressly provided herein or otherwise authorized in writing, shall
have no authority to act for or represent the Fund or the Adviser in any way or
otherwise be deemed an agent of the Fund or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will
--------
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities and other investments
(including brokerage fees and commissions and other transaction charges, if any)
purchased for the Fund. The Subadviser shall not be responsible for any expenses
of the operations of the Fund including, without limitation, brokerage fees and
commissions and other transaction charges, if any. The Subadviser shall not be
responsible for the Trust's, the Fund's or the Adviser's expenses.
5. Compensation. For the services provided and the expenses
------------
assumed with respect to the Fund pursuant to this Agreement, the Subadviser will
be entitled to a fee, computed and accrued daily and payable monthly in arrears
no later than the seventh (7th) business day following the end of each month,
from
-7-
<PAGE>
the Adviser or the Trust, calculated at the annual rate set forth in Exhibit I.
The method of determining net assets of the Fund for purposes hereof
shall be the same as the method of determining net assets for purposes of
establishing the offering and redemption price of the shares of the Fund as
described in the Prospectus. If this Agreement shall be effective for only a
portion of a month, the aforesaid fee shall be prorated for the portion of such
month during which this Agreement is in effect.
Notwithstanding any other provision of this Agreement, the Subadviser
may from time to time agree not to impose all or a portion of its fee otherwise
payable hereunder (in advance of the time such fee or portion thereof would
otherwise accrue). Any such fee reduction may be discontinued or modified by the
Subadviser at any time.
6. Representation and Warranties of Subadviser. The Subadviser
-------------------------------------------
represents and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under
the Advisers Act;
(b) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of Delaware with the power to own
and possess its assets and carry on its business as it is now being
conducted;
(c) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by its Board of Directors or shareholders, and no action by
or in respect of, or filing with, any governmental body, agency or
official is required on the part of the Subadviser for the execution,
delivery and performance by the Subadviser of this Agreement, and the
execution, delivery and performance by the Subadviser of this
Agreement do not contravene or constitute a default under (i) any
provision of applicable law, rule or regulation, (ii) the Subadviser's
governing instruments, or (iii) any material agreement, judgment,
injunction, order, decree or other instrument binding upon the
Subadviser;
-8-
<PAGE>
(d) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all
material respects.
7. Representations and Warranties of Adviser. The Adviser
-----------------------------------------
represents and warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
(b) The Adviser is a corporation duly organized and validly
existing under the laws of the State of Delaware with the power to own
and possess its assets and carry on its business as it is now being
conducted;
(c) The execution, delivery and performance by the Adviser of
this Agreement are within the Adviser's powers and have been duly
authorized by its Board of Directors or shareholders, and no action by
or in respect of, or filing with, any governmental body, agency or
official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement
do not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any material agreement, judgment, injunction,
order, decree or other instrument binding upon the Adviser;
(d) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC
and the information contained therein is accurate and complete in all
material respects;
(e) The Adviser acknowledges that it has received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement;
(f) The Trust is in compliance in all material respects, and
during the term of this Agreement will remain in compliance in all
material respects, with all federal and state laws, rules and
regulations applicable to the Trust and the operation of its
-9-
<PAGE>
business (other than those related to investment objectives, policies
and restrictions over which the Subadviser has discretion pursuant to
the terms hereof), including, without limitation, applicable
disclosure and filing obligations for prospectuses, statements of
additional information, registration statements, periodic reports to
shareholders and regulatory bodies, proxy statements and promotional
materials and advertisements; and
(f) The Trust is in compliance in all material respects, and
during the term of this Agreement will remain in compliance in all
material respects, with the terms and conditions of the Prospectus
(other than those related to investment objectives, policies and
restrictions over which the Subadviser has discretion pursuant to the
terms hereof), including, without limitation, provisions relating to
the computation of the Trust's net asset value and those relating to
processing purchase, exchange and redemption requests.
8. Survival of Representations and Warranties; Duty to Update
----------------------------------------------------------
Information. All representations and warranties made by the Subadviser and the
- -----------
Adviser pursuant to Sections 6 and 7, respectively, shall survive for the
duration of this Agreement and the parties hereto shall promptly notify each
other in writing upon becoming aware that any of the foregoing representations
and warranties are no longer true.
9. Liability. Except as may otherwise be provided by the 1940
---------
Act or other federal securities laws, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Subadviser or a reckless disregard
of its duties hereunder, the Subadviser, any affiliated person of the Subadviser
and each person, if any, who within the meaning of the Securities Act of 1933,
as amended, controls the Subadviser ("Controlling Persons") shall not be subject
to any liability to the Adviser, the Trust or the Fund or any of the Fund's
shareholders, and, in the absence of willful misfeasance, bad faith or gross
negligence on the part of the Adviser or a reckless disregard of its duties
hereunder, the Adviser, any affiliated person of the Adviser and each of its
Controlling Persons shall not be subject to any liability to the Subadviser, for
any act or omission in the case of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of Fund Investments.
10. Duration and Termination.
------------------------
-10-
<PAGE>
(a) Duration. Unless sooner terminated, this Agreement shall
--------
continue for an initial period of two years and thereafter shall
continue automatically for successive annual periods, provided such
continuance is specifically approved at least annually by the Trust's
Board of Trustees or vote of a majority of the outstanding voting
securities of the Fund; provided that in either event its continuance
--------
also is approved by a majority of the Trust's Trustees who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose
of voting on such approval.
(b) Termination. Notwithstanding whatever may be provided
-----------
herein to the contrary, this Agreement may be terminated at any time,
without payment of any penalty:
(i) By vote of a majority of the Trust's Board of
Trustees, or by vote of a majority of the outstanding voting
securities of the Fund, or by the Adviser, in each case, upon
sixty (60) days' written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice
to the other parties in the event of a material breach of any
provision of this Agreement by the other party; or
(iii) By the Subadviser upon sixty (60) days written notice
to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined
in the 1940 Act) and shall terminate automatically in the event of its
assignment or upon the termination of the Advisory Agreement. In the
event this Agreement is terminated or is not approved in the foregoing
manner, the provisions contained in Section 9 shall remain in effect.
11. Reference to Subadviser. Neither the Adviser, the Trust nor any
-----------------------
affiliated person or agent of the Adviser or the Trust shall make reference to
or use the name of "Warburg Pincus Asset Management, Inc." or any derivative
thereof or logo associated with that name, except references concerning the
identity of and services provided by the Subadviser to the Fund, which
references shall not differ in substance from those included in the Prospectus
and this Agreement, in any advertising
-11-
<PAGE>
or promotional materials without the prior approval of the Subadviser, which
approval shall not be unreasonably withheld or delayed.
Upon termination of this Agreement in accordance with Section 10(b)
hereof, the Adviser, the Trust and the Fund and their affiliates shall cease to
make such reference or use such name (or derivative or logo).
12. Amendment. This Agreement may be amended by written amendment
---------
signed by the parties, provided that the terms of any material amendment shall
be approved by: (a) the Trust's Board of Trustees or by a vote of a majority of
the outstanding voting securities of the Fund and (b) the vote of a majority of
those Trustees of the Trust who are not "interested persons" of either party to
this Agreement cast in person at a meeting called for the purpose of voting on
such approval, if such approval is required by applicable law.
13. Confidentiality. Subject to the duties of the Subadviser to
---------------
comply with applicable law, including any demand of any regulatory or taxing
authority having jurisdiction, the Subadviser shall treat as confidential all
records and other information pertaining to the Fund or the Adviser which the
Subadviser maintains or receives as a result of its responsibilities under this
Agreement. In addition, subject to the duties to comply with any applicable law,
the Adviser agrees to treat as confidential any information concerning the
Subadviser, including its investment policies or objectives, which the Adviser
receives as the result of its actions under this Agreement.
14. Notice. Any notice that is required to be given by the parties
------
to each other under the terms of this Agreement shall be in writing, delivered,
or mailed postpaid to the other parties at the following addresses, which may
from time to time be changed by the parties by notice to the other parties:
(a) If to the Subadviser:
Warburg Pincus Asset Management, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Attention: Eugene P. Grace
-12-
<PAGE>
(b) If to the Adviser:
CypressTree Asset Management Corporation, Inc.
286 Congress Street
Boston, Massachusetts 02210
Attention: Joseph T. Grause, Jr.
(c) If to the Trust:
North American Funds
c/o CypressTree Asset Management
Corporation, Inc.
286 Congress Street
Boston, Massachusetts 02210
Attention: Joseph T. Grause, Jr.
15. Jurisdiction. This Agreement shall be governed by and construed
------------
in accordance with substantive laws of the Commonwealth of Massachusetts without
reference to choice of law principles thereof and in accordance with the 1940
Act. In the case of any conflict, the 1940 Act shall control.
16. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
17. Certain Definitions. For the purposes of this Agreement,
-------------------
"interested person," "affiliated person", "majority of outstanding voting
securities" and "assignment" shall have their respective meanings as set forth
in the 1940 Act, subject, however, to such exemptions as may be granted by the
SEC.
18. Captions. The captions herein are included for convenience of
--------
reference only and shall be ignored in the construction or interpretation
hereof.
19. Severability. If any provision of this Agreement shall be
------------
held or made invalid by a court decision or applicable law, the remainder of the
Agreement shall not be affected adversely and shall remain in full force and
effect.
20. Massachusetts Business Trust. The terms "Trust" and "Trustees"
----------------------------
refer respectively to the Trust created and the Trustees as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust, which has been or may be amended from time to time, and to which
reference is hereby made and a copy of which is on file at the office of the
Secretary
-13-
<PAGE>
of State of The Commonwealth of Massachusetts and elsewhere as required by law,
and to any and all amendments thereto so filed or hereafter filed. The
Subadviser hereby acknowledges and agrees that the obligations of the Trust
entered into in the name or on behalf thereof by any of the Trust, the Trustees
or their representatives or agents are not made individually, but only in their
capacities with respect to the Trust. Such obligations are not binding upon any
of the Trustees, shareholders or representatives of the Trust personally, but
bind only the assets of the Trust. The Subadviser hereby acknowledges and
agrees that all persons dealing with any series of shares of the Trust must look
solely to the assets of the Trust belonging to such series for the enforcement
of any claims against the Trust.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first written above.
CYPRESSTREE ASSET MANAGEMENT
CORPORATION, INC.
By:_______________________________
Joseph T. Grause, Jr.
Vice President
WARBURG PINCUS ASSET MANAGEMENT,
INC.
By:_______________________________
Eugene P. Grace
Senior Vice President
-15-
<PAGE>
EXHIBIT I
.55% of the Fund's average daily net assets
-16-
<PAGE>
DEALER AGREEMENT
AGREEMENT by and among CypressTree Funds Distributors, Inc. ("Cypress") and
________________________________ ("Selling Dealer"), each of whom is registered
as a broker-dealer under the Securities Exchange Act of 1934, as amended, and is
a member of the National Association of Securities Dealers, Inc. ("NASD").
I. INTRODUCTION
WHEREAS, Cypress has been appointed principal underwriter of the shares of North
American Funds ("Fund") and has the exclusive right as agent for the Fund to
sell shares of the Fund; and
WHEREAS, Selling Dealer wishes to participate in the distribution of the shares
of the Fund;
NOW THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the parties hereto agree as follows:
II. AGREEMENT TO SELL
Subject to the terms and conditions set forth in the Agreement, Cypress shall,
acting as agent for the Fund and not as principal, sell shares of the Fund to
Selling Dealer which shall, acting as principal (dealer) for its own account and
not as broker or agent for, or employee of, Cypress or the Fund, resell such
shares to the public.
III. TERMS AND CONDITIONS
All transactions in Fund shares shall be subject to the following terms and
conditions:
1. Shares will be offered pursuant to the then current prospectus of the
Fund. If such prospectus contains provisions inconsistent with this Agreement,
the prospectus shall control.
2. Orders received from Selling Dealer will be accepted through Cypress
only at the public offering price applicable to each order as set forth in the
then current prospectus of the Fund. All orders from Selling Dealer will be
confirmed by or on behalf of the Fund in writing. Procedures for processing
orders shall be determined by Cypress and instructions relating thereto shall be
forwarded to Selling Dealer from time to time. The Fund and Cypress each may
accept or reject any order in their sole discretion.
3. Selling Dealer shall receive on all purchases of shares of the Fund
discounts or commission payments as specified in Schedule A hereto and in the
circumstances set forth in the then current prospectus of the Fund.
<PAGE>
4. If any shares of the Fund sold to Selling Dealer under the terms of
this Agreement are tendered for redemption or repurchase within seven business
days after the date of the confirmation of the original purchase by Selling
Dealer, Selling Dealer shall forfeit its right to any discount or commission
with respect to such shares. Cypress shall notify Selling Dealer of any such
redemption or repurchase within ten business days from the date on which the
request for redemption or repurchase is delivered to Cypress or to the Fund, and
Selling Dealer shall immediately refund to Cypress any discount or commission
allowed or paid in connection with such sale. In the event of any such
redemption or repurchase, Cypress shall refund to the Fund their share of the
sales charge.
5. Selling Dealer shall purchase shares of the Fund only from the Fund
through Cypress and from Selling Dealer's customers. If shares are purchased
from the Fund, Selling Dealer agrees that all such purchases shall be made only
to cover orders already received by Selling Dealer or for its own bonafide
investment. If shares are purchased from customers, Selling Dealer agrees to
pay such customers not less than the price to be paid by the Fund with respect
to purchases accepted through Cypress at such time.
6. Selling Dealer shall sell shares only: (a) to customers at the public
offering price in effect at the time of such sale, in states where shares of the
Fund may be legally sold by Selling Dealer and in accordance with the then
current prospectus, registrations and permits of the Fund; and (b) to the Fund
upon tender for redemption or repurchase, which redemption or repurchase shall
be effected in the manner set forth in the then current prospectus of the Fund.
In the event of such a tender, Selling Dealer may act as principal for its own
account or as agent for its customer. If Selling Dealer acts as principal for
its own account, it agrees to pay its customer not less than the price received
from the Fund or Cypress acting for the Fund. If selling Dealer acts as agent
for its customer, it agrees not to charge the customer more than a fair
commission for handling the transaction.
7. All sales of shares of the Fund by Selling Dealer shall be made at the
public offering price as determined as set forth in the then current prospectus
of the Fund, and Selling Dealer shall not withhold orders from Cypress so as to
profit as a result of such withholding.
8. Cypress will not forward to the Fund for acceptance any conditional
order from Selling Dealer for the sale, repurchase or redemption of shares of
the Fund.
9. Payment for shares ordered by Selling Dealer must be received by the
Fund's transfer agent by the later of (a) three business days after Selling
Dealer receives such customer's purchase order or (b) one business day after
Selling Dealer receives payment from the customer. If such payment is not so
received, each of the Fund and Cypress as agent for the Fund reserves the right,
without notice, to immediately cancel the sale, in which case Selling Dealer
shall be held responsible for any loss, including loss of profit, suffered by
Cypress or the Fund resulting from the failure of Selling Dealer to make payment
as specified above.
-2-
<PAGE>
10. Unless other arrangements for payment and delivery are made, shares of
the Fund sold to Selling Dealer pursuant to this Agreement shall be available
for delivery, against payment, at the office of the Fund's transfer agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
11. No person is authorized to make any representations concerning the
shares of the Fund except those contained in the then current prospectus of the
Fund and in such printed information subsequently issued by the Fund or Cypress
as information supplemental to such prospectus. Any such supplemental materials
shall not be modified by Selling Dealer without the prior written consent of
Cypress. Moreover, Selling Dealer shall not make use of any advertisement or
sales literature which refers specifically to the Fund unless such material has
been approved in writing by Cypress prior to its first use by Selling Dealer.
In purchasing shares of the Fund from Cypress, Selling Dealer shall rely solely
on the representations contained in the then current prospectus of the Fund and
supplemental information referred to above.
12. Cypress shall provide Selling Dealer upon request, without any expense
to Selling Dealer, copies in reasonable numbers of the then current prospectus
of the Fund, any information issued supplementing such prospectus and such other
material as Cypress determines is necessary or desirable for use in connection
with sales of the shares of the Fund.
13. The Fund and Cypress each reserve the right in their discretion,
without notice, to suspend sales or withdraw the offering of the shares of the
Fund entirely.
14. Cypress will, upon request, inform Selling Dealer as to the states in
which shares of the Fund have been qualified for sale under, or are exempt from
the requirements of, applicable state securities laws. Cypress assumes no
responsibility or obligation, however, as to Selling Dealer's right to sell
shares of the Fund in any jurisdiction.
15. Selling Dealer appoints the Fund's transfer agent as its agent to
execute the purchase transactions of shares of the Fund in accordance with the
terms and provisions of any account, program, plan or service established or
used by Selling Dealer's customers and to confirm each purchase to such
customers on Selling Dealer's behalf. Selling Dealer guarantees the legal
capacity of its customers purchasing shares of the Fund and any other person or
entity in whose name shares are to be registered.
-3-
<PAGE>
GENERAL PROVISIONS
A. WAIVER
Failure of any party to insist upon strict compliance with any of the terms
and conditions of this Agreement shall not be construed as a waiver of any of
the terms and conditions, but the same shall remain in full force and effect.
No waiver of any of the provisions of this Agreement shall be deemed to be, or
shall constitute, a waiver of any other provisions, whether or not similar, nor
shall any waiver constitute a continuing waiver.
B. BINDING EFFECT
This Agreement shall be binding on and shall inure to the benefit of the
parties to it and
respective successors and assigns, provided that Selling Dealer may assign this
Agreement or any of the rights and obligations hereunder only with the prior
written consent of Cypress.
C. REGULATIONS
All parties agree to observe and comply with the existing laws, rules and
regulations of applicable local, state and federal regulatory authorities and
with those which may be enacted or adopted while this Agreement is in force
regulating the business contemplated hereby in any jurisdiction in which the
business described herein is to be transacted.
D. DISPUTES
All parties to this Agreement agree to abide by the NASD's Conduct Rules
and agree that any dispute arising hereunder shall be submitted to arbitration
held in Boston, Massachusetts in accordance with the Code of Arbitration
Procedure of the NASD, or similar rules or codes, in effect at the time of
submission of any such dispute.
E. GOVERNING LAW
This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Massachusetts.
F. AMENDMENT OF AGREEMENT
Cypress reserves the right to amend this Agreement at any time and Selling
Dealer agrees that an order to purchase shares of the Fund placed after notice
of any such amendment shall constitute Selling Dealer's consent to any such
amendment.
-4-
<PAGE>
G. TERMINATION
Each of the parties to this Agreement has the right to cancel this
Agreement with or without cause on notice to the other parties. Each of the
parties represents that it is a member in good standing of the NASD and agrees
that termination or suspension of such membership at any time shall immediately
terminate this Agreement.
H. NOTICES
All notices or communications shall be sent to the address shown below, or
to such other address as the party may request by giving written notice to the
other parties.
For CypressTree Funds Distributors, Inc.
286 Congress Street
Boston, MA 02210
(800) 872-8037
(Selling Dealer)
(Address)
(Telephone #)
I. SIGNATURES
CypressTree Funds Distributors, Inc.
By:_______________________________________
For Selling Dealer: ______________________
Address:__________________________________
__________________________________________
By:_______________________________________
Name and Title (Please Print)
__________________________________________
Signature
__________________________________________
-5-
<PAGE>
Back Office Operations Name & Phone
-6-
<PAGE>
CUSTODIAN CONTRACT
Between
NORTH AMERICAN SECURITY TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held By It................................ 5
2. Duties of the Custodian with Respect to Property of the Fund Held by
the Custodian in the United States.................................................. 6
2.1 Holding Securities............................................................ 6
2.2 Delivery of Securities........................................................ 6
2.3 Registration of Securities.................................................... 10
2.4 Bank Accounts................................................................. 11
2.5 Availability of Federal Funds................................................. 11
2.6 Collection of Income.......................................................... 12
2.7 Payment of Fund Monies........................................................ 12
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased............................................... 15
2.9 Appointment of Agents......................................................... 15
2.10 Deposit of Fund Assets in Securities System................................... 15
2.10A Fund Assets Held in the Custodian's Direct Paper System....................... 18
2.11 Segregated Account............................................................ 19
2.12 Ownership Certificates for Tax Purposes....................................... 20
2.13 Proxies....................................................................... 20
2.14 Communications Relating to Portfolio Securities............................... 21
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States........................................................ 21
3.1 Appointment of Foreign Sub-Custodians......................................... 22
3.2 Assets to be Held............................................................. 22
3.3 Foreign Securities Depositories............................................... 22
3.4 Segregation of Securities..................................................... 23
3.5 Agreements with Foreign Banking Institutions.................................. 23
3.6 Access of Independent Accountants of the Fund................................. 24
3.7 Reports by Custodian.......................................................... 24
3.8 Transactions in Foreign Custody Account....................................... 24
3.9 Liability of Foreign Sub-Custodians........................................... 25
3.10 Liability of Custodian........................................................ 26
3.11 Reimbursement for Advances.................................................... 26
3.12 Monitoring Responsibilities................................................... 27
3.13 Branches of U.S. Banks........................................................ 28
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
4 Payments for Sales or Repurchase or Redemptions of Shares
of the Fund............................................................. 28
5 Proper Instructions..................................................... 29
6 Actions Permitted Without Express Authority............................. 29
7 Evidence of Authority................................................... 30
8 Duties of Custodian With Respect to the Books of Account and
Calculation of Net Asset Value and Net Income........................... 30
9 Record.................................................................. 31
10 Opinion of Fund's Independent Public Accountants........................ 32
11 Reports to Fund by Independent Public Accountants....................... 32
12 Compensation of Custodian............................................... 33
13 Responsibility of Custodian............................................. 33
14 Effective Period, Termination and Amendment............................. 35
15 Successor Custodian..................................................... 36
16 Interpretive and Additional Provisions.................................. 37
17 Additional Series....................................................... 38
18 Massachusetts Law to Apply.............................................. 38
19 Limitation of Liability................................................. 38
</TABLE>
-3-
<PAGE>
CUSTODIAN CONTRACT
This Contract between North American Security Trust, a business trust
organized and existing under the laws of Massachusetts, having its principal
place of business at 695 Atlantic Avenue, Boston, Massachusetts 02111
hereinafter called the "Trust", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Trust is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Trust intends to initially offer shares in six series,
the Growth Trust, U.S. Government High Yield Trust, Money Market Trust,
Conservative Asset Allocation Trust, Moderate Asset Allocation Trust and
Aggressive Asset Allocation Trust (such series together with all other series
subsequently established by the Trust and made subject to this Contract in
accordance with paragraph 17, being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
-4-
<PAGE>
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Trust hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Trust, including securities which the Trust, on behalf of
the applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities"). The Trust on behalf of the Portfolio(s) agrees to
deliver to the Custodian all securities and cash of the Portfolio(s), and all
payments of income, payments of principal or capital distributions received by
it with respect to all securities owned by the Portfolio(s) from time to time,
and the cash consideration received by it for such new or treasury shares of the
Trust representing interests in the Portfolio(s), ("Shares") as may be issued or
sold from time to time. The Custodian shall not be responsible for any property
of a Portfolio held or received by the Portfolio and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Trust
("Board") on behalf of the applicable Portfolio(s), and provided that the
Custodian shall have no more or less responsibility or liability to the Trust on
account of any actions or omissions of any sub-custodian so employed than any
such sub-custodian has to the Custodian. The Custodian may employ as sub-
custodian for the Trust's foreign securities on behalf of the applicable
Portfolio(s) the foreign banking institutions and foreign securities
depositories designated in Schedule A hereto but only in accordance with the
provisions of Article 3.
-5-
<PAGE>
2. Duties of the Custodian with Respect to Property of the Trust Held By the
-------------------------------------------------------------------------
Custodian in the United States
- ------------------------------
2.1 Holding Securities. The Custodian shall hold and physically segregate
------------------
for the account of each Portfolio all non-cash property, to be held by it
in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System" and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
----------------------
securities owned by a Portfolio held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Trust on behalf of the applicable Portfolio,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account of the
Portfolio and receipt of payment therefor;
-6-
<PAGE>
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered into by
the Portfolio ;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or
other similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other consideration
is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into
the name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of any
agent appointed pursuant to Section 2.9 or into the name or
nominee name of any sub-custodian appointed pursuant to Article
l; or for exchange for a different number of bonds, certificates
or other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
--------
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom;
-7-
<PAGE>
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such securities,
or pursuant to provisions for conversion contained in such
securities, or pursuant to any deposit agreement; provided that,
in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
9) In the case of warrants, rights or similar securities,
the surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that, in
any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities
made by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian and
the Trust on behalf of the Portfolio, which may be in the form of
cash or obligations issued by the United States
-8-
<PAGE>
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be credited
to the Custodian's account in the book-entry system authorized by
the U.S. Department of the Treasury, the Custodian will not be
held liable or responsible for the delivery of securities owned
by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any
borrowings by the Trust on behalf of the Portfolio requiring a
pledge of assets by the Trust on behalf of the Portfolio, but
---
only against receipt of amounts borrowed;
----
12) For delivery in accordance with the provisions of any
agreement among the Trust on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange,
or of any similar organization or organizations, regarding escrow
or other arrangements in connection with transactions by the
Portfolio of the Trust;
13) For delivery in accordance with the provisions of any
agreement among the Trust on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
-9-
<PAGE>
the Commodity Exchange Act, relating to compliance with the rules
of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Portfolio
of the Trust;
14) Upon receipt of instructions from the Trust for
delivery to the holders of shares in connection with
distributions in kind, as may be described from time to time in
the currently effective prospectus and statement of additional
information of the Trust, related to the Portfolio
("Prospectus"), in satisfaction of requests by holders of Shares
for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon
--- ----
receipt of, in addition to Proper Instructions from the Trust on
behalf of the applicable Portfolio, a certified copy of a
resolution of the Board or of the Executive Committee signed by
an officer of the Trust and certified by the Secretary or an
Assistant Secretary, specifying the securities of the Portfolio
to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
--------------------------
(other than bearer securities) shall be registered in the name of the
applicable Portfolio or in
-10-
<PAGE>
the name of any nominee of the Trust on behalf of the Portfolio or of any
nominee of the Custodian which nominee shall be assigned exclusively to the
Portfolio, unless the Trust has authorized in writing the appointment of a
------
nominee to be used in common with other registered investment companies
having the same investment adviser as the Portfolio, or in the name or
nominee name of any agent appointed pursuant to Section 2.9 or in the name
or nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Portfolio under the
terms of this Contract shall be in "street name" or other good delivery
form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the United States in the name of each Portfolio of
the Trust, subject only to draft or order by the Custodian acting pursuant
to the terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for the
account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Trusts held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desirable; provided, however, that
--------
every such bank or trust company shall be qualified to act as a custodian
under the Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust company
shall on behalf of each applicable Portfolio be approved by vote of a
-11-
<PAGE>
majority of the Board of the Trust. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Availability of Federal Trusts. Upon mutual agreement between the Trust on
------------------------------
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Trust on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Trust and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.6 Collection of Income. The Custodian shall collect on a timely basis all
--------------------
income and other payments with respect to registered domestic securities
held hereunder to which each Portfolio shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on a
timely basis all income and other payments with respect to bearer domestic
securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent thereof and shall credit such income, as
collected, to such Portfolio's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on securities held
hereunder. The risk of collection of income due each Portfolio on
securities loaned pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Trust. The Custodian will have no duty or
responsibility in connection therewith, other than
-12-
<PAGE>
to arrange for the timely delivery to the Custodian of the income to which
the Portfolio is properly entitled.
2.7 Payment of Trust Monies. Upon receipt of Proper Instructions from the
-----------------------
Trust on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian shall
pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic or foreign securities,
options on securities or securities indices or foreign
currencies, futures contracts on financial instruments or
securities indices or foreign currencies, or options on such
futures contracts and forward currency contracts for the account
of the Portfolio but only (a) against the delivery of such
securities or evidence of title to such options or contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under
the Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its agent
for this purpose) registered in the name of the Portfolio or in
the name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.10A; (d) in
-13-
<PAGE>
the case of repurchase agreements entered into between the Trust
on behalf of the Portfolio and the Custodian, or another bank, or
a broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase by the Portfolio of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Portfolio;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by
the Portfolio, including but not limited to the following
payments for the account of the Portfolio: interest, taxes,
management, accounting, transfer agent and legal fees, and
operating expenses of the Trust whether or not such expenses are
to be in whole or part capitalized or treated as deferred
expenses;
5) For the payment of any dividends on Shares of the
Portfolio declared pursuant to the governing documents of the
Trust;
-14-
<PAGE>
6) For payment of the amount of dividends received in
respect of securities sold short;
7) For any other proper purpose, but only upon receipt of,
in addition to Proper Instructions from the Trust on behalf of
the Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee of the Trust signed by an
officer of the Trust and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased. In any
-------------------------------------------------------------------
and every case where payment for purchase of domestic securities for and
every case where payment for purchase of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written instructions
from the Trust on behalf of such Portfolio to so pay in advance or unless
specifically authorized by this contract to so pay in advance, the
Custodian shall be absolutely liable to the Trust for such securities to
the same extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the
-15-
<PAGE>
Custodian may from time to time direct; provided, however, that the
--------
appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Trust Assets in Securities Systems. The Custodian may deposit
---------------------------------------------
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided that such securities are represented
in an account ("Account") of the Custodian in the Securities
System which shall not include any assets of the Custodian other
than assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to securities
of the Portfolio which are maintained in a Securities System
shall identify by book-entry those securities belonging to the
Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
-16-
<PAGE>
Securities System that such securities have been transferred to
the Account, and (ii) the making of an entry on the records of
the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon (i) receipt
of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Portfolio.
Copies of all advices from the Securities System of transfers of
securities for the account of the Portfolio shall identify the
Portfolio, be maintained for the Portfolio by the Custodian and
be provided to the Trust. The Custodian shall furnish the Trust
on behalf of the Portfolio confirmation of each transfer to or
from the account of the Portfolio in the form of a written advice
or notice and shall furnish to the Trust on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of
the Portfolio.
4) The Custodian shall provide the Trust for the Portfolio
with any report obtained by the Custodian on the Securities
System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the
Securities System;
-17-
<PAGE>
5) The Custodian shall have received from the Trust on
behalf of the Portfolio the initial or annual certificate, as the
case may be, required by Article 14 hereof;
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the Trust for
the benefit of the Portfolio for any loss or damage to the
Portfolio resulting from use of the Securities System by reason
of any negligence, misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce effectively
such rights as it may have against the Securities System; at the
election of the Trust, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may
have as a consequence of any such loss or damage if and to the
extent that the Portfolio has not been made whole for any such
loss or damage.
2.10A Trust Assets Held in the Custodian's Direct Paper System. The Custodian
--------------------------------------------------------
may deposit and/or maintain securities owned by a Portfolio in the Direct
Paper System of the Custodian subject to the procedures outlined in the
Securities and Exchange Commission's response dated July 8, 1985 to the
Custodian's request for a "no-action" letter and the following provisions:
-18-
<PAGE>
1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of Proper
Instructions from the Trust on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in
the Direct Paper System only if such securities are represented
in an account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian other
than assets held as a fiduciary, custodian or otherwise for
customers;
3) The records of the Custodian with respect to securities
of the Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to the
Portfolio ;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer of
securities to the account of the Portfolio. The Custodian shall
transfer securities sold for the account of the Portfolio upon
the making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Portfolio;
5) The Custodian shall furnish the Trust on behalf of the
Portfolio confirmation of each transfer to or from the account of
the Portfolio, in the form of a written advice or notice, of
Direct
-19-
<PAGE>
Paper on the next business day following such transfer and shall
furnish to the Trust on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transaction in the
Securities System for the account of the Portfolio;
6) The Custodian shall provide the Trust on behalf of the
Portfolio with any report on its system of internal accounting
control as the Trust may reasonably request from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions from the Trust on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on behalf
of each such Portfolio, into which account or accounts may be transferred
cash and/or securities, including securities maintained in an account by
the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Trust on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the
-20-
<PAGE>
purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or
releases of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment companies and
(iv) for other proper corporate purposes, but only, in the case of clause
--- ----
(iv), upon receipt of, in addition to Proper Instructions from the Trust on
behalf of the applicable Portfolio, a certified copy of a resolution of the
Board or of the Executive Committee signed by an officer of the Trust and
certified by the Secretary or an Assistant Secretary, setting forth the
purpose or purposes of such segregated account and declaring such purposes
to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
---------------------------------------
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
-------
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio or such other persons as may be
designated by the Board such proxies, all proxy soliciting materials and
all notices relating to such securities.
-21-
<PAGE>
2.14 Communications Relating to Portfolio Securities. The Custodian shall
-----------------------------------------------
transmit promptly to the Trust for each Portfolio all written information
(including, without limitation, pendency of calls and maturities of
domestic securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Trust on behalf
of the Portfolio and the maturity of futures contracts purchased or sold by
the Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange offers,
the Custodian shall transmit promptly to the Portfolio or such other
persons as may be designated by the Board all written information received
by the Custodian from issuers of the securities whose tender or exchange is
sought and from the party (or his agents) making the tender or exchange
offer. If the Portfolio desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Portfolio shall
notify the Custodian at least three business days prior to the date on
which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Trust Held Outside
--------------------------------------------------------------------------
of the United States
- --------------------
-22-
<PAGE>
3.1 Appointment of Foreign Sub-Custodians.
-------------------------------------
The Trust hereby authorizes and instructs the Custodian to employ as sub-
custodians for the Portfolio's securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign sub-
custodians"). Upon receipt of "Proper Instructions", as defined in Section
5 of this Contract, together with a certified resolution of the Trust's
Board, the Custodian and the Trust may agree to amend Schedule A hereto
from time to time to designate additional foreign banking institutions and
foreign securities depositories to act as foreign sub-custodian. Upon
receipt of Proper Instructions, the Trust may instruct the Custodian to
cease the employment of any one or more such foreign sub-custodians for
maintaining custody of the Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
------------------
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(l) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Trust may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
-------------------------------
writing by the Custodian and the Trust, assets of the Portfolios shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
-23-
<PAGE>
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books as
-------------------------
belonging to each applicable Portfolio of the Trust, the foreign securities
of such Portfolios held by each foreign sub-custodian. Each agreement
pursuant to which the Custodian employs a foreign banking institution shall
require that such institution establish a custody account for the Custodian
on behalf of the Trust for each applicable Portfolio of the Trust and
physically segregate in each account, securities and other assets of that
Portfolio, and, in the event that such institution deposits the securities
of one or more of the Portfolios in a foreign securities depository, that
it shall identify on its books as belonging to the Custodian, as agent for
each applicable Portfolio, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a foreign
--------------------------------------------
banking institution shall be substantially in the form set forth in Exhibit
1 hereto and shall provide that: (a) the assets of each Portfolio will not
be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or agent,
except a claim of payment for their safe custody or administration; (b)
beneficial ownership for the assets of each Portfolio will be freely
transferable without the payment of money or value other than for custody
or administration; (c) adequate records will be maintained identifying the
assets as belonging to each applicable Portfolio; (d) officers of or
auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public
accountants for the
-24-
<PAGE>
Trust, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Custodian;
and (e) assets of the Portfolios held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Trust. Upon request of the Trust,
----------------------------------------------
the Custodian will use its best efforts to arrange for the independent
accountants of the Trust to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian, or if
requested by the Trust to be provided with the confirmation of the contents
of such books and records insofar as such books and records relate to the
performance of such foreign banking institution under its agreement with
the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Trust from time to
--------------------
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians, including
but not limited to an identification of entities having possession of the
Portfolio(s) securities and other assets and advices or notifications of
any transfers of securities to or from each custodial account maintained by
a foreign banking institution for the Custodian on behalf of each
applicable Portfolio indicating, as to securities acquired for a Portfolio,
the identity of the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account.
---------------------------------------
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the
provision of Sections 2.2 and 2.7 of this Contract shall apply, mutatis
-------
mutandis
--------
-25-
<PAGE>
to the foreign securities of the Trust held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the account
of each applicable Portfolio may be effected in accordance with the
customary established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Trust agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
-----------------------------------
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian the Trust and each Portfolio for which it acts as foreign sub-
custodian from and against any loss, damage, cost, expense, liability or
claim arising out of or in connection with the institution's performance of
such obligations. At the election of the Trust, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims
against a
-26-
<PAGE>
foreign banking institution as a consequence of any such loss, damage,
cost, expense, liability or claim if and to the extent that the Trust has
not been made whole for any such loss, damage, cost, expense, liability or
claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
----------------------
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians in paragraph 1 of this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S.
bank as contemplated by paragraph 3.13 hereof, the Custodian shall not be
liable for any loss, damage, cost, expense, liability or claim resulting
from nationalization, expropriation, currency restrictions, or acts of war
or terrorism or any other circumstance where the Custodian and its agent
exercised reasonable care. Notwithstanding the foregoing provisions of
this paragraph 3.10, in delegating custody duties to State Street London
Ltd., the Custodian shall not be relieved of any responsibility to the
Trust for any loss due to such delegation, except such loss as may result
from (a) political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other risk of loss (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) for which neither the Custodian nor State Street London
Ltd. would be liable (including, but not limited to, losses due to Acts of
God, nuclear incident or other losses under circumstances where the
Custodian and State Street London Ltd. have exercised reasonable care).
-27-
<PAGE>
3.11 Reimbursement for Advances. If the Trust requires the Custodian to advance
--------------------------
cash or securities for any purpose for the benefit of a Portfolio including
the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the applicable Portfolio shall be security therefor and should
the Trust fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolios assets
to the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
---------------------------
Trust, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian and listed in Schedule A hereto. Such
information shall be similar in kind and scope to that furnished to the
Trust in connection with the initial approval of this Contract. In
addition, the Custodian will promptly inform the Trust of any material
change in circumstances surrounding the foreign custody arrangements or any
loss of the assets of the Trust or, in the case of any foreign sub-
custodian not the subject of an exemptive order from the Securities and
Exchange Commission, there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S.
-28-
<PAGE>
accounting principles). The Custodian shall supply the Trust on a
continuous basis with all information readily available to it which is
relevant to the Trust's compliance with Rule 17f-5 under the Investment
Company Act of 1940.
3.13 Branches of U.S. Banks.
----------------------
(a) Except as otherwise set forth in this Contract, the provisions hereof
shall not apply where the custody of the Portfolios assets are maintained
in a foreign branch of a banking institution which is a "bank" as defined
by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of
any such branch as a sub-custodian shall be governed by paragraph 1 of this
Contract.
(b) Cash held for each Portfolio of the Trust in the United Kingdom shall
be maintained in an interest bearing account established for the Trust with
the Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Trust
-----------------------------------------------------------------------
The Custodian shall receive from the Trust's transfer agent and deposit
into the account of the appropriate Portfolio such payments as are received for
Shares of that Portfolio issued or sold from time to time by the Trust. The
Custodian will provide timely notification to the Trust on behalf of each such
Portfolio of any receipt by it of payments for Shares of such Portfolio. From
such funds as may be available for the purpose, the Custodian, subject to the
limitations of any applicable votes of the Board, shall, upon receipt of
instructions from the Trust, make funds available for payment to holders of
Shares who have delivered to the Trust or its transfer agent a request for
-29-
<PAGE>
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from holders of Shares or the Trust's transfer agent to wire funds
to or through a commercial bank designated by the redeeming shareholders.
5. Proper Instructions
-------------------
Proper Instructions as used throughout this Contract means a writing signed
or initialed by one or more person or persons as the Board shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Trust shall cause all oral instructions to be confirmed in
writing. Upon receipt of a certificate of the Secretary or an Assistant Secr
etary as to the authorization by the Board accompanied by a detailed description
of procedures approved by the Board, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board and the Custodian are satisfied that such
procedures afford adequate safeguards for the Portfolios' assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three party agreement which requires a segregated
asset account in accordance with Section 2.11.
6. Actions Permitted without Express Authority
-------------------------------------------
-30-
<PAGE>
The Custodian may in its discretion, without express authority from the
Trust, on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Trust on behalf of
- --------
the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Portfolio except as otherwise directed by the
Board of the Trust.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Trust. The Custodian may receive and accept a certified copy of a vote of the
Board as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board as described in such vote, and such vote may be considered as in full
force and effect until receipt by the Custodian of written notice to the
contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income
- ------------------------------
-31-
<PAGE>
The Custodian shall keep the books of account and records of each
Portfolio. The Custodian shall compute the net asset value per share of the
outstanding shares of each Portfolio. In computing the value of securities held
in a Portfolio the Custodian shall use the State Street Bank automated pricing
system or such other pricing methods as are from time to time directed by the
Trust. The Custodian shall also calculate daily the net income and realized
gains of the Portfolio as described in the Trust's currently effective
prospectus related to such Portfolio and shall advise the Trust daily of the
total amounts of such net income and realized gains and, shall advise the Trust
and the holders of Shares periodically of the division of such net income and
realized gains among its various components. The calculations of the net asset
value per share and the daily net income and realized gains of each Portfolio
shall be made at the time or times described from time to time in the Trust's
currently effective prospectus related to such Portfolio and the Custodian shall
use its best efforts to advise the Trust of such calculations on a daily basis
by no later than 5:30 p.m. eastern time on the day for which such calculations
are made. The Custodian agrees to provide, from the effective date of this
Contract forward, the Trust and the holders of Shares with copies of reports and
other information necessary for the preparation of tax returns, audited
financial statements, Form N-SAR and any other reports or returns that the Trust
or its holders of Shares files with any state or federal authority from time to
time.
9. Records
-------
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Trust under the Investment Company
Act of 1940, with particular
-32-
<PAGE>
attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, applicable
federal and state tax laws and any other law or administrative rules or
procedures which may be applicable to the Trust. All such records shall be the
property of the Trust and shall at all times during the regular business hours
of the Custodian be open for inspection by duly authorized officers, employees
or agents of the Trust and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Trust's request, supply the Trust with a
tabulation of securities owned by each Portfolio and held by the Custodian and
shall, when requested to do so by the Trust, include certificate numbers in such
tabulations. The Custodian shall also provide the Trust with access to the
Trust's books and records through the "Horizon Plus" system or a similar system.
10. Opinion of Trust's Independent Public Accountants
-------------------------------------------------
The Custodian shall take all reasonable action, as the Trust on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Trust's independent accountants with respect to
its activities hereunder in connection with the preparation of the Trust's Form
N-lA, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Trust by Independent Public Accountants
--------------------------------------------------
The Custodian shall provide the Trust, on behalf of each of the Portfolios
at such times as the Trust may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, options on securities or securities
indices or foreign currencies, futures contracts on financial instruments or
securities indices or foreign currencies,
-33-
<PAGE>
options on such futures contracts and forward currency contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports, shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Trust to provide reasonable assurance that any material inadequacies would
be disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
12. Compensation of Custodian
-------------------------
The Custodian shall be entitled to the compensation for its services and
expenses as Custodian as set forth in Schedules B and C which are herein
incorporated and made apart of the Contract, or as shall be agreed upon from
time to time between the Trust on behalf of each applicable Portfolio and the
Custodian.
13. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Trust for any action
taken or omitted by it in good faith without negligence except as hereinafter
provided with respect to sub-custodians located in the United States or foreign
sub-custodians. It shall be entitled to rely on and may act
-34-
<PAGE>
upon advice of counsel (who may be counsel for the Trust) on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.10)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.11 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Trust to maintain custody or any
securities or cash of the Trust in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Trust on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Trust or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Trust on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Trust requires the Custodian to advance cash or securities for any
purpose for the benefit of a Portfolio including the purchase or sale of foreign
exchange or of contracts for foreign exchange or in the event that the Custodian
or its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in
-35-
<PAGE>
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Trust fail to repay the
Custodian promptly, the Custodian shall be entitled to utilize available cash
and to dispose of such Portfolio's assets to the extent necessary to obtain
reimbursement.
14. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective on the later of (i) the effective date
of the Trust's registration statement under the Securities Act of 1933 and the
Investment Company Act of 1940 and (ii) the date of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
--------
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board has approved the initial use
of a particular Securities System by such Portfolio and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board has
reviewed the use by such Portfolio of such Securities System, as required in
each case by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.10A
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board has approved the initial use of the Direct
Paper System
-36-
<PAGE>
by such Portfolio and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board has reviewed the use by such Portfolio of
the Direct Paper System; provided further, however, that the Trust shall not
-------- -------
amend or terminate this Contract in contravention of any applicable federal or
state regulations, and further provided, that the Trust on behalf of one or more
of the Portfolios may at any time by action of its Board (i) substitute another
bank or trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Trust on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
-------------------
If a successor custodian for the Trust, of one or more of the Portfolios
shall be appointed by the Board, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities and other property of each applicable
Portfolio then held by it hereunder and shall transfer to an account of the
successor custodian all of the securities of each such Portfolio held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board, deliver at
the office of the
-37-
<PAGE>
Custodian and transfer such securities, funds and other properties in accordance
with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board shall have been delivered to the Custodian
on or before the date when such termination shall become effective, then the
Custodian shall have the right to deliver to a bank or trust company, which is a
"bank" as defined in the Investment Company Act of 1940, doing business in
Boston, Massachusetts, of its own selection, having an aggregate capital,
surplus, and undivided profits, as shown by its last published report, of not
less than $25,000,000, all securities, funds and other properties held by the
Custodian on behalf of each applicable Portfolio and all instruments held by the
Custodian relative thereto and all other property held by it under this Contract
on behalf of each applicable Portfolio and to transfer to an account of such
successor custodian all of the securities of each such Portfolio held in any
Securities System. Thereafter, such bank or trust company shall be the
successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Trust to procure the certified copy of the vote referred to or of
the Board to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
16. Interpretive and Additional Provisions
--------------------------------------
-38-
<PAGE>
In connection with the operation of this Contract, the Custodian and the
Trust on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
--------
interpretive or additional provisions shall contravene any applicable federal or
state regulations. No interpretive or additional provisions made as provided in
the preceding sentence shall be deemed to be an amendment of this Contract.
17. Additional Series
-----------------
In the event that the Trust establishes one or more series of Shares in
addition to the Growth Trust, U.S. Government High Yield Trust, Money Market
Trust, Conservative Asset Allocation Trust, Moderate Asset Allocation Trust and
Aggressive Asset Allocation Trust with respect to which it desires to have the
Custodian render services as custodian under the terms hereof, it shall so
notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series of Shares shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Limitation of Liability
-----------------------
The Agreement and Declaration of Trust establishing the Trust, dated
September 28, 1988, a copy of which, together with all amendments thereto (the
"Declaration of Trust"), is on file in the office of the Secretary of The
Commonwealth of Massachusetts, provides
-39-
<PAGE>
that the name "North American Security Trust refers to the Trustees under the
Declaration of Trust 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 Series of Shares with respect to
which the obligation or claim arose, shall be liable.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of 1st day of June, 1989.
ATTEST NORTH AMERICAN SECURITY TRUST
KAREN S. ALWOOD W J ATHERTON
----------------------------------
Assistant Secretary President
ATTEST STATE STREET BANK AND TRUST COMPANY
___________________ By
Assistant Secretary Vice President
-40-
<PAGE>
Schedule A
----------
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of NASL Series Trust, Inc. for use
as sub-custodians for the Trust's securities and other assets:
Country Eligible Foreign Custodian
------- --------------------------
-41-
<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State street Bank and Trust Company (the
"Custodian") and North American Funds (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated June 1, 1989 (the "Custodian Contract") governing the terms and conditions
under which the Custodian maintains custody of the securities and other assets
of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in conformity
with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Contract by the
addition of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Contract, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign sub-
custodian in a single account that is identified as belonging to the custodian
for the benefit of its customers, provided however, that (i) the records of the
-------- -------
respect to securities and other non-cash property of the Fund which are
maintained in such account shall identify by book-entry those securities and
other non-cash property belonging to the Fund and (ii) the Custodian shall
require that securities and other non-cash property so held by the foreign sub-
custodian be held separately from any assets of the foreign sub-custodian or of
others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative this 1st day of July, 1996.
NORTH AMERICAN FUNDS
By:
Title:
STATE STREET BANK AND TRUST COMPANY
By:
Title:
-42-
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
between
NORTH AMERICAN SECURITY TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article 1 Terms of Appointment; Duties of the Bank................. 2
Article 2 Fees and Expenses........................................ 5
Article 3 Representations and Warranties of the Bank............... 6
Article 4 Representations and Warranties of the Trust.............. 7
Article 5 Indemnification.......................................... 7
Article 6 Covenants of the Trust and the Bank...................... 10
Article 7 Termination of Agreement................................. 12
Article 8 Additional Series........................................ 12
Article 9 Assignment............................................... 12
Article 10 Amendment................................................ 13
Article 11 Merger of Agreement...................................... 13
Article 12 Massachusetts Law to Apply............................... 13
Article 13 Limitation of Liability.................................. 13
</TABLE>
-2-
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 1st day of June , 1989, by and between NORTH
AMERICAN SECURITY TRUST, a Massachusetts business trust, having its principal
office and place of business at 695 Atlantic Avenue, Boston, Massachusetts 02111
(the "Trust"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company having its principal office and place of business at 225 Franklin
Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Trust is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and WHEREAS, the Trust intends to initially offer shares in
six series, the Growth Trust, U.S. Government High Yield Trust, Money Market
Trust, Conservative Asset Allocation Trust, Moderate Asset Allocation Trust and
Aggressive Asset Allocation Trust (each such series, together with all other
series subsequently established by the Trust and made subject to this Agreement
in accordance with Article 8, being herein referred to as a Portfolio and
collectively as the "Portfolios");
WHEREAS, the Trust on behalf of the Portfolios desires to appoint the Bank
as its transfer agent, dividend disbursing agent and agent in connection with
certain other activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
-3-
<PAGE>
Article 1 Terms of Appointment; Duties of the Bank
----------------------------------------
1.01 Subject to the terms and conditions set forth in this Agreement, the
Trust on behalf of the Portfolios hereby employs and appoints the Bank to act
as, and the Bank agrees to act as its transfer agent for the authorized and
issued shares of beneficial interest of the Trust representing interests in each
of the respective Portfolios ("Shares"), dividend disbursing agent and agent in
connection with any accumulation, open-account or similar plans provided to the
shareholders of each of the respective Portfolios of the Trust ( Shareholders")
and set out in the prospectus and statement of additional information as amended
from time to time ("prospectus") of the Trust on behalf of the applicable
Portfolio, including without limitation any periodic investment plan or periodic
withdrawal program.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Trust on behalf of each of the Portfolios, as applicable
and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the
Custodian of the Trust as appointed by resolution of the Board of
Trustees of the Trust (the "Custodian"); (ii) Pursuant to purchase
orders, issue the appropriate number of Shares and hold such Shares in
the appropriate Shareholder account;
-4-
<PAGE>
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the
Custodian;
(iv) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over or cause
to be paid over in the appropriate manner such monies as instructed by
the redeeming Shareholders ;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit pavements for dividends and distributions
declared by the Trust on behalf of the applicable Portfolio; and
(vii) Maintain one or more Share accounts as requested by each holder
of Shares of any Portfolio, showing the following information for each
such account :
(1) name and address;
(2) number of Shares held; and
(3) historical information, from the effective date of this
Contract forward, including dividends paid and the date and price of
all Share transactions.
(viii) Record the issuance of Shares and maintain pursuant to SEC Rule 17Ad-
10(e) a record of the total number of Shares which are authorized,
-5-
<PAGE>
based upon data provided to it by the Trust, and issued and
outstanding. Bank shall also provide the Trust on a regular basis with
the total number of Shares which are authorized and issued and
outstanding and shall have no obligation, when recording the issuance
of Shares, to monitor the issuance of such Shares or to take
cognizance of any laws relating to the issue or sale of such Shares,
which functions shall be the sole responsibility of the Trust.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), the Bank shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, agent in connection
with accumulation, open-account or similar plans (including without limitation
any periodic investment plan or periodic withdrawal program), including but not
limited to: maintaining all Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies, receiving and tabulating proxies, mailing Shareholder
reports and prospectuses to current Shareholders, withholding taxes on U.S.
resident and non-resident alien accounts, preparing and filing U.S. Treasury
Department Forms 1099 and other appropriate forms required with respect to
dividends and distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares, all payments of
dividends and
-6-
<PAGE>
distributions or reinvestments of same, all exchanges of Shares of a Portfolio
for Shares of another Portfolio and other confirmable transactions in
Shareholder accounts, preparing an mailing activity statements for Shareholders,
and providing Shareholder account information and (ii) provide a system which
will enable the Trust to monitor the total number of Shares sold in each State,
provided that, the Trust shall (i) identify to the Bank in writing those
transactions and assets to be treated as exempt from blue sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of the Bank for the Trust's blue sky State
registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Trust and the reporting of
such transactions to the Trust as provided above.
Procedures applicable to certain of these services may be established from
time to time by agreement between the Trust and the Bank.
Article 2 Fees and Expenses
-----------------
2.01 For performance by the Bank pursuant to this Agreement, the Trust agrees
on behalf of each of the Portfolios to pay the Bank an annual maintenance fee
for each Shareholder account as set out in the initial fee schedule attached
hereto. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Trust and the Bank.
-7-
<PAGE>
2.02 In addition to the fee paid under Section 2.01 above, the Trust agrees on
behalf of each of the Portfolios to reimburse the Bank for out-of-pocket
expenses or advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred by the Bank
at the request or with the consent of the Trust, will be reimbursed by the Trust
on behalf of the applicable Portfolio.
2.03 The Trust agrees on behalf of each of the Portfolios to pay all fees
and reimbursable expenses within five days following the mailing of the
respective billing notice. Postage for mailing of dividends, proxies, Trust
reports and other mailings to all Shareholder accounts shall be advanced to the
Bank by the Trust at least seven (7) days prior to the mailing date of such
materials.
Article 3 Representations and Warranties of the Bank
------------------------------------------
The Bank represents and warrants to the Trust that:
3.01 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
3.03 It is empowered under applicable laws and by its charter and by-laws to
enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement
3.05 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
-8-
<PAGE>
Article 4 Representations and Warranties of the Trust
-------------------------------------------
The Trust represents and warrants to the Bank that:
4.01 It is a business trust duly organized and existing and in good standing
under the laws of Massachusetts.
4.02 It is empowered under applicable laws and by its Declaration of Trust and
By-Laws to enter into and perform this agreement.
4.03 A11 corporate proceedings required by said Declaration of Trust and By-
Laws have been taken to authorize it to enter into and perform this Agreement.
4.04 It is an open-end management investment company registered under the
Investment Company Act of 1940.
4.05 A registration statement of the Trust under the Securities Act of 1933
containing a prospectus for each of the Portfolios is currently effective and
will remain effective, and appropriate state securities law filings have been
made and will continue to be made, with respect to all Shares being offered for
sale.
Article 5 Indemnification
---------------
5.01 The Bank shall not be responsible for, and the Trust shall on behalf of
the applicable Portfolio indemnify and hold the Bank harmless from and against,
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors required to be
taken pursuant to this Agreement,
-9-
<PAGE>
provided that such actions are taken in good faith and without negligence or
willful misconduct.
(b) The Trust's refusal or failure to comply with the terms of this Agreement,
or which arise out of the Trust's lack of good faith, negligence or willful
misconduct or which arise out of the breach of any representation or warranty of
the Trust hereunder.
(c) The reliance on or use by the Bank or its agents or subcontractors of
information, records and documents which (i) are received by the Bank or its
agents or subcontractors and furnished to it by or on behalf of the Trust, and
(ii) have been prepared and/or maintained by the Trust or any other person or
firm on behalf of the Trust.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Trust on behalf of the
applicable Portfolio.
(e) The offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities laws or regulations of
any state that such Shares be registered in such state or in violation of any
stop order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such Shares in such state.
5.02 The Bank shall indemnify and hold the Trust harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by the Bank as a result of the Bank's lack of good faith,
negligence or willful misconduct.
-10-
<PAGE>
5.03 At any time the Bank may apply to any officer of the Trust for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Trust on behalf of the applicable Portfolio for any
action taken or omitted by it in reliance upon such instructions or upon the
opinion of such counsel. The Bank, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Trust, reasonably believed to be genuine and to have been
signed by the proper person or persons, or upon any instruction, information,
data, records or documents provided the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the Trust, and shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the Trust. The Bank,
its agents and subcontractors shall also be protected and indemnified in
recognizing stock certificates which are reasonably believed to bear the proper
manual or facsimile signatures of the officers of the Trust, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5.04 In the event either party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond
-11-
<PAGE>
its control, such party shall not be liable for damages to the other for any
damages resulting from such failure to perform or otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
5.06 In order that the indemnification provisions contained in this Article 5
shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 Covenants of the Trust and the Bank
-----------------------------------
6.01 The Trust shall on behalf of each of the Portfolios promptly furnish to
the Bank the following:
(a) A certified copy of the resolution of the Board of Trustees of the Trust
authorizing the appointment of the Bank and the execution and delivery of this
Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Trust and all
amendments thereto.
-12-
<PAGE>
6.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Trust for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Trust and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Trust on and in accordance with its request.
6.04 The Bank and the Trust agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
6.05 In case of any requests or demands for the inspection of the Shareholder
records of the Trust, the Bank will use its best efforts to notify the Trust and
to secure instructions from an authorized officer of the Trust prior to such
inspection. The Bank reserves the right, however, to
-13-
<PAGE>
exhibit the Shareholder records to any person whenever it is advised by its
counsel that it may be held liable for the failure to exhibit the Shareholder
records to such person.
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other.
7.02 Should the Trust exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Trust on behalf of the applicable Portfolio(s). Additionally, the Bank
reserves the right to charge for any other reasonable expenses associated with
such termination.
Article 8 Additional Series
-----------------
8.01 In the event that the Trust establishes one or more series of Shares
in addition to the six series indicated on the first page of this Agreement with
respect to which it desires to have the Bank render services as transfer agent
under the terms hereof, it shall so notify the Bank in writing, and if the Bank
agrees in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
Article 9 Assignment
----------
9.01 Except as provided in Section 9.03 below, neither this Agreement nor any
rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
9.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
-14-
<PAGE>
9.03 The Bank may, without further consent on the part of the Trust,
subcontract for the performance hereof with (i) Boston Financial Data Services,
Inc., a Massachusetts corporation ("BFDS") which is duly registered as a
transfer agent pursuant to Section 17A(c)(l) of the Securities Exchange Act of
1934 ("Section 17A(c)(l)"), (ii) a BFDS subsidiary duly registered as a transfer
agent pursuant to Section 17A(c)(l) or (iii) a BFDS affiliate; provided,
however, that the Bank shall be as fully responsible to the Trust for the acts
and omissions of any subcontractor as it is for its own acts and omissions.
Article 10 Amendment
---------
10.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Trustees of the Trust.
Article 11 Merger of Agreement
-------------------
11.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
Article 12 Massachusetts Law to Apply
--------------------------
12.01 This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
Article 13 Limitation of Liability
-----------------------
13.01 The Agreement and Declaration of Trust establishing the Trust, dated
September 28, 1988, a copy of which, together with all amendments thereto (the
"Declaration of Trust"), is on file in the office of the Secretary of The
-15-
<PAGE>
Commonwealth of Massachusetts, provides that the name "North American Security
Trust" refers to the Trustees under the Declaration of Trust 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 Series of Shares with respect to which the obligation or claim arose,
shall be liable.
-16-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officer, as of the day and year first above written.
NORTH AMERICAN SECURITY TRUST
BY:
President
ATTEST:
Assistant Secretary
STATE STREET BANK AND TRUST COMPANY
BY:
Vice President
ATTEST:
Assistant Secretary
-17-
<PAGE>
AMENDMENT TO THE
----------------
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
THIS AMENDMENT, made as of January 1, 1991 between NORTH AMERICAN SECURITY
TRUST, a Massachusetts business trust (the "Fund") and State Street Bank and
Trust Company, a Massachusetts trust company (the "Bank"), to the Transfer
Agency and Service Agreement between the Fund and the Bank dated the 1st day of
June, 1989. (the "Agreement").
WITNESSETH THAT
---------------
WHEREAS, the Fund and the Bank desire to incorporate specific language
regarding the processing of as-of transactions into the Agreement;
NOW THEREFORE, the Fund and the Bank agree that Section 1.02 of the Agreement
be amended by the addition of the following Section 1.02(c):
(c) Additionally, the Bank shall:
(i) Utilize a system to identify all share transactions which involve
the purchase and redemption of orders that are processed at a time other than
the time of computation of the net asset value per share next computed after
receipt of such orders, and shall calculate the net effect upon the net asset
value of the Fund of these transactions on a daily and cumulative basis.
(ii) Correctly assign a reason code to every transaction described above
clearly indicating the party responsible for the transaction.
(iii) Calculate the dollar amount equivalent to one-half of one cent per
share. The amount determined on the basis of the above calculation will
represent the threshold limit. If the net effect of the as-of transactions is
negative and exceeds the threshold limit, the party responsible shall promptly
make payment to the Fund in cash to reduce the net effect to less than the
threshold limit.
-18-
<PAGE>
(iv) The party responsible for exceeding the threshold limit will be
determined by calculating the net effect of as-of transactions attributed to
individual parties. The party responsible for the most negative effect to the
Fund on that day will be deemed the party responsible if that party's negative
effect would reduce the total net negative effect to less than one-half of one
cent per share. If that party's net negative effect does not reduce the total
net negative effect to less than one-half of one cent per share then the party
with the second largest net negative effect will also be deemed to be
responsible. This calculation shall continue until the total net effect to the
Fund is under one-half of one cent. It is understood by both the Bank and the
Fund that the Fund shall be solely responsible for ensuring payment by all
parties other than the Bank.
(v) Will supply to the Fund reports summarizing the transactions
identified above and the daily and cumulative net effect of such transactions.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the above reference day and year.
ATTEST: STATE STREET BANK AND TRUST COMPANY
BY: ________________________
Assistant Secretary Vice President
ATTEST: NORTH AMERICAN SECURITY TRUST
BY:
-19-
<PAGE>
NORTH AMERICAN SECURITY TRUST
July 15, 1990
To whom it may concern:
This opinion is written in reference to the shares of beneficial interest, $.001
par value (the "Shares") of the Global Equity Trust of North American Security
Trust, a Massachusetts business trust (the "Trust"), to be offered and sold
pursuant to a Registration Statement (no. 33-27958) (the "Registration
Statement") filed by the Trust pursuant to the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended (the "Acts"). In
accordance with Rule 24f-2 under the Investment Company Act of 1940, as amended,
the Registration Statement relates to an indefinite amount of shares.
I, as counsel to North American Security Trust (the "Trust"), have examined such
records and documents and reviewed such questions of law as I deemed necessary
for purposes of this opinion.
1. The trust has been duly recorded under the laws of The Commonwealth of
Massachusetts and is a validly existing Massachusetts business trust.
2. The 100,000 shares of presently issued and outstanding beneficial
shares of the Global Equity Trust have been duly authorized and legally
issued and are fully paid and non-assessable.
3. The Shares have been duly authorized and, when sold, issued and paid
for in the manner contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable.
I consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Very truly yours,
RUTH ANN FLEMING
Ruth Ann Fleming, Esq.
<PAGE>
NORTH AMERICAN SECURITY TRUST
April 16, 1991
To whom it may concern:
This opinion is written in reference to the shares of beneficial interest, $.001
par value (the "Shares") of the Growth and Income Trust and Investment Quality
Bond Trust of North American Security Trust, a Massachusetts business trust (the
"Trust"), to be offered and sold pursuant to a Registration Statement (no. 33-
27958) (the "Registration Statement") filed by the Trust pursuant to the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended. In accordance with Rule 24f-2 under Investment Company Act of 1940, as
amended, the Registration Statement relates to an indefinite amount of shares.
I have examined such records and documents and reviewed such questions of law as
I deemed necessary for purposes of this opinion.
1. The Trust has been duly recorded under the laws of the Commonwealth of
Massachusetts and is a validly existing Massachusetts business trust.
2. The 10,000 shares of each of the presently issued and outstanding
beneficial shares of the Growth and Income Trust and the Investment Quality
Bond Trust have been duly authorized and legally issued and are fully paid
and non-assessable.
3. The Shares have been duly authorized and, when sold, issued and paid
for in the manner contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable.
I consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Very truly yours,
CHRISTINA M. PERRINO
Christina M. Perrino, Esq.
<PAGE>
NORTH AMERICAN SECURITY TRUST
July 1, 1992
To whom it may concern:
This opinion is written in reference to the shares of beneficial interest, $.001
par value (the "Shares") of the Asset Allocation Trust of North American
Security Trust, a Massachusetts business trust (the "Trust"), to be offered and
sold pursuant to a Registration Statement on Form N-1A (no. 33-27958) (the
"Registration Statement") filed by the Trust pursuant to the Securities Act of
1933.
I have examined such records and documents and reviewed such questions of law as
I deemed necessary for purposes of this opinion.
1. The Trust has been duly recorded under the laws of the Commonwealth of
Massachusetts and is a validly existing Massachusetts business trust.
2. The Shares have been duly authorized and, when sold, issued and paid
for in the manner contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable.
I consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Very truly yours,
CHRISTINA M. PERRINO
Christina M. Perrino, Esq.
<PAGE>
NORTH AMERICAN FUNDS
June 23, 1992
To whom it may concern:
This opinion is written in reference to the shares of beneficial interest, $.001
par value (the "Shares") of the Strategic Income Fund, the National Municipal
Bond Fund and the California Municipal Bond Fund of North American Funds, a
Massachusetts business trust (the "Fund"), to be offered and sold pursuant to a
Registration Statement on Form N-1A (no. 33-27958) (the "Registration
Statement") filed by the Fund pursuant to the Securities Act of 1933.
I have examined such records and documents and reviewed such questions of law as
I deemed necessary for purposes of this opinion.
1. The Fund had been duly recorded under the laws of the Commonwealth of
Massachusetts and is a validly existing Massachusetts business trust.
2. The Shares have been duly authorized and, when sold, issued and paid
for in the manner contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable.
I consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Very truly yours,
JEFFREY M. ULNESS
Jeffrey M. Ulness, Esq.
<PAGE>
NORTH AMERICAN FUNDS
--------------------
March 21, 1994
To Whom It May Concern:
This opinion is written in reference to the shares of beneficial interest, $.001
par value (the "Shares") of the Global Growth Fund-A, Growth and Income Fund-A,
Asset Allocation Fund-A, Strategic Income Fund-A, Investment Quality Bond Fund-
A, U.S. Government Securities Fund-A, National Municipal Bond Fund -A,
California Municipal Bond Fund-A, Money Market Fund-A, Global Growth Fund-B,
Growth Fund-B, Growth and Income Fund-B, Asset Allocation Fund-B, Strategic
Income Fund-B, Investment Quality Bond Fund-B, U.S. Government Securities Fund-
B, National Municipal Bond Fund-B, California Municipal Bond Fund-B, Money
Market Fund-B, Global Growth Fund-B, Growth Fund-B, Growth and Income Fund-B,
Asset Allocation Fund-B, Strategic Income Fund-C, Investment Quality Bond Fund-
C, U.S. Government Securities Fund-C, National Municipal Bond Fund-C, California
Municipal Bond Fund-C and Money Market Fund-C of North American Funds, a
Massachusetts business trust (the "Fund"), to be offered and sold pursuant to a
Registration Statement on Form N-1A (no. 33-27958) (the "Registration
Statement") filed by the Fund pursuant to the Securities Act of 1933.
I have examined such records and documents and reviewed such questions of law as
I deemed necessary for purposes of this opinion.
1. The Fund has been duly recorded under the laws of the Commonwealth of
Massachusetts and is a validity existing Massachusetts business trust.
2. The Shares have been duly authorized and, when sold issued and paid
for in the manner contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable.
I consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Very truly yours,
TRACY ANNE KANE
Tracy A. Kane, Esq.
<PAGE>
NORTH AMERICAN FUNDS
--------------------
December 26, 1994
To Whom It May Concern:
This opinion is written in reference to the Class A, Class B and Class C shares
of beneficial interest, $.001 par value (the "Shares") of the International
Growth and Income Fund of North American Funds, a Massachusetts business trust
(the "Fund"), to be offered and sold pursuant to a Registration Statement on
Form N-1A (No. 33-27958) (the "Registration Statement") filed by the Fund
pursuant to the Securities Act of 1933.
I have examined such records and documents and reviewed such questions of law as
I deemed necessary for purposes of this opinion.
1. The Fund has been duly recorded under the laws of the Commonwealth of
Massachusetts and is a validly existing Massachusetts business trust.
2. The Shares have been duly authorized and, when sold, issued and paid for in
the manner contemplated by the Registration Statement, will be legally
issued, fully paid and non-assessable.
I consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Very truly yours,
BETSY ANNE SEEL
Betsy Anne Seel, Esq.
<PAGE>
[LETTERHEAD OF ROPES AND GRAY APPEARS HERE]
December 18, 1997
North American Funds
286 Congress Street
Boston, Massachusetts 02210
Gentlemen:
You have informed us that you propose to register under the Securities Act
of 1933, as amended (the "Act"), and offer and sell from time to time shares of
beneficial interest, without par value, of your Tax-Sensitive Equity Fund series
and your Emerging Growth Fund series (the "Shares"), at not less than "net asset
value," as defined in your Agreement and Declaration of Trust, as amended.
We have examined your Amended and Restated Agreement and Declaration of
Trust, as amended (the "Agreement and Declaration of Trust"), on file in the
office of the Secretary of The Commonwealth of Massachusetts and the Clerk of
the City of Boston and are familiar with the action taken by your trustees to
authorize the issue and sale to the public from time to time of authorized and
unissued Shares. We have also examined such other documents, receipts and
records as we have deemed necessary for the purpose of this opinion.
Based on the foregoing, we are of the opinion that:
1. The beneficial interest in each of your Tax-Sensitive Equity Fund
series and your Emerging Growth Fund series is divided into an unlimited number
of Shares.
2. The issue and sale of the authorized but unissued Shares has been duly
authorized under Massachusetts law, and, upon the original issue and sale of any
of such authorized but unissued Shares and upon receipt of the authorized
consideration therefor in an amount not less than the net asset value of the
Shares at the time of their sale, the shares so issued will be validly issued,
fully paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of
<PAGE>
ROPES & GRAY
North American Funds
December 18, 1997
Page 2
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or its Trustees. The Agreement and Declaration of
Trust provides for indemnification out of the property of the Tax-Sensitive
Equity Fund series and the Emerging Growth Fund series (each a "Series") for all
loss and expense of any shareholder of a Series held personally liable solely by
reason of his or her being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of being a shareholder is
limited to circumstances in which a Series itself would be unable to meet its
obligations.
We understand that this opinion is to be used in connection with the
registration of an indefinite number of shares for offering and sale pursuant to
the Act. We consent to the filing of this opinion with and as part of your
Registration Statement on Form N-1A (File No. 33-27958) relating to such
offering and sale.
Very truly yours,
/s/Ropes & Gray
Ropes & Gray
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
To the Board of Trustees of
North American Funds:
We consent to the inclusion in and incorporation the reference into this Post-
Effective Amendment No. 27 under the Securities Act of 1933 and Amendment No. 29
under the Investment Company Act of 1940 to the Registration Statement on
Form N-1A (File No. 33-27958/811-5797) of our report dated December 23, 1997,
on our audits of the financial statements and financial highlights of North
American Funds, which are included in the Registration Statement. We also
consent to the reference to our Firm as "Experts" under the captions "Financial
Highlights" in Part A and "Independent Accountants" in Part B of the
Registration Statement.
/s/ Coopers & Lybrand LLP
Boston, Massachusetts
December 23, 1997
<PAGE>
Item 24(b)(16)
Schedule of Computation of each performance quotation provided in the
-----------------------
Registration Statement in response to Item 22:
Total Return
------------
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 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 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.
<PAGE>
Yield
-----
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
YIELD = 2[(--- + 1)(to the sixth power) -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.
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.
Yields for Money Market Funds
-----------------------------
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
<PAGE>
Non-Standard Performance
------------------------
The Fund may also from time to time include in 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 investments 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 indicies including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poors 500 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 if 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 CDSC's applicable to a class. To calculate its average
annual total 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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUND
<SERIES>
<NUMBER> 011
<NAME> EQUITY INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 165,413,343
<INVESTMENTS-AT-VALUE> 189,265,476
<RECEIVABLES> 1,136,205
<ASSETS-OTHER> 21,593
<OTHER-ITEMS-ASSETS> 351
<TOTAL-ASSETS> 190,423,625
<PAYABLE-FOR-SECURITIES> 1,857,880
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,392,142
<TOTAL-LIABILITIES> 23,250,022
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 130,232,847
<SHARES-COMMON-STOCK> 2,083,395
<SHARES-COMMON-PRIOR> 1,638,828
<ACCUMULATED-NII-CURRENT> 2,048,580
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,039,356
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,852,820
<NET-ASSETS> 167,173,603
<DIVIDEND-INCOME> 4,425,712
<INTEREST-INCOME> 789,799
<OTHER-INCOME> 0
<EXPENSES-NET> 2,882,201
<NET-INVESTMENT-INCOME> 2,333,310
<REALIZED-GAINS-CURRENT> 11,788,917
<APPREC-INCREASE-CURRENT> 21,707,884
<NET-CHANGE-FROM-OPS> 35,830,111
<EQUALIZATION> 28,169
<DISTRIBUTIONS-OF-INCOME> 307,637
<DISTRIBUTIONS-OF-GAINS> 6,143,038
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 592,754
<NUMBER-OF-SHARES-REDEEMED> 590,786
<SHARES-REINVESTED> 442,599
<NET-CHANGE-IN-ASSETS> 27,790,417
<ACCUMULATED-NII-PRIOR> 454,658
<ACCUMULATED-GAINS-PRIOR> 28,952,740
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,128,276
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,205,550
<AVERAGE-NET-ASSETS> 153,920,729
<PER-SHARE-NAV-BEGIN> 17.37
<PER-SHARE-NII> .33
<PER-SHARE-GAIN-APPREC> 3.59
<PER-SHARE-DIVIDEND> .18
<PER-SHARE-DISTRIBUTIONS> 3.67
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.44
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 012
<NAME> EQUITY INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 165,413,343
<INVESTMENTS-AT-VALUE> 189,265,476
<RECEIVABLES> 1,136,205
<ASSETS-OTHER> 21,593
<OTHER-ITEMS-ASSETS> 351
<TOTAL-ASSETS> 190,423,625
<PAYABLE-FOR-SECURITIES> 1,857,880
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,932,142
<TOTAL-LIABILITIES> 23,250,022
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 130,232,847
<SHARES-COMMON-STOCK> 2,098,779
<SHARES-COMMON-PRIOR> 1,571,748
<ACCUMULATED-NII-CURRENT> 2,048,580
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,039,356
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,852,820
<NET-ASSETS> 167,173,603
<DIVIDEND-INCOME> 4,425,712
<INTEREST-INCOME> 789,799
<OTHER-INCOME> 0
<EXPENSES-NET> 2,882,201
<NET-INVESTMENT-INCOME> 2,333,310
<REALIZED-GAINS-CURRENT> 11,788,917
<APPREC-INCREASE-CURRENT> 21,707,884
<NET-CHANGE-FROM-OPS> 35,830,111
<EQUALIZATION> 28,169
<DISTRIBUTIONS-OF-INCOME> 123,036
<DISTRIBUTIONS-OF-GAINS> 5,816,447
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 500,961
<NUMBER-OF-SHARES-REDEEMED> 356,308
<SHARES-REINVESTED> 382,378
<NET-CHANGE-IN-ASSETS> 27,790,417
<ACCUMULATED-NII-PRIOR> 454,658
<ACCUMULATED-GAINS-PRIOR> 28,952,740
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,128,276
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,205,550
<AVERAGE-NET-ASSETS> 153,920,729
<PER-SHARE-NAV-BEGIN> 17.22
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> 3.54
<PER-SHARE-DIVIDEND> .08
<PER-SHARE-DISTRIBUTIONS> 3.67
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.24
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 013
<NAME> EQUITY INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 165,413,343
<INVESTMENTS-AT-VALUE> 189,265,476
<RECEIVABLES> 1,136,205
<ASSETS-OTHER> 21,593
<OTHER-ITEMS-ASSETS> 351
<TOTAL-ASSETS> 190,423,625
<PAYABLE-FOR-SECURITIES> 1,857,880
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,392,142
<TOTAL-LIABILITIES> 23,250,022
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 130,232,847
<SHARES-COMMON-STOCK> 5,460,985
<SHARES-COMMON-PRIOR> 4,854,997
<ACCUMULATED-NII-CURRENT> 2,048,580
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,039,356
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,852,820
<NET-ASSETS> 167,173,603
<DIVIDEND-INCOME> 4,425,712
<INTEREST-INCOME> 789,799
<OTHER-INCOME> 0
<EXPENSES-NET> 2,882,201
<NET-INVESTMENT-INCOME> 2,333,310
<REALIZED-GAINS-CURRENT> 11,788,917
<APPREC-INCREASE-CURRENT> 21,707,884
<NET-CHANGE-FROM-OPS> 35,830,111
<EQUALIZATION> 28,169
<DISTRIBUTIONS-OF-INCOME> 297,921
<DISTRIBUTIONS-OF-GAINS> 17,766,496
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 824,546
<NUMBER-OF-SHARES-REDEEMED> 1,437,499
<SHARES-REINVESTED> 1,218,941
<NET-CHANGE-IN-ASSETS> 27,790,417
<ACCUMULATED-NII-PRIOR> 454,658
<ACCUMULATED-GAINS-PRIOR> 28,952,740
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,128,276
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,205,550
<AVERAGE-NET-ASSETS> 153,920,729
<PER-SHARE-NAV-BEGIN> 17.27
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> 3.56
<PER-SHARE-DIVIDEND> .06
<PER-SHARE-DISTRIBUTIONS> 3.67
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.33
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 021
<NAME> U.S. GOVERNMENT SECURITIES FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 126,531,993
<INVESTMENTS-AT-VALUE> 127,290,839
<RECEIVABLES> 7,297,714
<ASSETS-OTHER> 15,803
<OTHER-ITEMS-ASSETS> 42,275
<TOTAL-ASSETS> 134,646,631
<PAYABLE-FOR-SECURITIES> 30,069,659
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19,966,573
<TOTAL-LIABILITIES> 50,036,232
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 86,257,196
<SHARES-COMMON-STOCK> 5,357,730
<SHARES-COMMON-PRIOR> 7,425,475
<ACCUMULATED-NII-CURRENT> (414,108)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,991,535)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 758,846
<NET-ASSETS> 84,610,399
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,044,577
<OTHER-INCOME> 0
<EXPENSES-NET> 1,396,128
<NET-INVESTMENT-INCOME> 5,648,449
<REALIZED-GAINS-CURRENT> (120,702)
<APPREC-INCREASE-CURRENT> 977,025
<NET-CHANGE-FROM-OPS> 6,504,772
<EQUALIZATION> (90)
<DISTRIBUTIONS-OF-INCOME> 3,692,246
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 669,065
<NUMBER-OF-SHARES-REDEEMED> 2,978,747
<SHARES-REINVESTED> 241,937
<NET-CHANGE-IN-ASSETS> (27,616,755)
<ACCUMULATED-NII-PRIOR> (383,354)
<ACCUMULATED-GAINS-PRIOR> (2,294,981)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 567,391
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,561,245
<AVERAGE-NET-ASSETS> 94,565,112
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> .13
<PER-SHARE-DIVIDEND> .58
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 9.94
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> 1.25
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 022
<NAME> U.S GOVERNMENT SECURITIES FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 126,531,993
<INVESTMENTS-AT-VALUE> 127,290,839
<RECEIVABLES> 7,297,714
<ASSETS-OTHER> 15,803
<OTHER-ITEMS-ASSETS> 42,275
<TOTAL-ASSETS> 134,646,631
<PAYABLE-FOR-SECURITIES> 30,069,659
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19,966,573
<TOTAL-LIABILITIES> 50,036,232
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 86,257,196
<SHARES-COMMON-STOCK> 1,676,117
<SHARES-COMMON-PRIOR> 1,983,872
<ACCUMULATED-NII-CURRENT> (414,108)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,991,535)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 758,846
<NET-ASSETS> 84,610,399
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,044,577
<OTHER-INCOME> 0
<EXPENSES-NET> 1,396,128
<NET-INVESTMENT-INCOME> 5,648,449
<REALIZED-GAINS-CURRENT> (120,702)
<APPREC-INCREASE-CURRENT> 977,025
<NET-CHANGE-FROM-OPS> 6,504,772
<EQUALIZATION> (90)
<DISTRIBUTIONS-OF-INCOME> 925,591
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 360,887
<NUMBER-OF-SHARES-REDEEMED> 727,741
<SHARES-REINVESTED> 59,099
<NET-CHANGE-IN-ASSETS> (27,616,755)
<ACCUMULATED-NII-PRIOR> (383,354)
<ACCUMULATED-GAINS-PRIOR> (2,294,981)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 567,391
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,561,245
<AVERAGE-NET-ASSETS> 94,565,112
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> .51
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> 1.90
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 023
<NAME> U.S. GOVERNMENT SECURITIES FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 126,531,993
<INVESTMENTS-AT-VALUE> 127,290,839
<RECEIVABLES> 7,297,714
<ASSETS-OTHER> 15,803
<OTHER-ITEMS-ASSETS> 42,275
<TOTAL-ASSETS> 134,646,631
<PAYABLE-FOR-SECURITIES> 30,069,659
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19,966,573
<TOTAL-LIABILITIES> 50,036,232
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 86,257,196
<SHARES-COMMON-STOCK> 1,480,550
<SHARES-COMMON-PRIOR> 2,041,634
<ACCUMULATED-NII-CURRENT> (414,108)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,991,535)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 758,846
<NET-ASSETS> 84,610,399
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,044,577
<OTHER-INCOME> 0
<EXPENSES-NET> 1,396,128
<NET-INVESTMENT-INCOME> 5,648,449
<REALIZED-GAINS-CURRENT> (120,702)
<APPREC-INCREASE-CURRENT> 977,025
<NET-CHANGE-FROM-OPS> 6,504,772
<EQUALIZATION> (90)
<DISTRIBUTIONS-OF-INCOME> 811,000
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 447,002
<NUMBER-OF-SHARES-REDEEMED> 1,079,330
<SHARES-REINVESTED> 71,244
<NET-CHANGE-IN-ASSETS> (27,616,755)
<ACCUMULATED-NII-PRIOR> (383,354)
<ACCUMULATED-GAINS-PRIOR> (2,294,981)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 567,391
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,561,245
<AVERAGE-NET-ASSETS> 94,565,112
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> .51
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> 1.90
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 031
<NAME> MONEY MARKET
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 21,911,050
<INVESTMENTS-AT-VALUE> 21,911,050
<RECEIVABLES> 117,623
<ASSETS-OTHER> 14,151
<OTHER-ITEMS-ASSETS> 13,175
<TOTAL-ASSETS> 22,055,999
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 128,137
<TOTAL-LIABILITIES> 128,137
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,927,862
<SHARES-COMMON-STOCK> 11,056,985
<SHARES-COMMON-PRIOR> 8,086,668
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 21,927,862
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,105,794
<OTHER-INCOME> 0
<EXPENSES-NET> 100,333
<NET-INVESTMENT-INCOME> 1,005,461
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,005,461
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 398,539
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,410,945
<NUMBER-OF-SHARES-REDEEMED> 19,800,772
<SHARES-REINVESTED> 360,144
<NET-CHANGE-IN-ASSETS> 938,733
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40,088
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 198,650
<AVERAGE-NET-ASSETS> 21,833,267
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .50
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 032
<NAME> MONEY MARKET
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 21,911,050
<INVESTMENTS-AT-VALUE> 21,911,050
<RECEIVABLES> 117,623
<ASSETS-OTHER> 14,151
<OTHER-ITEMS-ASSETS> 13,175
<TOTAL-ASSETS> 22,055,999
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 128,137
<TOTAL-LIABILITIES> 128,137
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,927,862
<SHARES-COMMON-STOCK> 3,331,454
<SHARES-COMMON-PRIOR> 3,062,351
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 21,927,862
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,105,794
<OTHER-INCOME> 0
<EXPENSES-NET> 100,333
<NET-INVESTMENT-INCOME> 1,005,461
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,005,461
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 158,672
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,033,916
<NUMBER-OF-SHARES-REDEEMED> 11,905,013
<SHARES-REINVESTED> 140,200
<NET-CHANGE-IN-ASSETS> 938,733
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40,088
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 198,650
<AVERAGE-NET-ASSETS> 21,833,267
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .50
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 033
<NAME> MONEY MARKET
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 21,911,050
<INVESTMENTS-AT-VALUE> 21,911,050
<RECEIVABLES> 117,623
<ASSETS-OTHER> 14,151
<OTHER-ITEMS-ASSETS> 13,175
<TOTAL-ASSETS> 22,055,999
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 128,137
<TOTAL-LIABILITIES> 128,137
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,927,862
<SHARES-COMMON-STOCK> 7,539,423
<SHARES-COMMON-PRIOR> 9,840,110
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 21,927,862
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,105,794
<OTHER-INCOME> 0
<EXPENSES-NET> 100,333
<NET-INVESTMENT-INCOME> 1,005,461
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,005,461
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 448,250
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25,707,878
<NUMBER-OF-SHARES-REDEEMED> 28,422,359
<SHARES-REINVESTED> 413,794
<NET-CHANGE-IN-ASSETS> 938,733
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40,088
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 198,650
<AVERAGE-NET-ASSETS> 21,833,267
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .50
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 071
<NAME> GLOBAL EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 111,961,390
<INVESTMENTS-AT-VALUE> 129,821,366
<RECEIVABLES> 641,907
<ASSETS-OTHER> 19,552
<OTHER-ITEMS-ASSETS> 13,119,366
<TOTAL-ASSETS> 143,602,191
<PAYABLE-FOR-SECURITIES> 13,496,693
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,067,043
<TOTAL-LIABILITIES> 19,563,736
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 98,020,702
<SHARES-COMMON-STOCK> 1,897,016
<SHARES-COMMON-PRIOR> 1,788,038
<ACCUMULATED-NII-CURRENT> (102,559)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,780,248
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,340,064
<NET-ASSETS> 124,038,455
<DIVIDEND-INCOME> 2,547,754
<INTEREST-INCOME> 45,108
<OTHER-INCOME> 0
<EXPENSES-NET> 2,774,761
<NET-INVESTMENT-INCOME> (181,899)
<REALIZED-GAINS-CURRENT> 8,524,743
<APPREC-INCREASE-CURRENT> 19,218,860
<NET-CHANGE-FROM-OPS> 27,561,704
<EQUALIZATION> (134,022)
<DISTRIBUTIONS-OF-INCOME> 89,634
<DISTRIBUTIONS-OF-GAINS> 2,895,690
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 464,254
<NUMBER-OF-SHARES-REDEEMED> 563,696
<SHARES-REINVESTED> 208,420
<NET-CHANGE-IN-ASSETS> 7,623,529
<ACCUMULATED-NII-PRIOR> (256,903)
<ACCUMULATED-GAINS-PRIOR> 12,643,301
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,106,316
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,838,348
<AVERAGE-NET-ASSETS> 122,923,972
<PER-SHARE-NAV-BEGIN> 14.50
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 3.45
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 1.64
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.32
<EXPENSE-RATIO> 1.75
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 072
<NAME> GLOBAL EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 111,961,390
<INVESTMENTS-AT-VALUE> 129,821,366
<RECEIVABLES> 641,907
<ASSETS-OTHER> 19,552
<OTHER-ITEMS-ASSETS> 13,119,366
<TOTAL-ASSETS> 143,602,191
<PAYABLE-FOR-SECURITIES> 13,496,693
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,067,043
<TOTAL-LIABILITIES> 19,563,736
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 98,020,702
<SHARES-COMMON-STOCK> 2,972,553
<SHARES-COMMON-PRIOR> 1,786,687
<ACCUMULATED-NII-CURRENT> (102,559)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,780,248
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,340,064
<NET-ASSETS> 124,038,455
<DIVIDEND-INCOME> 2,547,754
<INTEREST-INCOME> 45,108
<OTHER-INCOME> 0
<EXPENSES-NET> 2,774,761
<NET-INVESTMENT-INCOME> (181,899)
<REALIZED-GAINS-CURRENT> 8,524,743
<APPREC-INCREASE-CURRENT> 19,218,860
<NET-CHANGE-FROM-OPS> 27,561,704
<EQUALIZATION> (134,022)
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 2,872,442
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 399,551
<NUMBER-OF-SHARES-REDEEMED> 407,472
<SHARES-REINVESTED> 193,787
<NET-CHANGE-IN-ASSETS> 7,623,529
<ACCUMULATED-NII-PRIOR> (256,903)
<ACCUMULATED-GAINS-PRIOR> 12,643,301
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,106,316
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,838,348
<AVERAGE-NET-ASSETS> 122,923,972
<PER-SHARE-NAV-BEGIN> 14.36
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> 3.47
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.64
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.14
<EXPENSE-RATIO> 2.40
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 073
<NAME> GLOBAL EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 111,961,390
<INVESTMENTS-AT-VALUE> 129,821,366
<RECEIVABLES> 641,907
<ASSETS-OTHER> 19,552
<OTHER-ITEMS-ASSETS> 13,119,366
<TOTAL-ASSETS> 143,602,191
<PAYABLE-FOR-SECURITIES> 13,496,693
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,067,043
<TOTAL-LIABILITIES> 19,563,736
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 98,020,702
<SHARES-COMMON-STOCK> 3,782,659
<SHARES-COMMON-PRIOR> 4,500,203
<ACCUMULATED-NII-CURRENT> (102,559)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,780,248
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,340,064
<NET-ASSETS> 124,038,455
<DIVIDEND-INCOME> 2,547,754
<INTEREST-INCOME> 45,108
<OTHER-INCOME> 0
<EXPENSES-NET> 2,774,761
<NET-INVESTMENT-INCOME> (181,899)
<REALIZED-GAINS-CURRENT> 8,524,743
<APPREC-INCREASE-CURRENT> 19,218,860
<NET-CHANGE-FROM-OPS> 27,561,704
<EQUALIZATION> (134,022)
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 7,051,972
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 473,379
<NUMBER-OF-SHARES-REDEEMED> 1,660,187
<SHARES-REINVESTED> 469,264
<NET-CHANGE-IN-ASSETS> 7,623,529
<ACCUMULATED-NII-PRIOR> (256,903)
<ACCUMULATED-GAINS-PRIOR> 12,643,301
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,106,316
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,838,348
<AVERAGE-NET-ASSETS> 122,923,972
<PER-SHARE-NAV-BEGIN> 14.41
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> 3.47
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.64
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.19
<EXPENSE-RATIO> 2.40
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 081
<NAME> INVESTMENT QUALITY BOND FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 21,706,164
<INVESTMENTS-AT-VALUE> 22,114,465
<RECEIVABLES> 825,866
<ASSETS-OTHER> 8,613
<OTHER-ITEMS-ASSETS> 274
<TOTAL-ASSETS> 22,949,218
<PAYABLE-FOR-SECURITIES> 444,078
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,673,555
<TOTAL-LIABILITIES> 5,117,633
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,931,985
<SHARES-COMMON-STOCK> 675,704
<SHARES-COMMON-PRIOR> 875,794
<ACCUMULATED-NII-CURRENT> 17,719
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (526,420)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 408,301
<NET-ASSETS> 17,831,585
<DIVIDEND-INCOME> 194
<INTEREST-INCOME> 1,480,320
<OTHER-INCOME> 0
<EXPENSES-NET> 311,330
<NET-INVESTMENT-INCOME> 1,691,184
<REALIZED-GAINS-CURRENT> 42,588
<APPREC-INCREASE-CURRENT> 249,233
<NET-CHANGE-FROM-OPS> 1,461,005
<EQUALIZATION> (2,133)
<DISTRIBUTIONS-OF-INCOME> 506,971
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 71,210
<NUMBER-OF-SHARES-REDEEMED> 311,082
<SHARES-REINVESTED> 39,782
<NET-CHANGE-IN-ASSETS> (3,445,169)
<ACCUMULATED-NII-PRIOR> 24,735
<ACCUMULATED-GAINS-PRIOR> (560,604)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 113,993
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 384,894
<AVERAGE-NET-ASSETS> 18,998,875
<PER-SHARE-NAV-BEGIN> 10.34
<PER-SHARE-NII> .67
<PER-SHARE-GAIN-APPREC> .18
<PER-SHARE-DIVIDEND> .67
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.52
<EXPENSE-RATIO> 2.40
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 082
<NAME> INVESTMENT QUALITY BOND FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 21,706,164
<INVESTMENTS-AT-VALUE> 22,114,465
<RECEIVABLES> 825,866
<ASSETS-OTHER> 8,613
<OTHER-ITEMS-ASSETS> 274
<TOTAL-ASSETS> 22,949,218
<PAYABLE-FOR-SECURITIES> 444,078
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,673,555
<TOTAL-LIABILITIES> 5,117,633
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,931,985
<SHARES-COMMON-STOCK> 438,362
<SHARES-COMMON-PRIOR> 452,815
<ACCUMULATED-NII-CURRENT> 17,719
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (526,420)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 408,301
<NET-ASSETS> 17,831,585
<DIVIDEND-INCOME> 194
<INTEREST-INCOME> 1,480,320
<OTHER-INCOME> 0
<EXPENSES-NET> 311,330
<NET-INVESTMENT-INCOME> 1,691,184
<REALIZED-GAINS-CURRENT> 42,588
<APPREC-INCREASE-CURRENT> 249,233
<NET-CHANGE-FROM-OPS> 1,461,005
<EQUALIZATION> (2,133)
<DISTRIBUTIONS-OF-INCOME> 2001,770
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 85,547
<NUMBER-OF-SHARES-REDEEMED> 122,683
<SHARES-REINVESTED> 22,683
<NET-CHANGE-IN-ASSETS> (3,445,169)
<ACCUMULATED-NII-PRIOR> 24,735
<ACCUMULATED-GAINS-PRIOR> (560,604)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 113,993
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 384,894
<AVERAGE-NET-ASSETS> 18,998,875
<PER-SHARE-NAV-BEGIN> 10.33
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> .20
<PER-SHARE-DIVIDEND> .61
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.52
<EXPENSE-RATIO> 1.90
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 083
<NAME> INVESTMENT QUALITY BOND FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 21,706,164
<INVESTMENTS-AT-VALUE> 22,114,465
<RECEIVABLES> 825,866
<ASSETS-OTHER> 8,613
<OTHER-ITEMS-ASSETS> 274
<TOTAL-ASSETS> 22,949,218
<PAYABLE-FOR-SECURITIES> 444,078
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,673,555
<TOTAL-LIABILITIES> 5,117,633
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,931,985
<SHARES-COMMON-STOCK> 580,612
<SHARES-COMMON-PRIOR> 730,094
<ACCUMULATED-NII-CURRENT> 17,719
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (526,420)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 408,301
<NET-ASSETS> 17,831,585
<DIVIDEND-INCOME> 194
<INTEREST-INCOME> 1,480,320
<OTHER-INCOME> 0
<EXPENSES-NET> 311,330
<NET-INVESTMENT-INCOME> 1,691,184
<REALIZED-GAINS-CURRENT> 42,588
<APPREC-INCREASE-CURRENT> 249,233
<NET-CHANGE-FROM-OPS> 1,461,005
<EQUALIZATION> (2,133)
<DISTRIBUTIONS-OF-INCOME> 1,367,107
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 93,047
<NUMBER-OF-SHARES-REDEEMED> 277,224
<SHARES-REINVESTED> 34,695
<NET-CHANGE-IN-ASSETS> (3,445,169)
<ACCUMULATED-NII-PRIOR> 24,735
<ACCUMULATED-GAINS-PRIOR> (560,604)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 113,993
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 384,894
<AVERAGE-NET-ASSETS> 18,998,875
<PER-SHARE-NAV-BEGIN> 10.33
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> .20
<PER-SHARE-DIVIDEND> .61
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.52
<EXPENSE-RATIO> 1.90
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 091
<NAME> GROWTH & EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 141,728,057
<INVESTMENTS-AT-VALUE> 194,530,537
<RECEIVABLES> 1,080,897
<ASSETS-OTHER> 18,853
<OTHER-ITEMS-ASSETS> 1634
<TOTAL-ASSETS> 195,631,921
<PAYABLE-FOR-SECURITIES> 365,075
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,959,393
<TOTAL-LIABILITIES> 8,324,468
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 119,356,606
<SHARES-COMMON-STOCK> 1,570,268
<SHARES-COMMON-PRIOR> 1,040,832
<ACCUMULATED-NII-CURRENT> 169,142
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,979,443
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 52,802,262
<NET-ASSETS> 187,307,453
<DIVIDEND-INCOME> 3,032,120
<INTEREST-INCOME> 189,855
<OTHER-INCOME> 0
<EXPENSES-NET> 3,039,807
<NET-INVESTMENT-INCOME> 182,168
<REALIZED-GAINS-CURRENT> 15,043,177
<APPREC-INCREASE-CURRENT> 26,450,431
<NET-CHANGE-FROM-OPS> 41,675,776
<EQUALIZATION> 21,811
<DISTRIBUTIONS-OF-INCOME> 176,566
<DISTRIBUTIONS-OF-GAINS> 1,114,556
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 912,261
<NUMBER-OF-SHARES-REDEEMED> 450,673
<SHARES-REINVESTED> 67,848
<NET-CHANGE-IN-ASSETS> 59,470,684
<ACCUMULATED-NII-PRIOR> 270,481
<ACCUMULATED-GAINS-PRIOR> 7,687,354
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 784,990
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,373,298
<AVERAGE-NET-ASSETS> 161,706,890
<PER-SHARE-NAV-BEGIN> 17.56
<PER-SHARE-NII> .14
<PER-SHARE-GAIN-APPREC> 5.26
<PER-SHARE-DIVIDEND> .15
<PER-SHARE-DISTRIBUTIONS> 1.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.77
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 092
<NAME> GROWTH & INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 141,728,057
<INVESTMENTS-AT-VALUE> 194,530,537
<RECEIVABLES> 1,080,897
<ASSETS-OTHER> 18,853
<OTHER-ITEMS-ASSETS> 1,634
<TOTAL-ASSETS> 195,631,921
<PAYABLE-FOR-SECURITIES> 365,075
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,959,393
<TOTAL-LIABILITIES> 8,324,468
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 119,356,606
<SHARES-COMMON-STOCK> 2,532,295
<SHARES-COMMON-PRIOR> 1,985,111
<ACCUMULATED-NII-CURRENT> 169,142
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,979,443
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 52,802,262
<NET-ASSETS> 187,307,453
<DIVIDEND-INCOME> 3,032,120
<INTEREST-INCOME> 189,855
<OTHER-INCOME> 0
<EXPENSES-NET> 3,039,807
<NET-INVESTMENT-INCOME> 182,168
<REALIZED-GAINS-CURRENT> 15,043,177
<APPREC-INCREASE-CURRENT> 26,450,431
<NET-CHANGE-FROM-OPS> 41,675,776
<EQUALIZATION> 21,811
<DISTRIBUTIONS-OF-INCOME> 73,496
<DISTRIBUTIONS-OF-GAINS> 2,130,500
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 787,724
<NUMBER-OF-SHARES-REDEEMED> 356,257
<SHARES-REINVESTED> 115,717
<NET-CHANGE-IN-ASSETS> 59,470,684
<ACCUMULATED-NII-PRIOR> 270,481
<ACCUMULATED-GAINS-PRIOR> 7,687,354
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 784,990
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,373,298
<AVERAGE-NET-ASSETS> 161,076,890
<PER-SHARE-NAV-BEGIN> 17.50
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> 5.23
<PER-SHARE-DIVIDEND> .03
<PER-SHARE-DISTRIBUTIONS> 1.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.67
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 093
<NAME> GROWTH & INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 141,728,057
<INVESTMENTS-AT-VALUE> 194,530,537
<RECEIVABLES> 1,080,897
<ASSETS-OTHER> 18,853
<OTHER-ITEMS-ASSETS> 1,634
<TOTAL-ASSETS> 195,631,921
<PAYABLE-FOR-SECURITIES> 365,075
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,959,393
<TOTAL-LIABILITIES> 8,324,468
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 119,356,606
<SHARES-COMMON-STOCK> 4,517,472
<SHARES-COMMON-PRIOR> 4,261,109
<ACCUMULATED-NII-CURRENT> 169,142
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,979,443
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 52,802,262
<NET-ASSETS> 187,307,453
<DIVIDEND-INCOME> 3,032,120
<INTEREST-INCOME> 189,855
<OTHER-INCOME> 0
<EXPENSES-NET> 3,039,807
<NET-INVESTMENT-INCOME> 182,168
<REALIZED-GAINS-CURRENT> 15,043,177
<APPREC-INCREASE-CURRENT> 26,450,431
<NET-CHANGE-FROM-OPS> 41,675,776
<EQUALIZATION> 21,811
<DISTRIBUTIONS-OF-INCOME> 113,514
<DISTRIBUTIONS-OF-GAINS> 4,448,214
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 882,662
<NUMBER-OF-SHARES-REDEEMED> 871,364
<SHARES-REINVESTED> 245,065
<NET-CHANGE-IN-ASSETS> 59,470,684
<ACCUMULATED-NII-PRIOR> 270,481
<ACCUMULATED-GAINS-PRIOR> 7,687,354
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 784,990
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,373,298
<AVERAGE-NET-ASSETS> 161,076,890
<PER-SHARE-NAV-BEGIN> 17.56
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> 5.25
<PER-SHARE-DIVIDEND> .03
<PER-SHARE-DISTRIBUTIONS> 1.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.75
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 101
<NAME> BALANCED FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 98,814,982
<INVESTMENTS-AT-VALUE> 103,496,344
<RECEIVABLES> 3,604,199
<ASSETS-OTHER> 13,023
<OTHER-ITEMS-ASSETS> 1,372,571
<TOTAL-ASSETS> 108,486,137
<PAYABLE-FOR-SECURITIES> 6,333,829
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,457,588
<TOTAL-LIABILITIES> 10,791,417
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,838,674
<SHARES-COMMON-STOCK> 976,982
<SHARES-COMMON-PRIOR> 881,735
<ACCUMULATED-NII-CURRENT> 1,388,676
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,785,914
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,681,456
<NET-ASSETS> 97,694,720
<DIVIDEND-INCOME> 1,384,997
<INTEREST-INCOME> 2,671,191
<OTHER-INCOME> 0
<EXPENSES-NET> 1,899,572
<NET-INVESTMENT-INCOME> 2,156,616
<REALIZED-GAINS-CURRENT> 15,728,900
<APPREC-INCREASE-CURRENT> (2,894,052)
<NET-CHANGE-FROM-OPS> 14,991,464
<EQUALIZATION> (205,430)
<DISTRIBUTIONS-OF-INCOME> 392,396
<DISTRIBUTIONS-OF-GAINS> 1,015,169
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 234,801
<NUMBER-OF-SHARES-REDEEMED> 265,075
<SHARES-REINVESTED> 125,521
<NET-CHANGE-IN-ASSETS> (2,218,749)
<ACCUMULATED-NII-PRIOR> 2,461,605
<ACCUMULATED-GAINS-PRIOR> 9,227,246
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 735,884
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,118,538
<AVERAGE-NET-ASSETS> 99,213,162
<PER-SHARE-NAV-BEGIN> 12.33
<PER-SHARE-NII> .34
<PER-SHARE-GAIN-APPREC> 1.52
<PER-SHARE-DIVIDEND> .45
<PER-SHARE-DISTRIBUTIONS> 1.16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.58
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 102
<NAME> BALANCED FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 98,814,982
<INVESTMENTS-AT-VALUE> 103,496,344
<RECEIVABLES> 3,604,199
<ASSETS-OTHER> 13,023
<OTHER-ITEMS-ASSETS> 1,372,571
<TOTAL-ASSETS> 108,496,137
<PAYABLE-FOR-SECURITIES> 6,333,829
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,457,588
<TOTAL-LIABILITIES> 10,791,417
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,838,674
<SHARES-COMMON-STOCK> 1,371,938
<SHARES-COMMON-PRIOR> 1,322,501
<ACCUMULATED-NII-CURRENT> 1,388,670
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,785,914
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,681,456
<NET-ASSETS> 97,694,720
<DIVIDEND-INCOME> 1,384,997
<INTEREST-INCOME> 2,671,191
<OTHER-INCOME> 0
<EXPENSES-NET> 1,899,572
<NET-INVESTMENT-INCOME> 2,156,676
<REALIZED-GAINS-CURRENT> 15,728,900
<APPREC-INCREASE-CURRENT> (2,894,052)
<NET-CHANGE-FROM-OPS> 14,991,464
<EQUALIZATION> (205,430)
<DISTRIBUTIONS-OF-INCOME> 509,836
<DISTRIBUTIONS-OF-GAINS> 1,534,515
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 279,360
<NUMBER-OF-SHARES-REDEEMED> 390,785
<SHARES-REINVESTED> 160,862
<NET-CHANGE-IN-ASSETS> (2,218,749)
<ACCUMULATED-NII-PRIOR> 2,461,605
<ACCUMULATED-GAINS-PRIOR> 9,227,246
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 735,884
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,118,538
<AVERAGE-NET-ASSETS> 99,213,162
<PER-SHARE-NAV-BEGIN> 12.26
<PER-SHARE-NII> .25
<PER-SHARE-GAIN-APPREC> 1.53
<PER-SHARE-DIVIDEND> .39
<PER-SHARE-DISTRIBUTIONS> 1.16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.49
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 103
<NAME> BALANCED FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 98,814,982
<INVESTMENTS-AT-VALUE> 103,496,344
<RECEIVABLES> 3,604,199
<ASSETS-OTHER> 13,023
<OTHER-ITEMS-ASSETS> 1,372,571
<TOTAL-ASSETS> 108,486,137
<PAYABLE-FOR-SECURITIES> 6,333,829
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,457,588
<TOTAL-LIABILITIES> 10,791,417
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,838,674
<SHARES-COMMON-STOCK> 5,406,916
<SHARES-COMMON-PRIOR> 5,896,688
<ACCUMULATED-NII-CURRENT> 1,388,676
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,785,914
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,681,456
<NET-ASSETS> 97,694,720
<DIVIDEND-INCOME> 1,384,997
<INTEREST-INCOME> 2,671,191
<OTHER-INCOME> 0
<EXPENSES-NET> 1,899,572
<NET-INVESTMENT-INCOME> 2,156,616
<REALIZED-GAINS-CURRENT> 15,728,900
<APPREC-INCREASE-CURRENT> (2,894,052)
<NET-CHANGE-FROM-OPS> 14,991,464
<EQUALIZATION> (205,430)
<DISTRIBUTIONS-OF-INCOME> 2,058,773
<DISTRIBUTIONS-OF-GAINS> 6,683,658
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 406,687
<NUMBER-OF-SHARES-REDEEMED> 1,633,682
<SHARES-REINVESTED> 737,223
<NET-CHANGE-IN-ASSETS> (2,218,749)
<ACCUMULATED-NII-PRIOR> 2,461,605
<ACCUMULATED-GAINS-PRIOR> 9,227,246
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 735,884
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,118,538
<AVERAGE-NET-ASSETS> 99,213,162
<PER-SHARE-NAV-BEGIN> 12.35
<PER-SHARE-NII> .25
<PER-SHARE-GAIN-APPREC> 1.54
<PER-SHARE-DIVIDEND> .36
<PER-SHARE-DISTRIBUTIONS> 1.16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.62
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 111
<NAME> NATIONAL MUNICIPAL BOND FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 17,038,421
<INVESTMENTS-AT-VALUE> 18,012,070
<RECEIVABLES> 1,128,580
<ASSETS-OTHER> 10,998
<OTHER-ITEMS-ASSETS> 89,131
<TOTAL-ASSETS> 19,240,779
<PAYABLE-FOR-SECURITIES> 968,590
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 88,517
<TOTAL-LIABILITIES> 1,057,107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,424,107
<SHARES-COMMON-STOCK> 629,317
<SHARES-COMMON-PRIOR> 792,318
<ACCUMULATED-NII-CURRENT> (474)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (213,613)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 973,649
<NET-ASSETS> 18,183,672
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,072,598
<OTHER-INCOME> 0
<EXPENSES-NET> 281,238
<NET-INVESTMENT-INCOME> 791,360
<REALIZED-GAINS-CURRENT> 211,627
<APPREC-INCREASE-CURRENT> 441,613
<NET-CHANGE-FROM-OPS> 653,240
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 318,542
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34,409
<NUMBER-OF-SHARES-REDEEMED> 214,451
<SHARES-REINVESTED> 17,041
<NET-CHANGE-IN-ASSETS> (1,349,781)
<ACCUMULATED-NII-PRIOR> (596)
<ACCUMULATED-GAINS-PRIOR> (425,240)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 109,842
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 333,228
<AVERAGE-NET-ASSETS> 18,307,058
<PER-SHARE-NAV-BEGIN> 9.73
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .36
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.09
<EXPENSE-RATIO> .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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 112
<NAME> NATIONAL MUNICIPAL BOND FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 17,038,421
<INVESTMENTS-AT-VALUE> 18,012,070
<RECEIVABLES> 1,128,580
<ASSETS-OTHER> 10,998
<OTHER-ITEMS-ASSETS> 89,131
<TOTAL-ASSETS> 19,240,779
<PAYABLE-FOR-SECURITIES> 968,590
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 88,517
<TOTAL-LIABILITIES> 1,057,107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,424,110
<SHARES-COMMON-STOCK> 647,576
<SHARES-COMMON-PRIOR> 629,916
<ACCUMULATED-NII-CURRENT> (474)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (213,613)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 973,649
<NET-ASSETS> 18,183,672
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,072,598
<OTHER-INCOME> 0
<EXPENSES-NET> 281,238
<NET-INVESTMENT-INCOME> 791,360
<REALIZED-GAINS-CURRENT> 211,627
<APPREC-INCREASE-CURRENT> 441,613
<NET-CHANGE-FROM-OPS> 653,240
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 254,666
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 138,304
<NUMBER-OF-SHARES-REDEEMED> 137,867
<SHARES-REINVESTED> 17,223
<NET-CHANGE-IN-ASSETS> (1,349,781)
<ACCUMULATED-NII-PRIOR> (569)
<ACCUMULATED-GAINS-PRIOR> (425,240)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 109,842
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 333,228
<AVERAGE-NET-ASSETS> 18,307,058
<PER-SHARE-NAV-BEGIN> 9.73
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> .36
<PER-SHARE-DIVIDEND> .40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.09
<EXPENSE-RATIO> 1.84
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 113
<NAME> NATIONAL MUNICIPAL BOND FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 17,038,421
<INVESTMENTS-AT-VALUE> 18,012,070
<RECEIVABLES> 1,128,580
<ASSETS-OTHER> 10,998
<OTHER-ITEMS-ASSETS> 89,131
<TOTAL-ASSETS> 19,210,779
<PAYABLE-FOR-SECURITIES> 968,590
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 88,517
<TOTAL-LIABILITIES> 1,057,107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,424,110
<SHARES-COMMON-STOCK> 525,979
<SHARES-COMMON-PRIOR> 585,040
<ACCUMULATED-NII-CURRENT> (474)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (213,613)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 973,649
<NET-ASSETS> 18,183,672
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,072,598
<OTHER-INCOME> 0
<EXPENSES-NET> 281,238
<NET-INVESTMENT-INCOME> 791,360
<REALIZED-GAINS-CURRENT> 211,627
<APPREC-INCREASE-CURRENT> 441,613
<NET-CHANGE-FROM-OPS> 653,240
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 218,057
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 75,518
<NUMBER-OF-SHARES-REDEEMED> 151,759
<SHARES-REINVESTED> 17,180
<NET-CHANGE-IN-ASSETS> (1,349,781)
<ACCUMULATED-NII-PRIOR> (569)
<ACCUMULATED-GAINS-PRIOR> (425,240)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 109,842
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 333,228
<AVERAGE-NET-ASSETS> 18,307,058
<PER-SHARE-NAV-BEGIN> 9.73
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> .36
<PER-SHARE-DIVIDEND> .40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.09
<EXPENSE-RATIO> 1.84
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 131
<NAME> STRATEGIC INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 106,168,011
<INVESTMENTS-AT-VALUE> 107,782,571
<RECEIVABLES> 7,108,296
<ASSETS-OTHER> 15,130
<OTHER-ITEMS-ASSETS> 21,170,994
<TOTAL-ASSETS> 136,064,373
<PAYABLE-FOR-SECURITIES> 36,560,415
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,307,207
<TOTAL-LIABILITIES> 52,867,622
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 80,430,257
<SHARES-COMMON-STOCK> 1,631,881
<SHARES-COMMON-PRIOR> 1,364,948
<ACCUMULATED-NII-CURRENT> (80,961)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,274,370
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,573,085
<NET-ASSETS> 83,196,751
<DIVIDEND-INCOME> 3,185
<INTEREST-INCOME> 6,671,840
<OTHER-INCOME> 0
<EXPENSES-NET> 1,542,849
<NET-INVESTMENT-INCOME> 5,132,176
<REALIZED-GAINS-CURRENT> 1,525,185
<APPREC-INCREASE-CURRENT> 517,710
<NET-CHANGE-FROM-OPS> 7,175,071
<EQUALIZATION> 471
<DISTRIBUTIONS-OF-INCOME> 1,337,836
<DISTRIBUTIONS-OF-GAINS> 272,850
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 728,750
<NUMBER-OF-SHARES-REDEEMED> 570,028
<SHARES-REINVESTED> 108,211
<NET-CHANGE-IN-ASSETS> 16,141,278
<ACCUMULATED-NII-PRIOR> 708,280
<ACCUMULATED-GAINS-PRIOR> 1,284,537
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 561,512
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,612,796
<AVERAGE-NET-ASSETS> 76,644,640
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> .70
<PER-SHARE-GAIN-APPREC> .28
<PER-SHARE-DIVIDEND> .84
<PER-SHARE-DISTRIBUTIONS> .18
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.76
<EXPENSE-RATIO> 1.50
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 132
<NAME> STRATEGIC INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 106,168,011
<INVESTMENTS-AT-VALUE> 107,782,571
<RECEIVABLES> 7,108,296
<ASSETS-OTHER> 15,130
<OTHER-ITEMS-ASSETS> 21,170,994
<TOTAL-ASSETS> 136,064,373
<PAYABLE-FOR-SECURITIES> 36,560,415
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,307,207
<TOTAL-LIABILITIES> 52,867,622
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 80,430,257
<SHARES-COMMON-STOCK> 3,545,149
<SHARES-COMMON-PRIOR> 3,151,002
<ACCUMULATED-NII-CURRENT> (80,961)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,274,370
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,573,085
<NET-ASSETS> 83,196,751
<DIVIDEND-INCOME> 3,185
<INTEREST-INCOME> 6,671,840
<OTHER-INCOME> 0
<EXPENSES-NET> 1,542,849
<NET-INVESTMENT-INCOME> 5,132,176
<REALIZED-GAINS-CURRENT> 1,525,185
<APPREC-INCREASE-CURRENT> 517,710
<NET-CHANGE-FROM-OPS> 7,175,071
<EQUALIZATION> 471
<DISTRIBUTIONS-OF-INCOME> 2,617,908
<DISTRIBUTIONS-OF-GAINS> 599,725
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 883,892
<NUMBER-OF-SHARES-REDEEMED> 668,180
<SHARES-REINVESTED> 178,435
<NET-CHANGE-IN-ASSETS> 16,141,278
<ACCUMULATED-NII-PRIOR> 708,280
<ACCUMULATED-GAINS-PRIOR> 1,284,537
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 561,512
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,612,796
<AVERAGE-NET-ASSETS> 76,644,640
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .28
<PER-SHARE-DIVIDEND> .78
<PER-SHARE-DISTRIBUTIONS> .18
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.76
<EXPENSE-RATIO> 2.15
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 133
<NAME> STRATEGIC INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 106,168,011
<INVESTMENTS-AT-VALUE> 107,782,571
<RECEIVABLES> 7,108,296
<ASSETS-OTHER> 15,130
<OTHER-ITEMS-ASSETS> 21,170,994
<TOTAL-ASSETS> 136,064,373
<PAYABLE-FOR-SECURITIES> 36,560,415
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,307,207
<TOTAL-LIABILITIES> 52,867,622
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 80,430,257
<SHARES-COMMON-STOCK> 3,349,697
<SHARES-COMMON-PRIOR> 2,324,147
<ACCUMULATED-NII-CURRENT> (80,961)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,274,370
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,573,085
<NET-ASSETS> 83,196,751
<DIVIDEND-INCOME> 3,185
<INTEREST-INCOME> 6,671,840
<OTHER-INCOME> 0
<EXPENSES-NET> 1,542,849
<NET-INVESTMENT-INCOME> 5,132,176
<REALIZED-GAINS-CURRENT> 1,525,185
<APPREC-INCREASE-CURRENT> 517,710
<NET-CHANGE-FROM-OPS> 7,175,071
<EQUALIZATION> 471
<DISTRIBUTIONS-OF-INCOME> 2,152,025
<DISTRIBUTIONS-OF-GAINS> 442,077
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,643,552
<NUMBER-OF-SHARES-REDEEMED> 827,696
<SHARES-REINVESTED> 209,694
<NET-CHANGE-IN-ASSETS> 16,141,278
<ACCUMULATED-NII-PRIOR> 708,280
<ACCUMULATED-GAINS-PRIOR> 1,284,537
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 561,512
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,616,796
<AVERAGE-NET-ASSETS> 76,644,640
<PER-SHARE-NAV-BEGIN> 9.80
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .28
<PER-SHARE-DIVIDEND> .78
<PER-SHARE-DISTRIBUTIONS> .18
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.76
<EXPENSE-RATIO> 2.15
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 141
<NAME> INTERNATIONAL GROWTH & INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 30,461,289
<INVESTMENTS-AT-VALUE> 29,421,934
<RECEIVABLES> 1,603,066
<ASSETS-OTHER> 8,209
<OTHER-ITEMS-ASSETS> 18,052,000
<TOTAL-ASSETS> 49,112,209
<PAYABLE-FOR-SECURITIES> 16,968,960
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,887,894
<TOTAL-LIABILITIES> 19,856,854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,811,953
<SHARES-COMMON-STOCK> 412,548
<SHARES-COMMON-PRIOR> 416,908
<ACCUMULATED-NII-CURRENT> (50,193)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,323,494
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (829,899)
<NET-ASSETS> 29,255,355
<DIVIDEND-INCOME> 498,505
<INTEREST-INCOME> 348,904
<OTHER-INCOME> 0
<EXPENSES-NET> 716,032
<NET-INVESTMENT-INCOME> 131,377
<REALIZED-GAINS-CURRENT> 2,303,144
<APPREC-INCREASE-CURRENT> (1,541,794)
<NET-CHANGE-FROM-OPS> 892,727
<EQUALIZATION> (9,971)
<DISTRIBUTIONS-OF-INCOME> 83,820
<DISTRIBUTIONS-OF-GAINS> 332,915
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 167,110
<NUMBER-OF-SHARES-REDEEMED> 450,673
<SHARES-REINVESTED> 67,848
<NET-CHANGE-IN-ASSETS> 230,201
<ACCUMULATED-NII-PRIOR> 263,235
<ACCUMULATED-GAINS-PRIOR> 1,939,578
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 280,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 765,254
<AVERAGE-NET-ASSETS> 31,184,795
<PER-SHARE-NAV-BEGIN> 11.35
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> .35
<PER-SHARE-DIVIDEND> .19
<PER-SHARE-DISTRIBUTIONS> .76
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.81
<EXPENSE-RATIO> 1.75
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 142
<NAME> INTERNATIONAL GROWTH & INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 30,461,289
<INVESTMENTS-AT-VALUE> 29,421,934
<RECEIVABLES> 1,630,066
<ASSETS-OTHER> 8,209
<OTHER-ITEMS-ASSETS> 18,052,000
<TOTAL-ASSETS> 49,112,209
<PAYABLE-FOR-SECURITIES> 16,968,960
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,887,894
<TOTAL-LIABILITIES> 19,856,854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,811,953
<SHARES-COMMON-STOCK> 1,519,184
<SHARES-COMMON-PRIOR> 1,346,082
<ACCUMULATED-NII-CURRENT> (50,193)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,323,494
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (829,899)
<NET-ASSETS> 29,255,355
<DIVIDEND-INCOME> 498,505
<INTEREST-INCOME> 348,904
<OTHER-INCOME> 0
<EXPENSES-NET> 716,032
<NET-INVESTMENT-INCOME> 131,377
<REALIZED-GAINS-CURRENT> 2,303,144
<APPREC-INCREASE-CURRENT> (1,541,794)
<NET-CHANGE-FROM-OPS> 892,727
<EQUALIZATION> (9,971)
<DISTRIBUTIONS-OF-INCOME> 180,641
<DISTRIBUTIONS-OF-GAINS> 1,034,399
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 787,724
<NUMBER-OF-SHARES-REDEEMED> 356,257
<SHARES-REINVESTED> 115,717
<NET-CHANGE-IN-ASSETS> 230,201
<ACCUMULATED-NII-PRIOR> 263,235
<ACCUMULATED-GAINS-PRIOR> 1,939,578
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 280,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 765,254
<AVERAGE-NET-ASSETS> 31,184,795
<PER-SHARE-NAV-BEGIN> 11.30
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> .13
<PER-SHARE-DISTRIBUTIONS> .76
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.75
<EXPENSE-RATIO> 2.40
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 143
<NAME> INTERNATIONAL GROWTH & INCOME FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 30,461,289
<INVESTMENTS-AT-VALUE> 29,421,934
<RECEIVABLES> 1,630,066
<ASSETS-OTHER> 8,209
<OTHER-ITEMS-ASSETS> 18,052,000
<TOTAL-ASSETS> 49,112,209
<PAYABLE-FOR-SECURITIES> 16,968,960
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,887,894
<TOTAL-LIABILITIES> 19,856,854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,811,953
<SHARES-COMMON-STOCK> 786,235
<SHARES-COMMON-PRIOR> 802,784
<ACCUMULATED-NII-CURRENT> (50,193)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,323,494
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (829,899)
<NET-ASSETS> 29,255,355
<DIVIDEND-INCOME> 498,505
<INTEREST-INCOME> 348,904
<OTHER-INCOME> 0
<EXPENSES-NET> 716,032
<NET-INVESTMENT-INCOME> 131,377
<REALIZED-GAINS-CURRENT> 2,303,144
<APPREC-INCREASE-CURRENT> (1,541,794)
<NET-CHANGE-FROM-OPS> 892,727
<EQUALIZATION> (9,971)
<DISTRIBUTIONS-OF-INCOME> 105,721
<DISTRIBUTIONS-OF-GAINS> 616,566
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 882,662
<NUMBER-OF-SHARES-REDEEMED> 871,364
<SHARES-REINVESTED> 245,065
<NET-CHANGE-IN-ASSETS> 230,201
<ACCUMULATED-NII-PRIOR> 263,235
<ACCUMULATED-GAINS-PRIOR> 1,939,578
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 280,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 765,254
<AVERAGE-NET-ASSETS> 31,184,795
<PER-SHARE-NAV-BEGIN> 11.31
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> .13
<PER-SHARE-DISTRIBUTIONS> .76
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.76
<EXPENSE-RATIO> 2.40
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 151
<NAME> SMALL/MID CAP FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 34,086,789
<INVESTMENTS-AT-VALUE> 38,155,034
<RECEIVABLES> 694,676
<ASSETS-OTHER> 9,229
<OTHER-ITEMS-ASSETS> 968
<TOTAL-ASSETS> 38,859,907
<PAYABLE-FOR-SECURITIES> 1,001,989
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,414,882
<TOTAL-LIABILITIES> 9,416,871
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24,892,847
<SHARES-COMMON-STOCK> 268,833
<SHARES-COMMON-PRIOR> 234,954
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 481,944
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,068,245
<NET-ASSETS> 29,443,036
<DIVIDEND-INCOME> 73,423
<INTEREST-INCOME> 81,421
<OTHER-INCOME> 0
<EXPENSES-NET> 521,970
<NET-INVESTMENT-INCOME> (367,126)
<REALIZED-GAINS-CURRENT> 1,592,142
<APPREC-INCREASE-CURRENT> 3,472,083
<NET-CHANGE-FROM-OPS> 4,697,099
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 195,283
<NUMBER-OF-SHARES-REDEEMED> 161,404
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11,576,951
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (771,607)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 217,083
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 633,205
<AVERAGE-NET-ASSETS> 23,468,382
<PER-SHARE-NAV-BEGIN> 12.62
<PER-SHARE-NII> (.14)
<PER-SHARE-GAIN-APPREC> 3.03
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.51
<EXPENSE-RATIO> 1.675
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 152
<NAME> SMALL/MID CAP FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 34,086,789
<INVESTMENTS-AT-VALUE> 38,155,034
<RECEIVABLES> 694,676
<ASSETS-OTHER> 9,229
<OTHER-ITEMS-ASSETS> 968
<TOTAL-ASSETS> 38,859,907
<PAYABLE-FOR-SECURITIES> 1,001,989
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,414,882
<TOTAL-LIABILITIES> 9,416,871
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24,892,847
<SHARES-COMMON-STOCK> 537,569
<SHARES-COMMON-PRIOR> 529,111
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,068,245
<NET-ASSETS> 29,443,036
<DIVIDEND-INCOME> 73,423
<INTEREST-INCOME> 81,421
<OTHER-INCOME> 0
<EXPENSES-NET> 521,970
<NET-INVESTMENT-INCOME> (367,126)
<REALIZED-GAINS-CURRENT> 1,592,142
<APPREC-INCREASE-CURRENT> 3,472,083
<NET-CHANGE-FROM-OPS> 4,697,099
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 399,400
<NUMBER-OF-SHARES-REDEEMED> 158,565
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11,576,951
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (771,607)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 217,083
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 633,205
<AVERAGE-NET-ASSETS> 23,468,382
<PER-SHARE-NAV-BEGIN> 12.58
<PER-SHARE-NII> (.23)
<PER-SHARE-GAIN-APPREC> 2.98
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.33
<EXPENSE-RATIO> 2.325
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 153
<NAME> SMALL/MID CAP FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 34,086,789
<INVESTMENTS-AT-VALUE> 38,155,034
<RECEIVABLES> 694,676
<ASSETS-OTHER> 9,229
<OTHER-ITEMS-ASSETS> 968
<TOTAL-ASSETS> 38,859,907
<PAYABLE-FOR-SECURITIES> 1,001,989
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,414,882
<TOTAL-LIABILITIES> 9,416,871
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24,892,847
<SHARES-COMMON-STOCK> 512,483
<SHARES-COMMON-PRIOR> 654,464
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 481,944
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,068,245
<NET-ASSETS> 29,443,036
<DIVIDEND-INCOME> 73,423
<INTEREST-INCOME> 81,421
<OTHER-INCOME> 0
<EXPENSES-NET> 521,970
<NET-INVESTMENT-INCOME> (367,126)
<REALIZED-GAINS-CURRENT> 1,592,142
<APPREC-INCREASE-CURRENT> 3,472,083
<NET-CHANGE-FROM-OPS> 4,697,099
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 742,841
<NUMBER-OF-SHARES-REDEEMED> 519,604
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11,576,951
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (771,607)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 217,083
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 633,205
<AVERAGE-NET-ASSETS> 23,468,382
<PER-SHARE-NAV-BEGIN> 12.59
<PER-SHARE-NII> (.23)
<PER-SHARE-GAIN-APPREC> 2.99
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.35
<EXPENSE-RATIO> 2.325
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 161
<NAME> INTERNATIONAL SMALL CAP FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 16,499,004
<INVESTMENTS-AT-VALUE> 17,800,980
<RECEIVABLES> 335,578
<ASSETS-OTHER> 7,574
<OTHER-ITEMS-ASSETS> 1,257,191
<TOTAL-ASSETS> 19,065,745
<PAYABLE-FOR-SECURITIES> 536,392
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 910,882
<TOTAL-LIABILITIES> 1,447,274
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,898,496
<SHARES-COMMON-STOCK> 232,650
<SHARES-COMMON-PRIOR> 157,851
<ACCUMULATED-NII-CURRENT> 8,330
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (587,448)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,299,093
<NET-ASSETS> 17,618,471
<DIVIDEND-INCOME> 133,914
<INTEREST-INCOME> 153,531
<OTHER-INCOME> 0
<EXPENSES-NET> 407,940
<NET-INVESTMENT-INCOME> (120,495)
<REALIZED-GAINS-CURRENT> (568,550)
<APPREC-INCREASE-CURRENT> 939,624
<NET-CHANGE-FROM-OPS> 250,579
<EQUALIZATION> 1803
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 172,223
<NUMBER-OF-SHARES-REDEEMED> 97,424
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,913,799
<ACCUMULATED-NII-PRIOR> 4,522
<ACCUMULATED-GAINS-PRIOR> (58,234)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,637
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 481,335
<AVERAGE-NET-ASSETS> 16,727,282
<PER-SHARE-NAV-BEGIN> 13.43
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> .46
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.86
<EXPENSE-RATIO> 1.90
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 162
<NAME> INTERNATIONAL SMALL CAP FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 16,499,004
<INVESTMENTS-AT-VALUE> 17,800,980
<RECEIVABLES> 335,578
<ASSETS-OTHER> 7,574
<OTHER-ITEMS-ASSETS> 1,257,191
<TOTAL-ASSETS> 19,065,745
<PAYABLE-FOR-SECURITIES> 536,392
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 910,882
<TOTAL-LIABILITIES> 1,447,274
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,898,496
<SHARES-COMMON-STOCK> 537,569
<SHARES-COMMON-PRIOR> 378,970
<ACCUMULATED-NII-CURRENT> 8,330
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (587,448)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,299,093
<NET-ASSETS> 17,618,471
<DIVIDEND-INCOME> 133,914
<INTEREST-INCOME> 153,531
<OTHER-INCOME> 0
<EXPENSES-NET> 407,940
<NET-INVESTMENT-INCOME> (120,495)
<REALIZED-GAINS-CURRENT> (568,550)
<APPREC-INCREASE-CURRENT> 939,624
<NET-CHANGE-FROM-OPS> 250,579
<EQUALIZATION> 1,803
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 311,497
<NUMBER-OF-SHARES-REDEEMED> 152,898
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,913,799
<ACCUMULATED-NII-PRIOR> 4,522
<ACCUMULATED-GAINS-PRIOR> (58,234)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,637
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 481,335
<AVERAGE-NET-ASSETS> 16,727,282
<PER-SHARE-NAV-BEGIN> 13.37
<PER-SHARE-NII> (.11)
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.71
<EXPENSE-RATIO> 2.55
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 163
<NAME> INTERNATIONAL SMALL CAP FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 16,499,004
<INVESTMENTS-AT-VALUE> 17,800,980
<RECEIVABLES> 335,578
<ASSETS-OTHER> 7,574
<OTHER-ITEMS-ASSETS> 1,257,191
<TOTAL-ASSETS> 19,065,745
<PAYABLE-FOR-SECURITIES> 536,392
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 910,882
<TOTAL-LIABILITIES> 1,447,274
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,898,496
<SHARES-COMMON-STOCK> 512,483
<SHARES-COMMON-PRIOR> 412,466
<ACCUMULATED-NII-CURRENT> 8,330
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (587,448)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,299,093
<NET-ASSETS> 17,618,471
<DIVIDEND-INCOME> 133,914
<INTEREST-INCOME> 153,531
<OTHER-INCOME> 0
<EXPENSES-NET> 407,940
<NET-INVESTMENT-INCOME> (120,495)
<REALIZED-GAINS-CURRENT> (568,550)
<APPREC-INCREASE-CURRENT> 939,624
<NET-CHANGE-FROM-OPS> 250,579
<EQUALIZATION> 1803
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 287,465
<NUMBER-OF-SHARES-REDEEMED> 187,448
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,913,799
<ACCUMULATED-NII-PRIOR> 4,522
<ACCUMULATED-GAINS-PRIOR> (58,234)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,637
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 481,335
<AVERAGE-NET-ASSETS> 16,727,282
<PER-SHARE-NAV-BEGIN> 13.37
<PER-SHARE-NII> (.11)
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.71
<EXPENSE-RATIO> 2.55
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 171
<NAME> GROWTH EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 29,549,293
<INVESTMENTS-AT-VALUE> 31,730,170
<RECEIVABLES> 378,945
<ASSETS-OTHER> 8,584
<OTHER-ITEMS-ASSETS> 7,540
<TOTAL-ASSETS> 32,125,239
<PAYABLE-FOR-SECURITIES> 478,419
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,787,483
<TOTAL-LIABILITIES> 7,265,902
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,463,767
<SHARES-COMMON-STOCK> 179,467
<SHARES-COMMON-PRIOR> 162,826
<ACCUMULATED-NII-CURRENT> 87,652
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,126,767
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,181,151
<NET-ASSETS> 24,859,337
<DIVIDEND-INCOME> 169,373
<INTEREST-INCOME> 125,017
<OTHER-INCOME> 0
<EXPENSES-NET> 439,258
<NET-INVESTMENT-INCOME> (144,868)
<REALIZED-GAINS-CURRENT> 2,699,130
<APPREC-INCREASE-CURRENT> 1,477,854
<NET-CHANGE-FROM-OPS> 4,032,116
<EQUALIZATION> 33,219
<DISTRIBUTIONS-OF-INCOME> 33,593
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 126,280
<NUMBER-OF-SHARES-REDEEMED> 206,586
<SHARES-REINVESTED> 35,116
<NET-CHANGE-IN-ASSETS> 11,373,291
<ACCUMULATED-NII-PRIOR> 240,392
<ACCUMULATED-GAINS-PRIOR> (426,568)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 178,839
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 535,129
<AVERAGE-NET-ASSETS> 19,871,003
<PER-SHARE-NAV-BEGIN> 13.78
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> 3.45
<PER-SHARE-DIVIDEND> .19
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.01
<EXPENSE-RATIO> 1.65
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 172
<NAME> GROWTH EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 29,549,293
<INVESTMENTS-AT-VALUE> 31,730,170
<RECEIVABLES> 378,945
<ASSETS-OTHER> 8,584
<OTHER-ITEMS-ASSETS> 7,540
<TOTAL-ASSETS> 32,125,239
<PAYABLE-FOR-SECURITIES> 478,419
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,787,483
<TOTAL-LIABILITIES> 7,265,902
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,463,767
<SHARES-COMMON-STOCK> 534,959
<SHARES-COMMON-PRIOR> 345,868
<ACCUMULATED-NII-CURRENT> 87,652
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21,126,767
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,181,151
<NET-ASSETS> 24,859,337
<DIVIDEND-INCOME> 169,373
<INTEREST-INCOME> 125,017
<OTHER-INCOME> 0
<EXPENSES-NET> 439,258
<NET-INVESTMENT-INCOME> (144,868)
<REALIZED-GAINS-CURRENT> 2,699,130
<APPREC-INCREASE-CURRENT> 1,477,854
<NET-CHANGE-FROM-OPS> 4,032,116
<EQUALIZATION> 33,219
<DISTRIBUTIONS-OF-INCOME> 63,216
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 494,750
<NUMBER-OF-SHARES-REDEEMED> 259,786
<SHARES-REINVESTED> 98,555
<NET-CHANGE-IN-ASSETS> 11,373,291
<ACCUMULATED-NII-PRIOR> 240,392
<ACCUMULATED-GAINS-PRIOR> (426,568)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 178,839
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 535,129
<AVERAGE-NET-ASSETS> 19,871,003
<PER-SHARE-NAV-BEGIN> 13.73
<PER-SHARE-NII> (.13)
<PER-SHARE-GAIN-APPREC> 3.46
<PER-SHARE-DIVIDEND> .16
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.90
<EXPENSE-RATIO> 2.30
<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 (A) NORTH
AMERICAN FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000848103
<NAME> NORTH AMERICAN FUNDS
<SERIES>
<NUMBER> 173
<NAME> GROWTH EQUITY FUND
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 29,549,293
<INVESTMENTS-AT-VALUE> 31,730,170
<RECEIVABLES> 378,945
<ASSETS-OTHER> 8,584
<OTHER-ITEMS-ASSETS> 7,540
<TOTAL-ASSETS> 32,125,239
<PAYABLE-FOR-SECURITIES> 478,419
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,787,483
<TOTAL-LIABILITIES> 7,265,902
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,463,767
<SHARES-COMMON-STOCK> 755,894
<SHARES-COMMON-PRIOR> 472,932
<ACCUMULATED-NII-CURRENT> 87,652
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,126,767
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,181,151
<NET-ASSETS> 24,859,337
<DIVIDEND-INCOME> 169,373
<INTEREST-INCOME> 125,017
<OTHER-INCOME> 0
<EXPENSES-NET> 439,258
<NET-INVESTMENT-INCOME> (144,868)
<REALIZED-GAINS-CURRENT> 2,699,130
<APPREC-INCREASE-CURRENT> 1,477,854
<NET-CHANGE-FROM-OPS> 4,032,116
<EQUALIZATION> 33,219
<DISTRIBUTIONS-OF-INCOME> 90,077
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 521,137
<NUMBER-OF-SHARES-REDEEMED> 304,781
<SHARES-REINVESTED> 61,067
<NET-CHANGE-IN-ASSETS> 11,373,291
<ACCUMULATED-NII-PRIOR> 240,392
<ACCUMULATED-GAINS-PRIOR> (426,568)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 178,839
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 535,129
<AVERAGE-NET-ASSETS> 19,871,003
<PER-SHARE-NAV-BEGIN> 13.73
<PER-SHARE-NII> (.13)
<PER-SHARE-GAIN-APPREC> 3.46
<PER-SHARE-DIVIDEND> .17
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.89
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
