<PAGE>
REGISTRATION NOS. 33-27958,811-5797
As filed with the Securities and Exchange Commission
on October 17, 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. 26 /X/
-
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
-
AMENDMENT NO. 28 /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)
Copy to:
Gregory D. Sheehan, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
____________________
Approximate Date of Proposed Public Offering:
As soon as practicable after this
Registration Statement becomes effective.
It is proposed that this filing will become effective 75 days after filing
pursuant to paragraph (a)(2) 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 -- to be filed by later amendment; 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
23. Financial Statements -- to be filed by later amendment; Exhibits
</TABLE>
N-1A Item of Part C
- -------------------
Part C is arranged by Item number.
<PAGE>
NORTH AMERICAN FUNDS
286 Congress Street, Boston, Massachusetts 02210
(800) 872-8037
North American Funds (the "Fund") is an open-end, diversified management
investment company (mutual fund) providing a range of investment options through
thirteen separate investment portfolios (the "Portfolios"), each of which has a
specific investment objective. This Prospectus relates to the following
portfolios of the Fund:
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 by investing in equity securities of small
to medium sized domestic companies with emerging or renewed growth potential.
Warburg, Pincus Counsellors, Inc., a wholly-owned subsidiary of Warburg Pincus
Counsellors G.P., manages the Emerging Growth Fund.
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 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 OF CONTENTS
<TABLE>
<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-1
APPENDIX II.........................................A-4
</TABLE>
<PAGE>
SUMMARY
THE FUND
The Fund is an open-end, diversified, management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts on September 28, 1988.
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 Counsellors, 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. 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."
Each Portfolio has a stated specific investment objectives, which together
with certain investment policies are set forth on the inside cover of this
Prospectus and are also described below. See "INVESTMENT PORTFOLIOS." There
can be no assurance that any Portfolio will
1
<PAGE>
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:
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
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C> <C>
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>
[TO BE UPDATED]
PORTFOLIO CLASS A CLASS B CLASS C
<S> <C> <C> <C>
TAX-SENSITIVE EQUITY FUND
Management fees % % %
Rule 12b-1 fees % % %
Other expenses*(after fee waiver) % % %
------- ------- -------
Total fund operating expenses*
(after fee waiver) % % %
EMERGING GROWTH FUND
Management fees.................................... % % %
Rule 12b-1 fees.................................... % % %
Other expenses*(after fee waiver).................. % % %
------- ------- -------
Total fund operating expenses*
(after fee waiver)................................. % % %
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%
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%
----- ----- -----
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total fund operating expenses*
(after fee waiver)................................. 1.750% 2.400% 2.400%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO............................................ CLASS A CLASS B CLASS C
<S> <C> <C> <C>
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%
INVESTMENT QUALITY BOND..............................
Management fees.................................... 0.600% 0.600% 0.600%
Rule 12b-1 fees.................................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver).................. 0.300% 0.300% 0.300%
----- ----- -----
Total fund operating expenses*
(after fee waiver)................................. 1.250% 1.900% 1.900%
NATIONAL MUNICIPAL BOND FUND
Management fees.................................... 0.600% 0.600% 0.600%
Rule 12b-1 fees.................................... 0.150% 1.000% 1.000%
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C>
Other expenses*(after fee waiver).................. 0.240% 0.240% 0.240%
----- ----- -----
Total fund operating expenses*
(after fee waiver)................................. 0.990% 1.840% 1.840%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO............................................ CLASS A CLASS B CLASS C
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES FUND
Management fees.................................... 0.600% 0.600% 0.600%
Rule 12b-1 fees.................................... 0.350% 1.000% 1.000%
Other expenses*(after fee waiver).................. 0.300% 0.300% 0.300%
----- ----- -----
Total fund operating expenses*
(after fee waiver)................................. 1.250% 1.900% 1.900%
MONEY MARKET FUND
Management fees.................................... 0.200% 0.200% 0.200%
Rule 12b-1 fees.................................... 0.000% 1.000% 1.000%
Other expenses*(after fee waiver).................. 0.300% 0.300% 0.300%
----- ----- -----
Total fund operating expenses*.....................
(after fee waiver)................................. 0.500% 0.500% 0.500%
</TABLE>
*Amounts listed under "Other expenses" and "Total fund operating expenses"
in the table above for each class of all Portfolios (except the International
Small Cap, Growth Equity and the Small/Mid Cap Funds) are based on the
application of expense limitations applicable during the most recent fiscal
year. See "Advisory Arrangements" below. Amounts listed under "Other expenses"
and "Total fund operating expenses" for the above-named Portfolios are based on
estimates for current fiscal year expenses. To the extent that actual expenses
are lower than the expense limitations, "Other expenses" may vary as between
classes of a Portfolio as a result of certain class-specific incremental
expenses being allocated to a particular class of shares.
The amounts set forth under the caption "Shareholder Transaction Expenses"
are the maximum sales charges applicable to purchases of Fund shares. Because a
portion of the 12b-1 fees payable by each class of shares is considered an asset
based sales charge by the National Association of Securities Dealers, Inc. (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 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 $ $
Class B Shares $ $
Class B No redemption $ $
Class C Shares $ $
Class C No redemption $ $
EMERGING GROWTH FUND
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Class A Shares $ $
Class B Shares $ $
Class B No redemption $ $
Class C Shares $ $
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
EMERGING GROWTH FUND
Class C No redemption $ $
INTERNATIONAL SMALL CAP FUND
Class A Shares $66 $104 $ $
Class B Shares $76 $119 $ $
Class B No redemption $26 $ 79 $ $
Class C Shares $36 $ 79 $ $
Class C No redemption $26 $ 79 $ $
SMALL/MIDCAP FUND
Class A Shares $64 $ 98 $ $
Class B Shares $74 $113 $ $
Class B No redemption $24 $ 73 $ $
Class C Shares $34 $ 73 $ $
Class C No redemption $24 $ 73 $ $
GLOBAL EQUITY 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 $ $
Class B Shares $73 $112 $ $
Class B No redemption $23 $ 72 $ $
Class C Shares $33 $ 72 $ $
Class C No redemption $23 $ 72 $ $
INTERNATIONAL GROWTH AND INCOME 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 $251*
Class B No redemption $20 $ 62 $107 $251*
Class C Shares $30 $ 62 $107 $232
Class C No redemption $20 $ 62 $107 $232
EQUITY-INCOME FUND
Class A Shares $60 $ 88 $117 $201
Class B Shares $70 $102 $127 $251*
Class B No redemption $20 $ 62 $107 $251*
Class C Shares $30 $ 62 $107 $232
Class C No redemption $20 $ 62 $107 $232
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
BALANCED FUND
<S> <C> <C> <C> <C>
Class A Shares $60 $ 88 $117 $201
Class B Shares $70 $102 $127 $251*
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
BALANCED FUND
Class B No redemption $20 $ 62 $107 $251*
Class C Shares $30 $ 62 $107 $232
Class C No redemption $20 $ 62 $107 $232
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 $163
Class B Shares $69 $ 98 $120 $193*
Class B No redemption $19 $ 58 $100 $193*
Class C Shares $29 $ 58 $100 $216
Class C No redemption $19 $ 58 $100 $216
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 $ 63
Class B Shares $ 5 $ 16 $ 28 $ 63
Class C Shares $ 5 $ 16 $ 28 $ 63
</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%.
* * * * *
7
<PAGE>
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
[THIS SECTION WILL BE UPDATED BY LATER AMENDMENT.]
8
<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
9
<PAGE>
any period of time in which Class B or Class C shares are held in that
Portfolio. For example, if Class B shares of a Portfolio other than the Money
Market Fund are exchanged for Class B shares of the Money Market Fund two years
after purchase and are subsequently exchanged one year later for Class B shares
of a Portfolio other than the Money Market Fund, the one year of ownership in
the Money Market Fund does not count in the determination of the time of
conversion to Class A shares.
For purposes of the conversion of Class B and Class C shares to Class A
shares, shares purchased through the reinvestment of dividends and distributions
paid on Class B shares or Class C shares, as the case may be, in a shareholder's
Fund account will be considered to be held in a separate sub-account. Each time
any Class B shares or Class C shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class B shares or Class C shares, as the case may be, in the sub-account
will also convert to Class A shares.
The conversion of Class B shares to Class A shares and the conversion of
Class C shares to Class A shares are both subject to the continuing availability
of a ruling of the Internal Revenue Service that payment of different dividends
on Class A shares and Class B shares, and on Class A shares and Class C shares,
does not result in the Portfolios' dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as amended
(the "Code"), and the continuing availability of an opinion of counsel to the
effect that the conversion of shares does not constitute a taxable event under
Federal income tax law. The conversion of Class B shares and Class C shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B shares or Class C shares would occur, and those
shares might continue to be subject to higher distribution and service fees for
an indefinite period which may extend beyond the period ending 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 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."
10
<PAGE>
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 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
11
<PAGE>
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
12
<PAGE>
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 series 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 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) and medium-term (five years or less
remaining to maturity) debt 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. 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
13
<PAGE>
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 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.
14
<PAGE>
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.
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,
15
<PAGE>
substantial investments in foreign securities may have adverse tax implications
as described under "GENERAL INFORMATION -Taxes" in this Prospectus. The
Portfolio may also purchase American Depository Receipts ("ADRs") or U.S.
dollar-denominated securities of foreign issuers that are not included in the
20% foreign securities limitation. See "RISK FACTORS - Foreign Securities" in
this Prospectus for a description of ADRs.
Use of Hedging and Other Strategic Transactions. The Small/Mid Cap Fund is
currently authorized to use all of the various investment strategies referred to
under "RISK FACTORS -- Hedging and Other Strategic Transactions". The Statement
of Additional Information contains a description of these strategies and of
certain risks associated therewith.
GLOBAL EQUITY FUND
The investment objective of the Global Equity Fund 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 100% of its total assets in foreign securities. These
risks, including the risks of the possible increased likelihood of expropriation
or the return to power of a communist regime which would institute policies to
expropriate, nationalize or otherwise confiscate investments, are described
under the caption "RISK FACTORS --Foreign Securities" in this Prospectus.
Moreover, substantial investments in foreign securities may have adverse tax
implications as described under "GENERAL INFORMATION --Taxes" in this
Prospectus.
Use of Hedging and Other Strategic Transactions. The Global Equity Fund is
currently authorized to use all of the various investment strategies referred to
under "RISK FACTORS -- Hedging and Other Strategic Transactions." With the
exception of currency transactions, however, it is not presently anticipated
that any of these strategies will be used to a significant degree by the
portfolio. The Statement of Additional Information contains a description of
these strategies and of certain risks associated therewith.
GROWTH EQUITY FUND
The investment objective of the Growth Equity Fund is to seek long-term
growth of capital. Founders manages the Growth Equity Fund and will pursue this
objective by investing, under normal market conditions, at least 65% of its
assets in common stocks of well-established, high-quality growth companies that
Founders believes have the potential to increase earnings faster than the rest
of the market. These companies tend to have strong performance records, solid
market positions and reasonable financial strength, and have continuous
operating records of three years or more.
The Growth Equity Fund may invest in convertible securities, preferred
stocks, bonds, debentures and other corporate obligations when Founders believes
that these investments offer opportunities for capital appreciation. Current
income will not be a substantial factor in the selection of these securities.
The Growth Equity Fund will only invest in bonds, debentures and corporate
obligations--other than convertible securities and
16
<PAGE>
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 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").
17
<PAGE>
Using a dividend discount model and based on analysts' industry expertise,
securities within each country are ranked within industry sectors according to
their relative value. Based on this valuation, J.P. Morgan selects the
securities which appear the most attractive for the Portfolio. J.P. Morgan
believes that under normal market conditions, industrial sector weightings
generally will be similar to those of the EAFE index.
Finally, J.P. Morgan actively manages currency exposure, in conjunction
with country and stock allocation, in an attempt to protect and possibly enhance
the International Growth and Income Fund's market value. Through the use of
forward foreign currency exchange contracts, J.P. Morgan will adjust the
Portfolio's foreign currency weightings to reduce its exposure to currencies
that the Subadviser deems unattractive and, in certain circumstances, increase
exposure to currencies deemed attractive, as market conditions warrant, based on
fundamental research, technical factors and the judgment of a team of
experienced currency managers.
The International Growth and Income Fund intends to manage its portfolio
actively in pursuit of its investment objective. The Portfolio does not expect
to trade in securities for short-term profits; however, when circumstances
warrant, securities may be sold without regard to the length of time held. See
"GENERAL INFORMATION -- Taxes." To the extent the Portfolio engages in short-
term trading, it may incur increased transaction costs.
The International Growth and Income Fund may also invest in securities on a
when-issued or delayed delivery basis, enter into repurchase and reverse
repurchase agreements, loan its portfolio securities and purchase certain
privately placed securities. See "RISK FACTORS" 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
18
<PAGE>
environment, management, balance sheet, income statement, anticipated earnings
and dividends and other related measures of value. When selecting securities of
issuers domiciled outside of the United States, Wellington Management will also
monitor and evaluate the economic and political climate and the principal
securities markets of the country in which each company is located.
The Growth and Income Fund will invest primarily in securities listed on
national securities exchanges, but from time to time it may also purchase
securities traded in the "over-the-counter" market.
The Growth and Income Fund will be subject to certain risks as a result of
its ability to invest up to 20% of its assets in foreign securities. These risks
are described under the caption "RISK FACTORS -- Foreign Securities" in this
Prospectus. Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "GENERAL INFORMATION -- Taxes" in
this Prospectus.
Use of Hedging and Other Strategic Transactions. The Growth and Income
Fund is currently authorized to use all of the various investment strategies
referred to under "RISK FACTORS -- Hedging and Other Strategic Transactions."
However, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Portfolio. The Statement of Additional
Information contains a description of these strategies and of certain risks
associated therewith.
EQUITY-INCOME FUND
The investment objective of the Equity-Income Fund 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
19
<PAGE>
can combine the characteristics of securities, futures and options. For example,
the principal amount, redemption or conversion terms of a security could be
related to the market price of some commodity, currency or securities index.
Such securities may bear interest or pay dividends at below market (or even
relatively nominal) rates. The Statement of Additional Information contains a
fuller description of such instruments and the risks associated therewith.
The Equity-Income Fund will be subject to special risks as a result of its
ability to invest up to 25% of its total assets in foreign securities. These
include nondollar-denominated securities traded outside of the U.S. and dollar-
denominated securities of foreign issuers traded in the U.S. (such as ADRs).
These risks are described under the caption "RISK FACTORS --Foreign Securities"
in this Prospectus. Moreover, substantial investments in foreign securities may
have adverse tax implications as described under "GENERAL INFORMATION --Taxes"
in this Prospectus.
Use of Hedging and Other Strategic Transactions. The Equity-Income Fund is
currently authorized to use all of the various investment strategies referred to
under "RISK FACTORS -- Hedging and Other Strategic Transactions." The Statement
of Additional Information contains a description of these strategies and of
certain risks associated therewith.
BALANCED FUND
The investment objective of the Balanced Fund is current income and capital
appreciation. Founders is the manager of the Balanced Fund and seeks to attain
this objective by investing in a balanced portfolio of common stocks, U.S. and
foreign government obligations and a variety of corporate fixed-income
securities.
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.
20
<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 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.
21
<PAGE>
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.
22
<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")."
23
<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.
TANs, BANs and RANs are usually general obligations of the issuer.
24
<PAGE>
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.
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.
25
<PAGE>
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;
(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
26
<PAGE>
(5) collateralized mortgage obligations issued by private issuers for which
the underlying mortgage-backed securities serving as collateral are backed (i)
by the credit alone of the U.S. Government agency or instrumentality which
issues or guarantees the mortgage-backed securities, or (ii) by the full faith
and credit of the U.S. Government.
The mortgage-backed securities in which the U.S. Government Securities Fund
invests represent participating interests in pools of residential mortgage loans
which are guaranteed by the U.S. Government, its agencies or instrumentalities
of the U.S. Government. However, the guarantee of these types of securities
runs only to the principal and interest payments and not to the market value of
such securities. In addition, the guarantee only runs to the portfolio
securities held by the U.S. Government Securities Fund and not to the purchase
of shares of the Portfolio.
Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks, and savings and loan associations. Such securities differ
from conventional debt securities which provide for periodic payment of interest
in fixed amounts (usually semiannually) with principal payments at maturity or
specified call dates. Mortgage-backed securities provide monthly payments which
are, in effect, a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans. Principal prepayments result from the sale of the underlying
property or the refinancing or foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based on the average life of the
underlying pool of mortgage loans, which is computed on the basis of the
maturities of the underlying instruments. The actual life of any particular
pool may be shortened by unscheduled or early payments of principal and
interest. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors and, accordingly, it is not possible to
accurately predict the average life of a particular pool. For pools of fixed
rate 30-year mortgages, it has been common practice to assume that prepayments
will result in a 12-year average life. The actual prepayment experience of a
pool of mortgage loans may cause the yield realized by the U.S. Government
Securities Fund to differ from the yield calculated on the basis of the average
life of the pool. In addition, if any of these mortgage-backed securities are
purchased at a premium, the premium may be lost in the event of early prepayment
which may result in a loss to the Portfolio.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. Reinvestment by the U.S. Government Securities Fund of scheduled
principal payments and unscheduled prepayments may occur at higher or lower
rates than the original investment, thus affecting the yield of the Portfolio.
Monthly interest payments received by the Portfolio have a compounding effect
which will increase the yield to shareholders as compared to debt obligations
that pay interest semiannually. Because of the reinvestment of prepayments of
principal at current rates, mortgage-backed securities may be less effective
than Treasury bonds of similar maturity at maintaining yields during periods of
declining interest rates. Also, although the value of debt securities may
increase as interest rates decline, the value of these pass-through type of
securities may not increase as much due to the prepayment feature.
While the Portfolio seeks a high level of current income, it cannot invest
in instruments such as lower grade corporate obligations which offer higher
yields but are subject to greater risks. The Portfolio will not knowingly invest
in a high risk mortgage security. The term "high risk mortgage security" is
defined generally as any mortgage security that exhibits greater price
volatility than a benchmark security, the Federal National Mortgage Association
current coupon 30-year mortgage-backed pass through security. Shares of the
Portfolio are neither insured nor guaranteed by the U.S. Government, its
agencies or instrumentalities.
In order to make the U.S. Government Securities Fund an eligible investment
for federal credit unions ("FCUs"), federal savings and loan institutions and
national banks, the Portfolio will invest in U.S. Government securities that are
eligible for investment by such institutions without limitation, and will also
generally be managed so as to qualify as an eligible investment for such
institutions. The Portfolio will comply with all investment limitations
applicable to FCUs including (i) the requirement that a FCU may only purchase
collateralized mortgage obligations which would meet the high risk securities
test of Part 703 of the National Credit Union Administration Rules and
Regulations or would be held solely to reduce interest rate risk and (ii) the
requirement that a FCU may not purchase zero coupon securities having maturities
greater than ten years.
The ability of the U.S. Government Securities Fund to provide a high level
of current income is restrained because that Portfolio invests predominantly in
U.S. Government bonds; debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; and U.S.
dollar-denominated money market instruments, respectively.
Use of Hedging and Other Strategic Transactions. The U.S. Government
Securities Fund is not currently authorized to use any of the various investment
strategies referred to under "RISK FACTORS -- Hedging and Other Strategic
Transactions." However, such strategies may be used in the future by the
Portfolio. The Statement of Additional Information contains a description of
these strategies and of certain risks associated therewith.
27
<PAGE>
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.
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."
_________________________________
28
<PAGE>
RISK FACTORS
INVESTMENT RESTRICTIONS GENERALLY
The Fund is subject to a number of restrictions in pursuing its investment
objectives and policies. Such restrictions generally serve to limit investment
practices that may subject the Fund to investment and market risk. The
following is a brief summary of certain restrictions that may be of interest to
investors. Some of these restrictions are subject to exceptions not stated
here. Such exceptions and a complete list of the investment restrictions
applicable to the individual Portfolios and to the Fund are set forth in the
Statement of Additional Information under the caption "INVESTMENT RESTRICTIONS."
Except for the restrictions specifically identified as fundamental, all
investment restrictions described in this Prospectus and in the Statement of
Additional Information are not fundamental, so that the Trustees of the Fund may
change them without shareholder approval. Fundamental policies may not be
changed without the affirmative vote of a majority of the outstanding voting
securities.
Fundamental policies applicable to all Portfolios include prohibitions on
(i) investing more than 25% of the total assets of any Portfolio in the
securities of issuers having their principal activities in any particular
industry (with exceptions for U.S. Government securities and, with respect to
the Money Market Fund, obligations of domestic branches of U.S. banks, and with
respect to the National Municipal Bond Fund, obligations issued or guaranteed by
any state or territory, and possession of the United States, the District of
Columbia, or any of their authorities, agencies, instrumentalities or political
subdivisions) (for purposes of this restriction, supranational issuers will be
considered to comprise an industry as will each foreign government that issues
securities purchased by a Portfolio); (ii) borrowing money, except for temporary
or emergency purposes (but not for leveraging) and then not in excess of 33 1/3%
of the value of the total assets of the Portfolio at the time the borrowing is
made (as a nonfundamental investment policy, a Portfolio will not purchase
additional securities at any time its borrowings exceed 5% of total assets) and
except in connection with reverse repurchase agreements, mortgage dollar rolls
and other similar transactions, and (iii) purchasing securities of any issuer if
the purchase would cause more than 5% of the value of a Portfolio's total assets
to be invested in the securities of any one issuer (excluding U.S. Government
securities and bank obligations) or cause more than 10% of the voting securities
of the issuer to be held by a Portfolio, except that up to 25% of the value of
each Portfolio's total assets (except the Money Market Fund) may be invested
without regard to this restriction.
Restrictions that apply to all Portfolios that are not fundamental include
prohibitions on (i) knowingly investing more than 10% (except the Tax-Sensitive
Equity 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 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
29
<PAGE>
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by the
Portfolio with a commensurate effect on the value of the Portfolio's shares. The
Strategic Income Fund may invest without limitation in high yield debt
securities, and accordingly, should not be considered as a complete investment
program for all investors.
Because the Strategic Income and Investment Quality Bond Funds will invest
primarily in fixed-income securities, the net asset value of each Portfolio's
shares can be expected to change as general levels of interest rates fluctuate,
although the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities. Except to the extent that
values are affected independently by other factors such as developments relating
to a specific issuer, when interest rates decline, the value of a fixed-income
portfolio can generally be expected to rise. Conversely, when interest rates
rise, the value of a fixed-income portfolio can generally be expected to
decline.
The secondary markets for high yield corporate and sovereign debt
securities are not as liquid as the secondary markets for higher rated
securities. The secondary markets for high yield debt securities are
concentrated in relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield debt securities is generally lower than that for higher-rated
securities and the secondary markets could contract under adverse market or
economic conditions independent of any specific adverse changes in the condition
of a particular issuer. These factors may have an adverse effect on a Fund's
ability to dispose of particular portfolio investments and may limit the ability
of those Portfolios to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Portfolio is not able to
obtain precise or accurate market quotations for a particular security, it will
become more difficult for the Trustees to value such Portfolio's investment
portfolio and the Fund's Trustees may have to use a greater degree of judgment
in making such valuations. Less liquid secondary markets may also affect a
Portfolio's ability to sell securities at their fair value. In addition, each
Portfolio may invest up to 10% of its net assets, measured at the time of
investment, in illiquid securities, which may be more difficult to value and to
sell at fair value. If the secondary markets for high yield debt securities are
affected by adverse economic conditions, the proportion of a Portfolio's assets
invested in illiquid securities may increase.
CORPORATE DEBT SECURITIES.
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the market values of
certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-rated
securities. In addition, such securities generally present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss
due to default by such issuers is significantly greater than with investment
grade securities because such securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness.
FOREIGN SOVEREIGN DEBT SECURITIES.
Investing in foreign sovereign debt securities will expose a Portfolio to
the direct or indirect consequences of political, social or economic changes in
the developing and emerging countries that issue the securities. The ability
and willingness of sovereign obligors in developing and emerging countries or
the governmental authorities that control repayment of their external debt to
pay principal and interest on such debt when due may depend on general economic
and political conditions within the relevant country. Countries such as those
in which the Portfolios may invest have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate trade difficulties and extreme poverty and unemployment. Many of these
countries are also characterized by political uncertainty or instability.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, and its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of 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
30
<PAGE>
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-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.
31
<PAGE>
There may be less publicly available information about a foreign issuer
than about a domestic issuer. Foreign issuers, including foreign branches of
U.S. banks, are subject to different accounting and reporting requirements which
are generally less extensive than the requirements applicable to domestic
issuers. Foreign stock markets (other than Japan) have substantially less volume
than the U.S. exchanges and securities of foreign issuers are generally less
liquid and more volatile than those of comparable domestic issuers. These risks
are heightened in the case of emerging markets. There is frequently less
governmental regulation of exchanges, broker-dealers and issuers than in the
United States, and brokerage costs may be higher. In addition, investments in
foreign companies may be subject to the possibility of nationalization,
withholding of dividends at the source, expropriation or confiscatory taxation,
currency blockage, political or economic instability or diplomatic developments
that could adversely affect the value of those investments. Finally, in the
event of a default on any foreign obligation, it may be difficult for the Fund
to obtain or to enforce a judgment against the issuer.
Foreign markets, especially emerging markets, may have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of a
Portfolio is uninvested and no return is earned thereon. The inability of a
Portfolio to make intended security purchases due to settlement could cause the
Portfolio to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result in losses to a
Portfolio due to subsequent declines in values of the portfolio securities or,
if the Portfolio has entered into a contract to sell the security, possible
liability to the purchaser. Certain foreign markets, especially emerging
markets, may require governmental approval for the repatriation of investment
income, capital or the proceeds of sales of securities by foreign investors. A
Portfolio could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation of capital, as well as by the
application to the Portfolio of any restrictions on investments.
In addition to the foreign securities listed above, the International Small
Cap, Strategic Income, Investment Quality Bond, Growth Equity and Balanced Funds
may also invest in foreign sovereign debt securities, which involve certain
additional risks. See "RISK FACTORS -- High Yield/High Risk Securities --
Foreign Sovereign Debt Securities" above.
WARRANTS
Subject to certain restrictions, each of the Portfolios except the National
Municipal Bond and Money Market Funds may purchase warrants, including warrants
traded independently of the underlying securities. It is a non-fundamental
investment restriction of each Portfolio not to purchase warrants if as a result
that Portfolio would then have more than 10% of its total net assets invested in
warrants, or if more than 5% of the value of the Portfolio's total net assets
would be invested in warrants which are not listed on a recognized United States
or foreign stock exchange, except for warrants included in units or attached to
other securities.
LENDING PORTFOLIO SECURITIES
To attempt to increase its income, each Portfolio may lend its portfolio
securities in amounts up to 33% of its total non-cash assets to brokers, dealers
and other financial institutions, provided such loans are callable at any time
by the Portfolio and are at all times fully secured by cash, cash equivalents or
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, marked to market to the value of loaned securities on a daily
basis. As with any extensions of credit, there may be risks of delay in recovery
and in some cases even loss of rights in the collateral should the borrower of
the securities fail financially. However, these loans of portfolio securities
will only be made to firms deemed by the Subadvisers to be creditworthy.
WHEN-ISSUED SECURITIES ("FORWARD COMMITMENTS")
In order to help ensure the availability of suitable securities, each of
the Portfolios may purchase debt securities on a "when-issued" or on a "forward
delivery" basis, which means that the obligations will be delivered to the
Portfolio at a future date, which may be a month or more after the date of
commitment (referred to as "forward commitments"). It is expected that, under
normal circumstances, a Portfolio purchasing securities on a when-issued or
forward delivery basis will take delivery of the securities, but the Portfolio
may sell the securities before the settlement date, if such action is deemed
advisable. In general, a Portfolio does not pay for the securities or start
earning interest on them until the purchase of the obligation is scheduled to be
settled, but it does, in the meantime, record the transaction and reflect the
value each day of the securities in determining its net asset value. At the
time delivery is made, the value of when-issued or forward delivery securities
may be more or less than the transaction price, and the yields then available in
the market may be higher than those obtained in the 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.
32
<PAGE>
HEDGING AND OTHER STRATEGIC TRANSACTIONS
Individual Portfolios may be authorized to use a variety of investment
strategies described below for hedging purposes only, including hedging various
market risks (such as interest rates, currency exchange rates and broad or
specific market movements), and managing the effective maturity or duration of
debt instruments held by the Portfolio. The description in this Prospectus of
each Portfolio indicates which, if any, of these types of transactions may be
used by the Portfolio. Limitations on the portion of a Portfolio's assets that
may be used in connection with the investment strategies described below are set
out in the Statement of Additional Information.
Subject to the constraints described above, an individual Portfolio may (if
and to the extent so authorized) purchase and sell (or write) exchange-listed
and over-the-counter put and call options on securities, index futures
contracts, financial futures contracts and fixed-income indices and other
financial instruments, enter into financial futures contracts, enter into
interest rate transactions, and enter into currency transactions (collectively,
these transactions are referred to in this Prospectus as "Hedging and Other
Strategic Transactions"). Other Strategic Transactions are also referred to as
derivative transactions. A "derivative" is generally defined as an instrument
whose value is based upon, or derived from, some underlying index, reference
rate (e.g. interest rate or currency exchange rate, security, commodity or other
asset). Portfolio's interest rate transactions may take the form of swaps, caps,
floors and collars, and a Portfolio's currency transactions may take the form of
currency forward contracts, currency futures contracts, currency swaps and
options on currencies or currency futures contracts.
Hedging and Other Strategic Transactions may generally be used to attempt
to protect against possible changes in the market value of securities held or to
be purchased by a Portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect a Portfolio's unrealized gains in the
value of its securities, to facilitate the sale of those securities for
investment purposes, to manage the effective maturity or duration of a
Portfolio's securities or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities. A
Portfolio may use any or all types of Hedging and Other Strategic Transactions
which it is authorized to use at any time; no particular strategy will dictate
the use of one type of transaction rather than another, as use of any authorized
Hedging and Other Strategic Transaction will be a function of numerous
variables, including market conditions. The ability of a Portfolio to utilize
Hedging and Other Strategic Transactions successfully will depend on, in
addition to the factors described above, the Subadviser's ability to predict
pertinent market movements, which cannot be assured. These skills are different
from those needed to select a Portfolio's securities. None of the Portfolios is
a "commodity pool" (i.e., a pooled investment vehicle which trades in commodity
futures contracts and options thereon and the operator of which is registered
with the Commodity Futures Trading Commission (the "CFTC")). Futures contracts
and options on futures contracts will be purchased, sold or entered into only
for bona fide hedging to the extent permitted by CFTC regulations. The use of
certain Hedging and Other Strategic Transactions will require that a Portfolio
segregate cash, liquid high grade debt obligations or other assets to the extent
a Portfolio's obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. Risks associated with
Hedging and Other Strategic Transactions are described in "HEDGING AND OTHER
STRATEGIC TRANSACTIONS -- Risk Factors" in the Statement of Additional
Information. A detailed discussion of various Hedging and Other Strategic
Transactions, including applicable regulations of the CFTC and the requirement
to segregate assets with respect to these transactions, also appears in the
Statement of Additional Information.
ILLIQUID SECURITIES
Each of the portfolios (except the Tax-Sensitive Equity 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. Excluded from the 10%
limitation (or 15% with regard to the Tax-Sensitive Equity 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 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
33
<PAGE>
Each of the Fund's Portfolios may enter into repurchase agreements and
reverse repurchase agreements. Repurchase agreements involve the acquisition by
a Portfolio of debt securities subject to an agreement to resell them at an
agreed-upon price. Under a repurchase agreement, at the time the Portfolio
acquires a security, it agrees to resell it to the original seller (a financial
institution or broker/dealer which meets the guidelines established by the
Trustees) and must deliver the security (and/or securities that may be added to
or substituted for it under the repurchase agreement) to the original seller on
an agreed-upon date in the future. The repurchase price is in excess of the
purchase price. The arrangement is in economic effect a loan collateralized by
securities.
The Trustees have adopted procedures that establish certain
creditworthiness, asset and collateralization requirements for the
counterparties to a Portfolio's repurchase agreements. The Trustees will
regularly monitor the use of repurchase agreements and the Subadvisers will,
pursuant to procedures adopted by the Trustees, continuously monitor the amount
of collateral held with respect to a repurchase transaction so that it equals or
exceeds the amount of the obligation.
A Portfolio's risk in a repurchase transaction is limited to the ability of
the seller to pay the agreed-upon sum on the delivery date. In the event of
bankruptcy or other default by the seller, there may be possible delays and
expenses in liquidating the instrument purchased, decline in its value and loss
of interest. Securities subject to repurchase agreements will be valued every
business day and additional collateral will be requested if necessary so that
the value of the collateral is at least equal to the value of the repurchase
obligation, including the interest accrued thereon.
Each Portfolio of the Fund may enter into "reverse" repurchase agreements.
Under a reverse repurchase agreement, a Portfolio may sell a debt security and
agree to repurchase it at an agreed upon time and at an agreed upon price. The
Portfolio retains record ownership of the security and the right to receive
interest and principal payments thereon. At an agreed upon future date, the
Portfolio repurchases the security by remitting the proceeds previously
received, plus interest. The difference between the amount the Portfolio
receives for the security and the amount it pays on repurchase is deemed to be
payment of interest. The Portfolio will maintain in a segregated custodial
account cash, Treasury bills or other U.S. Government securities having an
aggregate value equal to the amount of such commitment to repurchase including
accrued interest, until payment is made. In certain types of agreements, there
is no agreed-upon repurchase date and interest payments are calculated daily,
often based on the prevailing overnight repurchase rate.
MORTGAGE DOLLAR ROLLS
Each Portfolio of the Fund (except the Money Market Fund) may enter into
mortgage dollar rolls. Under a mortgage dollar roll, a Portfolio sells
mortgage-backed securities for delivery in the future (generally within 30 days)
and simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Portfolio forgoes principal and interest paid on the mortgage-backed
securities. A Portfolio is compensated by the difference between the current
sale price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A Portfolio may also be compensated by receipt of a commitment
fee. A Portfolio may only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash or cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction. Dollar roll transactions involve the risk
that the market value of the securities sold by the Portfolio may decline below
the repurchase price of those securities.
MANAGEMENT OF THE FUND
Under Massachusetts law and the Fund's Declaration of Trust and By-Laws,
the business and affairs of the Fund are managed under the direction of the
Trustees.
ADVISORY ARRANGEMENTS
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
capacity, the "Former Distributor").
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
34
<PAGE>
the Trustees. The Fund has applied for an order from the Securities and Exchange
Commission which would permit the Adviser to appoint a subadviser pursuant to an
agreement that is not approved by shareholders. The Fund, therefore, would be
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, and as of the
date of this Prospectus 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:
<TABLE>
EXPENSE
PORTFOLIO LIMITATION
<S> <C>
Tax-Sensitive Equity Fund
Emerging Growth Fund
International Small Cap Fund 1.55%
Small/Mid Cap Fund 1.325%
Global Equity Fund 1.40%
Growth Equity Fund 1.30%
International Growth and Income Fund 1.40%
Growth and Income Fund .99%
Equity-Income Fund .99%
Balanced Fund .99%
Strategic Income Fund 1.15%
Investment Quality Bond .90%
U.S. Government Securities Fund .90%
National Municipal Bond Fund .85%
Money Market Fund .50%
</TABLE>
35
<PAGE>
As compensation for its services, the Adviser receives a fee from the Fund
computed separately for each Portfolio. The fee for each Portfolio is stated as
an annual percentage of the current value of the net assets of the Portfolio.
The fee, which is accrued daily and payable monthly, is calculated for each day
by multiplying the fraction of one over the number of calendar days in the year
by the annual percentage prescribed for a Portfolio, and multiplying this
product by the value of the net assets of the Portfolio at the close of business
on the previous business day of the Fund. The following is a schedule of the
management fees each Portfolio currently is obligated to pay the Adviser under
the Advisory Agreement (prior to the application of any fee waivers):
<TABLE>
<CAPTION>
BETWEEN BETWEEN
$50,000,000 $200,000,000
FIRST AND AND EXCESS OVER
FUNDS $ 50,000,000 $200,000,000 $500,000,000 $500,000,000
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Sensitive Equity Fund.............
Emerging Growth Fund..................
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
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 [ ], 1997, Wellington Management
had investment management authority with respect to approximately $[ ]
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, 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.
36
<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 [ ], Standish managed approximately $[ ]
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 the Standish Tax-Sensitive Equity Fund, a mutual
fund which has the same investment objective as the Fund's Tax-Sensitive Equity
Fund, and uses investment policies and strategies substantially similar
(although not necessarily identical) to those of the Class A shares of the
Fund's Tax-Sensitive Equity Fund. The average annual total returns of the
Standish Tax-Sensitive Equity Fund shown below for the periods ended September
30, 1997 have been adjusted to reflect the expected expense ratio for the Class
A shares of the Fund's Tax-Sensitive Equity Fund, and are based on data supplied
by Standish:
<TABLE>
<CAPTION>
One Year Since Inception (1/2/96)
-------- ------------------------
<S> <C> <C>
Standish Tax-Sensitive Equity Fund
S&P 500 Index
</TABLE>
Warburg, Pincus Counsellors, Inc.
Warburg Pincus Counsellors, Inc. ("Warburg"), the Subadviser to the Emerging
Growth Fund, is a wholly owned subsidiary of Warburg Pincus Counselors G.P., a
New York general 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 Warburg, Pincus & Co. and
Warburg. Warburg Pincus Counselors 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 [ ],
Warburg managed approximately $[ ] billion of assets, including
approximately $[ ] 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.
Past performance of Warburg. The Emerging Growth Fund is a new Portfolio
---------------------------
of the Fund, and therefore has no historical performance record. However,
Warburg also manages the Warburg Pincus Emerging Growth Fund, a mutual fund
which has the same investment objective as the Fund's Emerging Growth Fund, and
uses investment policies and strategies substantially similar (although not
necessarily identical) to those of the Fund's Emerging Growth Fund. The average
annual total returns for the periods ended September 30, 1997 shown below have
been adjusted to reflect the expected expense ratio of the Fund's Emerging
Growth Fund, and are based on data supplied by Warburg:
<TABLE>
<CAPTION>
One Year Three Years Five Years Since Inception (4/4/91)
-------- ----------- ---------- ------------------------
<S> <C> <C> <C> <C>
Warburg Pincus
Emerging Growth
Fund (Advisory Shares)
Russel 2000 Growth Index
</TABLE>
37
<PAGE>
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 $197 billion as of
September 30, 1996. J.P. Morgan has managed international securities for
institutional investors since 1974. As of September 30, 1996, the non-U.S.
securities under J.P. Morgan's management was approximately $65 billion. J.P.
Morgan provides investment advice and portfolio management services to the
Portfolio. Subject to the supervision of the Fund's Trustees, J.P. Morgan makes
the Portfolio's day-to-day investment decisions, arranges for the execution of
portfolio transactions and generally manages the Portfolio's investments.
J.P. Morgan uses a sophisticated, disciplined, collaborative process for
managing the Portfolio. The following persons are primarily responsible for the
day-to-day management and implementation of J.P. Morgan's process for the
Portfolio (their business experience for the past 5 years is indicated
parenthetically): Paul A. Quinsee, Vice President (employed by J.P. Morgan since
February 1992, previously Vice President, Citibank), and Gareth A. Fielding,
Assistant Vice President (employed by J.P. Morgan since February 1992,
previously he received his MBA from Imperial College at London University, while
he was a self-employed trader on the London International Financial Futures
Exchange). Mr. Quinsee has been managing the International Growth and Income
Fund since the portfolio's inception (January 1995), and Mr. Fielding has been
managing the portfolio since May 1995.
Mr. Quinsee is primarily responsible for the day-to-day management of
several other institutional and investment company accounts that invest in
international securities constituting approximately $[ ] billion of assets.
Since July 1994, Mr. Fielding has been responsible for the day-to-day management
(in some cases with another person) of 10 institutional and investment company
portfolios that invest primarily in international fixed income securities,
constituting approximately $[ ] billion of assets. Mr. Fielding is a
specialist in mortgage and asset-backed securities. Prior to July 1994, Mr.
Fielding traded global fixed income products on J.P. Morgan's London trading
desk.
Salomon Brothers Asset Management Inc
Salomon Brothers Asset Management Inc ("SBAM"), the subadviser to the U.S.
Government Securities Fund and Strategic Income Fund (collectively, the "Funds")
is a wholly-owned subsidiary of Salomon Brothers Holding Company Inc, which is
in turn wholly-owned by Salomon Inc ("SI"). SBAM was incorporated in 1987 and,
together with affiliates in London, Frankfurt and Hong Kong, provides a full
range of fixed income and equity investment advisory services for individual and
institutional clients around the world, including European and Far East central
banks, pension funds, endowments, insurance companies, and services as
investment adviser to various investment companies. In providing such
investment advisory services, SBAM and it affiliates have access to SI's more
than 250 economists, mortgage, bond, sovereign and equity analysts. As of
[ ], SBAM and its worldwide investment advisory affiliates managed
approximately $[ ] billion in assets. SBAM's business offices are located
at 7 World Trade Center, New York, New York 10048.
[Salomon/Travelers Merger Disclosure]
In connection with SBAM's service as subadviser to the Strategic Income
Fund, SBAM's London-based affiliate, Salomon Brothers Asset Management Limited
("SBAM Limited"), whose business address is Victoria Plaza, 111 Buckingham
Palace Road, London SW1W OSB, England, provides certain advisory services to
SBAM with regard to currency transactions and investments in non-dollar
denominated debt securities for the benefit of the Strategic Income Fund. SBAM
Limited is compensated by SBAM at no additional expense to the Strategic Bond
Fund. SBAM Limited is an indirect, wholly-owned subsidiary of Salomon Brothers
Holding Company Inc. SBAM Limited is a member of the Investment Management
Regulatory Organization Limited in the United Kingdom and is registered as an
investment adviser in the United States pursuant to the Investment Advisers Act
of 1940, as amended.
Steven Guterman and Roger Lavan 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 February 1993. Mr.
Guterman, who joined SBAM in 1990, is a Managing Director of Salomon Brothers
Inc and a managing Director and Senior Portfolio Manager of SBAM, responsible
for SBAM's investment company and institutional portfolios which invest
primarily in mortgage-backed securities and U.S. government issues. Mr.
Guterman also serves as portfolio manager for two offshore mortgage funds and a
number of institutional clients. Mr. Guterman joined Salomon Brothers Inc in
1983 working initially in the mortgage research group where he became a Research
Director and later traded derivative mortgage-backed securities.
38
<PAGE>
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.
Mssrs. Guterman and Lavan are assisted in the management of the Strategic
Income Fund by Peter Wilby since February 1993 and David Scott since January
1995. Mr. Wilby, who joined SBAM in 1989, is a Managing Director of Salomon
Brothers Inc and SBAM and a Senior Portfolio Manager of SBAM, responsible for
investment company and institutional portfolio investments in high yield U.S.
corporate debt securities and high yield foreign sovereign debt securities. From
1984 to 1989, Mr. Wilby was employed by Prudential Capital Management Group
("Prudential"), where he served as Director of Prudential's credit research unit
and as a corporate and sovereign credit analyst. Mr. Wilby also managed high
yield bonds and leveraged equities for Prudential mutual funds and institutional
portfolios.
David Scott is a Senior Portfolio Manager with SBAM Limited in London with
primary responsibility for managing long-term global bond portfolios. He also
plays an integral role in developing strategy. Mr. Scott manages currency
transactions and investments in non-dollar denominated securities for the
Strategic Income Fund. Prior to joining Salomon Brothers in April 1994, Mr.
Scott worked at J.P. Morgan from 1990 to 1994 where he had responsibility for
global and non-dollar portfolios for clients including departments of various
governments, pension funds and insurance companies. Before joining J.P. Morgan,
from 1987 to 1990, Mr. Scott worked for Mercury Asset Management managing
captive insurance portfolios and products.
Fred Alger 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 [ ] had approximately $[ ]
billion under management, including $[ ] billion in mutual fund accounts
and $[ ] billion in other advisory accounts. Alger is wholly owned by Fred
Alger & Company, Incorporated which in turn is wholly owned by Alger Associates,
Inc., a financial services holding company. Fred M. Alger, III and his brother,
David D. Alger, are the majority shareholders of Alger Associates, Inc. and may
be deemed to control that company and its subsidiaries.
David D. Alger, President of Alger Management, 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 Management since 1990, and
he serves as a Senior Vice President. Prior to 1990, he was a member of the
technical staff at AT&T Bell Laboratories. Ms. Khoo has been employed by Alger
Management since 1989, and she serves as a Senior Vice President.
Founders Asset Management, Inc.
Investment decisions for the Growth Equity, International Small Cap and
Balanced Funds are made by its Subadviser, Founders Asset Management, Inc.
("Founders"), located at 2930 East Third Avenue, Denver, Colorado 80206, a
registered investment adviser first established as an asset manager in 1938.
Bjorn K. Borgen, Chairman, Chief Executive Officer and Chief Investment Officer
of Founders, owns 100% of the voting stock of Founders. As of [ ],
Founders had over $[ ] billion of assets under management, including
approximately $[ ] billion in mutual fund accounts and $1.1 billion in other
advisory accounts. [update if acquisition]
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
39
<PAGE>
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 $[ ] billion for over [ ] million individual and institutional
investor accounts as of [ ]
The investment advisory committee for the Equity-Income Fund is comprised
of the following members: Brian C. Rogers, Chairman, Stephen W. Boese, Richard
P. Howard, and William J. Stromberg. Mr. Rogers joined T. Rowe Price in 1982 and
has been managing investments since 1983. He has been chairman of the Equity
Income Fund investment advisory committee since October 1, 1996.
Morgan Stanley Asset Management.
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 [ ], Morgan Stanley, together with
its affiliated asset management companies (including MAS), managed investments
totaling approximately $[ ] billion, including approximately $[ ]
billion under active management and $[ ] billion as named fiduciary or
fiduciary adviser.
Frances Campion has been primarily responsible for the portfolio management
of the Global Equity Fund since October 1996. Ms. Campion joined Morgan Stanley
in January 1990 as a global equity fund manager and is now a Principal of Morgan
Stanley & Co. Incorporated. Her responsibilities include day to day management
of the Global Equity Portfolio of Morgan Stanley Institutional Fund, Inc.
Prior to joining Morgan Stanley, Ms. Campion was a U.S. equity analyst with
Lombard Odler Limited where she had responsibility for the management of global
portfolios. Ms. Campion has ten years global investment experience. She is a
graduate of University of College, Dublin.
Manufacturers Adviser Corporation
MAC, a Colorado corporation, is the subadviser of the Money Market Fund.
Its principal business at the present time is to provide investment management
services to these portfolios and comparable portfolios of NASL Series Trust. MAC
is an indirect wholly-owned subsidiary of Manulife. The address of MAC is 200
Bloor Street East, Toronto, Ontario, Canada M4W 1E5. As of [ ],
MAC together with Manulife had approximately $[ ] 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.
* * *
40
<PAGE>
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 ADVISOR
AND ARE NOT ADDITIONAL CHARGES TO THE PORTFOLIOS OR THEIR SHAREHOLDERS.
<TABLE>
<CAPTION>
BETWEEN BETWEEN
$50,000,000 $200,000,000
FIRST AND AND EXCESS OVER
FUNDS $ 50,000,000 $200,000,000 $500,000,000 $500,000,000
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Sensitive Equity Fund............. [TO BE ADDED]
Emerging Growth Fund..................
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
41
<PAGE>
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.
Each Fund's portfolio turnover rate is set forth under the "Financial
Highlights" section of the Prospectus. A high rate of portfolio turnover (in
excess of 100%) generally involves correspondingly greater commission expenses,
which must be borne directly by the Fund. The portfolio turnover rate of each of
the Fund's portfolios may vary from year to year, as well as within a year. See
"PORTFOLIO BROKERAGE" in the Statement of Additional Information.
GENERAL INFORMATION
NET ASSET VALUE
The net asset value of the shares of each class of each Portfolio is
calculated separately and, except as described below, is determined once daily
as of the close of regularly scheduled trading on the New York Stock Exchange
(the "Exchange"), Monday through Friday. Net asset value per share of each
class of each Portfolio (other than the Money Market Fund, as described below)
is calculated by dividing the value of the portion of the Portfolio's securities
and other assets attributable to that class, less the liabilities attributable
to that class, by the number of shares of that class outstanding. No
determination is required on (i) days on which changes in the value of such
Portfolio's securities holdings will not materially affect the current net asset
value of the shares of the Portfolio, (ii) days during which no shares of such
Portfolio are tendered for redemption and no order to purchase or sell such
shares is received by the Fund, or (iii) the following business holidays or the
days on which such holidays are observed by the Exchange: New Year's Day,
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
42
<PAGE>
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 Fund, declares and pays any capital gains dividends annually.
Generally, income dividends of Portfolios other than the Strategic Income,
Investment Quality Bond, U.S. Government Securities, National Municipal Bond and
Money Market Funds and capital gains dividends of Portfolios other than the
Money Market Fund paid shortly after a purchase of shares prior to the record
date, although in effect a return of capital, will be subject to income tax.
The maximum distribution and service fees payable by the Class B shares and
Class C shares of each Portfolio (other than the Money Market Fund, which bears
no such fees) are more than the maximum fees payable by each such Portfolio's
Class A shares. In addition, certain incremental expenses which are
specifically allocable to a particular class of shares in a Portfolio are
separately allocated to that class of shares. As a result, the per share
dividend on Class B and Class C shares will generally be lower than the per
share dividend on Class A shares of a Portfolio.
For the convenience of shareholders, all income dividends and capital gains
distributions are paid in full and fractional shares of the same class of a
Portfolio on the payment date unless a shareholder has requested payment in
cash. Shareholders may elect to have dividends and distributions from a class
of a Portfolio invested in shares of the same class of another Portfolio at the
respective net asset value. See SHAREHOLDER SERVICES -- Automatic Dividend
Diversification."
TAXES
It is expected that each Portfolio of the Fund will qualify as a "regulated
investment company" under the Code. If it so qualifies, a Portfolio will not be
subject to United States federal income taxes on its net investment 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
43
<PAGE>
(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 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
44
<PAGE>
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.
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
45
<PAGE>
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 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
[ ] 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., the
Fund's former independent accountants, 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.
46
<PAGE>
GENERAL METHODS OF PURCHASING SHARES
1. By Mail. To make an initial account purchase, mail a check made
payable in U.S. dollars to "North American Funds" with a completed New Account
Application (copy enclosed with this Prospectus) to:
North American Funds
P.O. Box 8505
Boston, MA 02266-8505
Third party checks which are payable to an existing shareholder of the Fund who
is a natural person (as opposed to a corporation or partnership) and endorsed
over to the Fund will be accepted.
To make a purchase of shares to an existing North American Funds account,
please note your account number on the check and forward it with an account
investment slip to the above address.
Note: To establish certain tax deferred retirement plan accounts, such as IRAs,
you will be required to complete a separate application which may be obtained
from the Distributor or a securities dealer who has a Dealer Agreement with the
Distributor.
2. By Federal Funds Wire. Shares may be purchased in any Portfolio by
wire transfer. To obtain instructions for Federal Funds Wire purchases, please
contact the Customer Service Department at (800) 872-8037.
3. Through a Securities Dealer. You may purchase shares by contacting a
securities dealer who has a Dealer Agreement with the Distributor.
Orders for shares of all Portfolios except the Money Market Fund will be
assigned the next closing price after receipt of the order. Orders for the
Money Market Fund will be assigned the next closing price after the payment has
been converted to Federal Funds and dividends will begin to accrue on the
business day after such conversion. While orders for shares of the Strategic
Income, Investment Quality Bond, U.S. Government Securities and National
Municipal Bond Funds are assigned the next closing price after receipt of the
order, dividends will begin to accrue on the business day after the purchase has
been converted into Federal Funds.
SHARE PRICE
The public offering price of the Class A shares of each Portfolio is the
net asset value per share (next determined following receipt of an order) plus,
in the case of all Portfolios except the Money Market Fund, a front end sales
charge, if applicable. The share price for Class B shares and Class C shares is
the net asset value per share (next determined following receipt of an order).
CLASS A SHARES
The public offering price for purchases of Class A shares of less than $1
million is the net asset value per share plus a front end sales charge,
expressed as a percentage of the offering price as set forth in the table below.
No front end sales charge is imposed on the purchase of Class A shares of the
Money Market Fund. However, when Class A shares of the Money Market Fund on
which no sales charge has been paid or waived are exchanged for Class A shares
of another Portfolio, the sales charge applicable to purchases of Class A shares
will be assessed at that time. Purchases of Class A shares of $1 million or
more are offered for sale at net asset value subject to a CDSC of 1% of the
dollar amount subject thereto if redeemed within one year of purchase. See
"PURCHASES OF SHARES --Contingent Deferred Sales Charge" below. The CDSC may be
waived on certain redemptions of shares. See "PURCHASES OF SHARES - Waiver of
CDSC."
47
<PAGE>
CLASS A SALES CHARGE TABLE
<TABLE>
<CAPTION>
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."
**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.
48
<PAGE>
Statement of Intention. For the purposes of determining which sales charge
level in the table above is applicable to a purchase of Class A shares,
investors may also establish a total investment goal in shares of the Fund to be
achieved over a thirteen-month period and may purchase Class A shares during
such period at the applicable reduced front end sales charge. All shares,
including Class B shares and Class C shares (but excluding shares purchased or
held in the Money Market Fund), previously purchased and still beneficially
owned by the investor and his or her spouse and children under the age of 21
may, upon written notice to the transfer agent, also be included at the current
net asset value to reach a level specified in the table above.
Shares totaling 5% of the dollar amount of the Statement of Intention will
be held in escrow by the Transfer Agent in the name of the purchaser. The
effective date of a Statement of Intention may be back-dated up to 90 days, in
order that any investments made during this 90-day period, valued at the
purchaser's cost, can be applied to the fulfillment of the Statement of
Intention goal.
The Statement of Intention does not obligate the investor to purchase, nor
the Fund to sell, the indicated amount. In the event the investment goal is not
achieved within the thirteen-month period, the purchaser is required to pay the
front end sales charge that would otherwise have applied to the purchases of
Class A shares made during this period. If a payment is due under the preceding
sentence, it must be made directly to the Distributor within twenty days of
notification or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain such difference. Certain transitional rules apply to
shareholders who had a statement of intention in effect prior to April 1, 1994.
For additional information, shareholders should contact the Fund, Wood Logan or
eligible securities dealers.
Group Purchases. Subject to applicable regulations, reduced front end
sales charges as set forth in the "Class A Sales Charge Schedule" are available
on the purchase of Class A shares when sales are made to a group of individuals
in such a manner as results in a savings of sales expenses. Approval of group
purchase reduced front end sales charge plans is subject to the discretion of
the Distributor.
Certain Qualified Purchasers. No front end sales charge or CDSC is
applicable to any sale of Class A shares to a Trustee or officer of the Fund, or
to the immediate families (i.e., the spouse, children, mother or father) of such
persons, or any full-time employee or registered representative of
broker/dealers having Dealer Agreements with the Distributor ("Selling Broker")
and their immediate families (or any trust, pension, profit sharing or other
benefit plan for the benefit of such persons), or any full-time employee of a
bank, savings and loan, credit union or other financial institution that
utilizes a Selling Broker to clear purchases of Fund shares, and their immediate
families. In addition, no front end sales charge or CDSC is applicable on any
sale to 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."
49
<PAGE>
CLASS B CDSC TABLE
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
YEAR(S) SINCE PURCHASE ORDER DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
Up to 2 years 5%
2 years or more but less than 3 years 4%
3 years or more but less than 4 years 3%
4 years or more but less than 5 years 2%
5 years or more but less than 6 years 1%
6 or more years 0%
</TABLE>
The CDSC may be waived on certain redemption of shares. See "PURCHASES OF
SHARES - Waiver of CDSC"
CLASS C SHARES
Class C shares are offered for sale at net asset value and are offered for
purchases of less than $1 million. Class C shares are sold without a front end
sales charge. Class C shares 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 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.
50
<PAGE>
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.
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,
51
<PAGE>
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 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
52
<PAGE>
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.
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.
53
<PAGE>
By mail - an exchange will be honored by a written letter of request to the
Fund if signed by all registered owners of the account.
By telephone - All accounts are eligible for the telephone exchange
privilege. See "-- ADDITIONAL SHAREHOLDER PRIVILEGES --Telephone Exchanges."
TRANSFER OF SHARES
Shareholders may transfer fund shares to family members and others at any
time without incurring a front end sales charge (Class A shares purchases of
less than $1 million) and without a CDSC being imposed at that time (Class A
shares purchases of $1 million or more, Class B shares and Class C shares).
Shareholders should consult their tax adviser concerning such transfers.
REDEMPTION OF SHARES
You may redeem shares of your account in any amount and at any time at the
applicable net asset value next determined after the request for redemption is
received in proper order by the Fund. As described under "PURCHASE OF SHARES,"
redemptions of Class A shares purchases of $1 million or more, Class B shares
and Class C shares and may subject to a CDSC. The Fund will normally send the
proceeds from a redemption (less any applicable CDSC) on the next business day,
but if making immediate payment could adversely affect the Fund, it may take up
to seven days for payment to be made. Payment may also be delayed if the shares
to be redeemed were purchased by check and that check has not cleared.
GENERAL METHODS OF REDEEMING SHARES
1. By Mail. You may redeem shares by mail by sending a written request for
the redemption to the Fund. The request will be processed after receipt of all
required documents in proper order: certificates of beneficial interest (if
issued); a stock power signed by all account owners exactly as the account is
registered specifying the number of shares or dollars to be redeemed; and in the
case of a redemption to be paid to a person or address other than the person or
address of record and/or in an amount greater than $50,000, a guarantee of the
stock power signatures(s) without restriction, condition or qualification by an
officer of a commercial bank, Trust Company, Federal savings and loan
institution, member firm of a national securities exchange or NASD member. If
shares are held in the name of a corporation, trust, estate, custodianship,
partnership or pension or profit sharing plan, additional documentation may be
necessary.
2. Through a Securities Dealer. You may sell your shares by contacting a
securities dealer who has a Dealer Agreement with the Distributor. (See
"GENERAL -- Repurchase of Shares" in the Statement of Additional Information for
more details.) The dealer may assess a nominal fee for this service.
REINSTATEMENT PRIVILEGE
With regard to Class A shares (purchases of less than $1 million), you may
reinstate at net asset value any portion of shares which have been previously
redeemed if the redemption occurred within 90 days of the request. With regard
to Class A shares (purchases of $1 million or more), Class B shares and Class C
shares and, if an investor redeems these shares and pays a CDSC upon redemption,
and then uses those proceeds to purchase the same class of shares of any
Portfolio within 90 days, the shares purchased will be credited with any CDSC
paid in connection with the prior redemption.
Any gain recognized on a redemption or repurchase is taxable despite the
reinstatement in the Portfolio. Any loss realized as a result of the redemption
or repurchase may not be allowed as a deduction for federal income tax purposes
but may be applied, depending on the amount reinstated, to adjust the cost basis
of the shares acquired upon reinstatement. In addition, if the shares redeemed
or repurchased had been acquired within the 90 days preceding the redemption or
repurchase, the amount of any gain or loss on the redemption or repurchase may
have to be computed without regard to any sales charges incurred on the redeemed
or repurchased shares (except to the extent those sales charges exceed the sales
charges waived in connection with the reinstatement). See "GENERAL INFORMATION
- -- Taxes."
MINIMUM ACCOUNT BALANCE
The Fund reserves the right to involuntarily redeem your account any time
the value of your account falls below $500 as a result of redemption, with the
exception of a retirement plan account and with respect to an account
established with a minimum of $50 pursuant to programs such as Automatic
Investment Plans, Automatic Dividend Diversification, and Systematic Investing.
You will be notified in writing prior to the redemption and be allowed 30 days
to make additional investments before the redemption is processed.
54
<PAGE>
REDEMPTION IN KIND
The Trustees of the Fund reserve the right to redeem proceeds in whole or
in part by a distribution in kind of marketable securities held by a Portfolio
of the Fund. See "GENERAL -- Redemption in Kind" in the Statement of Additional
Information for more details.
ADDITIONAL SHAREHOLDER PRIVILEGES
CERTAIN PRIVILEGES LISTED IN THIS SECTION MAY NOT BE OFFERED BY THE FUND IF
YOU HOLD SHARES WITH THE FUND IN THE "STREET NAME" OF A FINANCIAL INSTITUTION,
OR IF THE ACCOUNT IS NETWORKED THROUGH NATIONAL SECURITIES CLEARING CORPORATION
(NSCC).
AUTOMATIC INVESTMENT PLAN
If you open an account and wish to make subsequent, periodic investments in
a Portfolio by electronic funds transfer from a bank account, you may establish
an Automatic Investment Plan on your account. The bank at which your account is
maintained must be a member of the Automated Clearing House (ACH). The
frequency with which the investments occur is specified by you (monthly, every
alternate month, quarterly, etc.) with the exception that no more than one
investment will be processed each month. On or about the tenth of the month,
the Fund will debit your bank account in the specified amount (minimum of $50
per draft) and the proceeds will be invested at the applicable offering price
determined on the date of the debit. In the event of a full exchange, this plan
will follow into the new Portfolio unless otherwise specified.
AUTOMATIC DIVIDEND DIVERSIFICATION (ADD)
The ADD program allows you to have all dividends and any other
distributions from a Portfolio automatically used to purchase shares of the same
class of any other Portfolio of the Fund. The receiving account must be in the
same name as your existing account. The purchase of shares to the Portfolio
receiving the cross-investment of the dividends will be using the net asset
value at the close of business of the dividend payable date.
SYSTEMATIC INVESTING
You may request that your shares of any class of the Money Market, U.S.
Government Securities or National Municipal Bond Fund be exchanged monthly for
shares of the same class of up to three other Portfolios. A predetermined
dollar amount of at least $50 per exchange will then occur on or about the 15th
of each month in accordance with the instructions you provided on the initial
account application or on the Systematic Investing application. This Systematic
Investing program is also referred to as "Dollar Cost Averaging."
SYSTEMATIC WITHDRAWAL PLAN
You may establish a plan for redemptions to be made automatically at
monthly, quarterly, semiannual or annual intervals with payments sent directly
to you or to persons designated by you as recipients of the withdrawals. Up to
12% of the value of an account (i.e., up to 1% per month of the value of the
account at the time the Systematic Withdrawal is taken) may be withdrawn without
the imposition of CDSC. See "PURCHASES OF SHARES - Waiver of CDSC." Requests
for this service not made on the initial application require signature
guarantees unless the payments are to be made to you and mailed to the address
of record on your account. You are required to have a minimum account value of
$10,000 per Portfolio in order to establish this plan. Maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares may
be disadvantageous to you because of the sales charges on certain purchases and
redemptions.
The redemptions will occur on or about the 25th day of the month and the
checks will generally be mailed within two days after the redemption occurs. No
redemption will occur if the account balance falls below the amount required to
meet the requested withdrawal amount. This service may be terminated at any
time, and, while no fee is currently charged (although a CDSC may be
applicable), the Distributor reserves the right to initiate a fee of up to $5
per withdrawal upon 30 days' written notice to the shareholder.
CHECKWRITING
Checkwriting is available only to Class A and Class C shareholders of the
U.S. Government Securities, National Municipal Bond and Money Market Funds. You
will be issued a book of blank checks if the request is indicated on the account
application and is accompanied by a correctly completed and endorsed signature
card. The checks may be made payable to the order of anyone in any amount not
less than $250. You should not attempt to close your account by check.
Checks which exceed the value of the account at the time of receipt by the
Fund will not be honored. In addition, the privilege will be invalid when your
account is closed.
55
<PAGE>
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.
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.
56
<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 sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
A-1
<PAGE>
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".
Bonds:
A-2
<PAGE>
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
and D extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor.
"DDD" represents the highest potential for recovery on these bonds, and
"D" represents the lowest potential for recovery.
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 % %
Aa AA % %
A A % %
Baa BBB % %
Ba BB % %
B B % %
Caa CCC % %
Ca CC % %
C C % %
D % %
Unrated as a Group: %
U.S. Government Securities* %
Total 100%
</TABLE>
The actual distribution of the Strategic Income Fund's corporate and
government bond investments by ratings on any given date will vary. In addition,
the distribution of the Portfolio's investments by ratings as set forth above
should not be considered as representative of the Portfolio's future portfolio
composition.
*Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
A-4
<PAGE>
INVESTMENT QUALITY BOND FUND DEBT RATINGS
The average distribution of investments in corporate and government bonds
by ratings for the fiscal year ended October 31, 1996, calculated monthly on a
dollar-weighted basis, for the Investment Quality Bond Fund, was as follows:
<TABLE>
<CAPTION>
UNRATED BUT
OF COMPARABLE
MOODY'S STANDARD & POOR'S QUALITY PERCENTAGE
<S> <C> <C> <C>
Aaa AAA % %
Aa AA % %
A A % %
Baa BBB % %
Ba BB % %
B B % %
Caa CCC % %
Ca CC % %
C C % %
D % %
Unrated as a Group: %
U.S. Government Securities* %
Total 100%
</TABLE>
The actual distribution of the Investment Quality Bond Fund's corporate and
government bond investments by ratings on any given date will vary. In
addition, the distribution of the Portfolio's investments by ratings as set
forth above should not be considered as representative of the Portfolio's future
portfolio composition.
*Obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities.
A-5
<PAGE>
[Front outside over of Prospectus]
98 Prospectus
J.P. Morgan Investment
Management Inc.
Manufacturers Adviser
Corporation
Salomon Brothers Asset
Management Inc
Standish, Ayer & Wood, Inc.
Warburg, Pincus Counsellors, 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 APPEARS HERE]
<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 Counsellors, Inc.
Adviser Distributor
CypressTree Asset Management CypressTree Funds Distributors, Inc.
Corporation, 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
[ ]
Customer Service
800-872-8037
[LOGO APPEARS HERE]
<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. Warrants, Rights, Preferred Stock and Convertible Securities. Certain
of the portfolios may invest in warrants, rights, preferred stock and
convertible securities to the extent noted in the Prospectus. A warrant is a
security, usually issued together with a bond or preferred stock, that entitles
the holder to buy a proportionate amount of common stock at a specified price,
usually higher than the market price at the time of issuance, for a period of
years or to perpetuity. (For additional information on warrants see "Hedging
and Other Strategic Transactions - Warrant Transactions and Risks.") In
contrast, rights, which also represent the right to buy common shares, normally
have a subscription price lower than the current market value of the common
stock and a life of two to four weeks. A warrant is usually issued as a
sweetener, to enhance the marketability of the accompanying fixed income
securities. Preferred stock is a class of capital stock that pays dividends at a
specified rate and that has preference over common stock in the payment of
dividends and the liquidation of assets. Preferred stock does not ordinarily
carry voting rights. Convertible securities are securities (usually preferred
shares or bonds) that are exchangeable for a set number of another form of
securities (usually common stock) at a prestated price. The convertible feature
is usually designed as a sweetener to enhance the marketability of the security.
7. Canadian and Provincial Government and Crown Agency Obligations.
Canadian Government obligations are debt securities issued or guaranteed as to
principal or interest by the Government of Canada pursuant to authority granted
by the Parliament of Canada and approved by the Governor in Council, where
necessary. These securities include treasury bills, notes, bonds, debentures
and marketable Government of Canada loans. Canadian Crown agency obligations
are debt securities issued or guaranteed by a Crown corporation, company or
agency ("Crown agencies") pursuant to authority granted by the Parliament of
Canada and approved by the Governor in Council, where necessary. Certain Crown
agencies are by statute agents of Her Majesty in right of Canada, and their
obligations, when properly authorized, constitute direct obligations of the
Government of Canada. Such obligations include, but are not limited to, those
issued or guaranteed by the Export Development Corporation, Farm Credit
Corporation, Federal Business Development Bank and Canada Post Corporation. In
addition, certain Crown agencies which are not by law agents of Her Majesty may
issue obligations which by statute the Governor in Council may authorize the
Minister of Finance to guarantee on behalf of the Government of Canada. Other
Crown agencies which are not by law agents of Her Majesty may issue or guarantee
obligations not entitled to be guaranteed by the Government of Canada. No
assurance can be given that the Government of Canada will support the
obligations of Crown agencies which are not agents of Her Majesty, which it has
not guaranteed, since it is not obligated to do so by law.
4
<PAGE>
Provincial Government obligations are debt securities issued or guaranteed
as to principal or interest by the government of any province of Canada pursuant
to authority granted by the Legislature of any such province and approved by the
Lieutenant Governor in Council of any such province, where necessary. These
securities include treasury bills, notes, bonds and debentures. Provincial
Crown agency obligations are debt securities issued or guaranteed by a
provincial Crown corporation, company or agency ("provincial Crown agencies")
pursuant to authority granted by a provincial Legislature and approved by the
Lieutenant Governor in Council of such province, where necessary. Certain
provincial Crown agencies are by statute agents of Her Majesty in right of a
particular province of Canada, and their obligations, when properly authorized,
constitute direct obligations of such province. Other provincial Crown agencies
which are not by law agents of Her Majesty in right of a particular province of
Canada may issue obligations which by statute the Lieutenant Governor in Council
of such province may guarantee, or may authorize the Treasurer thereof to
guarantee, on behalf of the government of such province. Finally, other
provincial Crown agencies which are not by law agencies of Her Majesty may issue
or guarantee obligations not entitled to be guaranteed by a provincial
government. No assurance can be given that the government of any province of
Canada will support the obligations of provincial Crown agencies which are not
agents of Her Majesty, which it has not guaranteed, as it is not obligated to do
so by law. Provincial Crown agency obligations described above include, but are
not limited to, those issued or guaranteed by a provincial railway corporation,
a provincial hydroelectric or power commission or authority, a provincial
municipal financing corporation or agency and a provincial telephone commission
or authority.
Any Canadian obligation acquired by the Money Market Fund will be
denominated in U.S. dollars.
OTHER INSTRUMENTS
The following provides a more detailed explanation of some of the other
instruments that certain Portfolios may invest in.
1. MORTGAGE SECURITIES
Mortgage securities differ from conventional bonds in that principal is
paid over the life of the securities rather than at maturity. As a result, a
Portfolio receives monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. When a Portfolio reinvests the payments and any
unscheduled prepayments of principal it receives, it may receive a rate of
interest which is higher or lower than the rate on the existing mortgage
securities. For this reason, mortgage securities may be less effective than
other types of debt securities as a means of locking in long-term interest
rates.
In addition, because the underlying mortgage loans and assets may be
prepaid at any time, if a Portfolio purchases mortgage securities at a premium,
a prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if a Portfolio purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected payments will reduce, yield to maturity.
Adjustable rate mortgage securities are similar to the mortgage securities
discussed above, except that unlike fixed rate mortgage securities, adjustable
rate mortgage securities are collateralized by or represent interests in
mortgage loans with variable rates of interest. These variable rates of
interest reset periodically to align themselves with market rates. Most
adjustable rate mortgage securities provide for an initial mortgage rate that is
in effect for a fixed period, typically ranging from three to twelve months.
Thereafter, the mortgage interest rate will reset periodically in accordance
with movements in a specified published interest rate index. The amount of
interest due to an adjustable rate mortgage holder is determined in accordance
with movements in a specified published interest rate index by adding a pre-
determined increment or "margin" to the specified interest rate index. Many
adjustable rate mortgage securities reset their interest rates based on changes
in the one-year, three-year and five-year constant maturity Treasury rates, the
three-month or six-month Treasury Bill rate, the 11th District Federal Home Loan
Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-
month, six-month or one-year London Interbank Offered Rate ("LIBOR") and other
market rates.
A Portfolio will not benefit from increases in interest rates to the extent
that interest rates rise to the point where they cause the current coupon of
adjustable rate mortgages held as investments to exceed any maximum allowable
annual or lifetime reset limits (or "cap rates") for a particular mortgage. In
this event, the value of the mortgage securities in a Portfolio would likely
decrease. Also, the Portfolio's net asset value could vary to the extent that
current yields on adjustable rate mortgage securities are different than market
yields during interim periods between coupon reset dates. During periods of
declining interest rates, income to a Portfolio derived from adjustable rate
mortgages which remain in a mortgage pool will decrease in contrast to the
income on fixed 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.
5
<PAGE>
PRIVATELY-ISSUED MORTGAGE SECURITIES. Privately-issued pass through
securities provide for the monthly principal and interest payments made by
individual borrowers to pass through to investors on a corporate basis, and in
privately-issued collateralized mortgage obligations, as further described
below. Privately-issued mortgage securities are issued by private originators
of, or investors in, mortgage loans, including mortgage bankers, commercial
banks, investment banks, savings and loan associations and special purpose
subsidiaries of the foregoing. Since privately-issued mortgage certificates are
not guaranteed by an entity having the credit status of GNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. For a description of the types of credit enhancements that may
accompany privately-issued mortgage securities, see "Asset-Backed Securities--
Types of Credit Support" below. A Portfolio will not limit its investments to
asset-backed securities with credit enhancements.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs generally are bonds or
certificates issued in multiple classes that are collateralized by or represent
an interest in mortgages. CMOs may be issued by single-purpose, stand-alone
finance subsidiaries or trusts of financial institutions, government agencies,
investment banks or other similar institutions. Each class of CMOs, often
referred to as a "tranche", may be issued with a specific fixed coupon rate
(which may be zero) or a floating coupon rate, and has a stated maturity or
final distribution date. Principal prepayments on the underlying mortgages may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates. Interest is paid or accrued on CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the underlying
mortgages may be allocated among the several classes of a series of a CMO in
many ways. The general goal sought to be achieved in allocating cash flows on
the underlying mortgages to the various classes of a series of CMOs is to create
tranches on which the expected cash flows have a higher degree of predictability
than the underlying mortgages. As a general matter, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or more
tranches generally must be created that absorb most of the volatility in the
cash flows on the underlying mortgages. The yields on these tranches are
relatively higher than on tranches with more predictable cash flows. Because of
the uncertainty of the cash flows on these tranches, and the sensitivity thereof
to changes in prepayment rates on the underlying mortgages, the market prices of
and yield on these tranches tend to be highly volatile.
CMOs purchased may be:
(1) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. Government;
(2) collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and the guarantee is collateralized by U.S.
Government securities; or
(3) securities for which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest is supported by
the credit of an agency or instrumentality of the U.S. Government.
STRIPS. In addition to the U.S. Government securities discussed above,
certain Portfolios may invest in separately traded interest components of
securities issued or guaranteed by the U.S. Treasury. The interest components
of selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ("STRIPS"). Under the
STRIPS program, the interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts independently.
STRIPPED MORTGAGE SECURITIES. Stripped mortgage securities are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. Government, or by private issuers,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
mortgage securities have greater volatility than other types of mortgage
securities in which a Portfolio invests. Although stripped mortgage securities
are purchased and sold by institutional investors through several investment
banking firms acting as brokers or dealers, the market for such securities has
not yet been fully developed. Accordingly, stripped mortgage securities are
generally illiquid and to such extent, together with any other illiquid
investments, will not exceed 10% of a Portfolio's net assets.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving 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
6
<PAGE>
underlying mortgage assets, and a rapid rate of principal payments may have a
material adverse effect on a Portfolio's yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Portfolio may fail to fully recoup its initial investment in these securities
even if the securities have received the highest rating by a nationally
recognized statistical rating organization.
As interest rates rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other mortgage securities
described in this Statement of Additional Information, like other debt
instruments, will tend to move in the opposite direction of interest rates.
Accordingly, the Fund believes that investing in IOs, in conjunction with the
other mortgage securities described herein, will contribute to a Portfolio's
relatively stable net asset value.
In addition to the stripped mortgage securities described above, the
Strategic Income may invest in similar securities such as Super POs and Levered
IOs which are more volatile than POs 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 a Portfolio's net assets.
Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Such
securities have the effect of providing a degree of investment leverage since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term debt obligations increase or decrease in response
to such changes. As a result, the market values of such securities will
generally be more volatile than the market value of fixed-rate obligations.
2. ASSET-BACKED SECURITIES
The securitization techniques used to develop mortgage securities are also
being applied to a broad range of other assets. Through the use of trusts and
special purpose corporations, automobile and credit card receivables are being
securitized in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to the CMO structure. Generally
the issuers of asset-backed bonds, notes or pass-through certificates are
special purpose entities and do not have any significant assets other than the
receivables securing such obligations. In general, the collateral supporting
asset-backed securities is of a shorter maturity than mortgage loans. As a
result, investment in these securities should result in greater price stability
for a Portfolio's shares. Instruments backed by pools of receivables are
similar to mortgage-backed securities in that they are subject to unscheduled
prepayments of principal prior to maturity. When the obligations are prepaid, a
Portfolio must reinvest the prepaid amounts in securities the yields of which
reflect interest rates prevailing at the time. Therefore, a Portfolio's ability
to maintain a portfolio which includes high-yielding asset-backed securities
will be adversely affected to the extent that prepayments of principal must be
reinvested in securities which have lower yields than the prepaid obligations.
Moreover, prepayments of securities purchased at a premium could result in a
realized loss. A Portfolio will only invest in asset-backed securities rated,
at the time of purchase, "AA" or better by S&P or "Aa" or better by Moody's or
which, in the opinion of the applicable Subadviser, are of comparable quality.
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
7
<PAGE>
to asset-backed securities with credit enhancements. Although asset-backed
securities are not generally traded on a national securities exchange, such
securities are widely traded by brokers and dealers, and to such extent will not
be considered illiquid securities for the purposes of the investment restriction
under "Investment Restrictions" below.
TYPES OF CREDIT SUPPORT. Mortgage securities and asset-backed securities
are often backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failure by obligors on underlying
assets to make payments, such securities may contain elements of credit support.
Such credit support falls into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
pass-through of payments due on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The Fund will not pay any additional fees for
such credit support, although the existence of credit support may increase the
price of a security.
The ratings of mortgage securities and asset-backed securities for which
third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
3. ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS
Zero coupon securities and pay-in-kind bonds involve special risk
considerations. Zero coupon securities are debt securities that do not provide
for the payment of cash income but are sold at substantial discounts from their
value at maturity. When a zero coupon security is held to maturity, its entire
return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference
is known at the time of purchase, so that investors holding zero coupon
securities until maturity know at the time of their investment what the return
on their investment will be. Certain zero coupon securities also are sold at
substantial discounts from their maturity value and provide for the commencement
of regular interest payments at a deferred date. The Portfolios also may
purchase pay-in-kind bonds. Pay-in-kind bonds are bonds that pay all or a
portion of their interest in the form of additional debt or equity securities.
The U.S. Government Securities Fund will not invest in zero coupon securities
having maturities of greater than ten years.
Zero coupon securities and pay-in-kind bonds tend to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. The value of zero
coupon securities appreciates more during periods of declining interest rates
and depreciates more during periods of rising interest rates.
Zero coupon securities and pay-in-kind bonds may be issued by a wide
variety of corporate and governmental issuers. Although zero coupon securities
and pay-in-kind bonds are generally not traded on a national securities
exchange, such securities are widely traded by brokers and dealers and, to such
extent, will not be considered illiquid for the purposes of the investment
restriction under "Investment Restrictions" below.
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.
8
<PAGE>
4. HIGH YIELD/HIGH RISK DOMESTIC CORPORATE DEBT SECURITIES
The market for high yield U.S. corporate debt securities (commonly known as
"junk bonds") has undergone significant changes in the past decade. Issuers in
the U.S. high yield market originally consisted primarily of growing small
capitalization companies and larger capitalization companies whose credit
quality had declined from investment grade. During the mid-1980s, participants
in the U.S. high yield market issued high yield securities principally in
connection with leveraged buyouts and other leveraged recapitalizations. In
late 1989 and 1990, the volume of new issues of high yield U.S. corporate debt
declined significantly and liquidity in the market decreased. Since early 1991,
the volume of new issues of high yield U.S. corporate debt securities has
increased substantially and secondary market liquidity has improved. During the
same periods, the U.S. high yield debt market exhibited strong returns, as it
continues to be an attractive market in terms of yield and yield spread over
U.S. Treasury securities. Currently, most new offerings of U.S. high yield
securities are being issued to refinance higher coupon debt and to raise funds
for general corporate purposes.
High yield U.S. corporate debt securities include bonds, debentures, notes
and commercial paper and will generally be unsecured. Most of these debt
securities will bear interest at fixed rates. However, a Portfolio may also
invest in debt securities with variable rates of interest or which involve
equity features, such as contingent interest or participations based on
revenues, sales or profits (i.e., interest or other payments, often in addition
to a fixed rate of return, that are based on the borrower's attainment of
specified levels of revenues, sales or profits and thus enable the holder of the
security to share in the potential success of the venture).
5. HIGH YIELD/HIGH RISK FOREIGN SOVEREIGN DEBT SECURITIES
The Strategic Income, High Yield and Investment Quality Bond Funds expect
that a significant portion of their emerging market governmental debt
obligations will consist of "Brady Bonds." In addition, the International Small
Cap, and Balanced Funds may also invest in Brady Bonds. Brady Bonds are debt
securities, generally denominated in U.S. dollars, issued under the framework
of the "Brady Plan," an initiative announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external commercial bank indebtedness. The Brady Plan framework, as
it has developed, contemplates the exchange of external commercial bank debt for
newly issued bonds (Brady Bonds). Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the debt
restructuring. Investors should recognize that Brady Bonds have been issued
only recently, and accordingly do not have a long payment history. Brady Bonds
issued to date generally have maturities of between 15 and 30 years from the
date of issuance and have traded at a deep discount from their face value. The
Portfolios may invest in Brady Bonds of emerging market countries that have been
issued to date, as well as those which may be issued in the future. In addition
to Brady Bonds, the Portfolios may invest in emerging market governmental
obligations issued as a result of debt restructuring agreements outside of the
scope of the Brady Plan. A substantial portion of the Brady Bonds and other
sovereign debt securities in which the Portfolios invest are likely to be
acquired at a discount, which involves certain considerations discussed below
under "TAXES -- Pay-in-kind Bonds, Zero Coupon Bonds and Discount Obligations."
Agreements implemented under the Brady Plan to date are designed to achieve
debt and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of one
percent above the then current six month LIBOR rate. Regardless of the stated
face amount and stated interest rate of the various types of Brady Bonds, the
Portfolios will purchase Brady Bonds in secondary markets, as described below,
in which the price and yield to the investor reflect market conditions at the
time of purchase. Brady Bonds issued to date have traded at a deep discount
from their face value. Certain sovereign bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Certain Brady Bonds
have been collateralized as to principal due at maturity (typically 15 to 30
years from the date of issuance) by U.S. Treasury zero coupon bonds with a
maturity equal to the final maturity of such 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
9
<PAGE>
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories.
6. MUNICIPAL LEASE OBLIGATIONS
The National Municipal Bond Fund may invest in municipal lease obligations.
Municipal lease obligations are secured by revenues derived from the lease of
property to state and local government units. The underlying leases typically
are renewable annually by the governmental user, although the lease may have a
term longer than one year. If the governmental user does not appropriate
sufficient funds for the following year's lease payments, the lease will
terminate, with the possibility of default on the lease obligations and
significant loss to the Portfolio. In the event of a termination, assignment or
sublease by the governmental user, the interest paid on the municipal lease
obligation could become taxable, depending upon the identity of the succeeding
user.
7. HYBRID INSTRUMENTS
Hybrid instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those of
debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security, preferred
stock, depository share, trust certificate, certificate of deposit or other
evidence of indebtedness on which a portion of or all interest payments, and/or
the principal or stated amount payable at maturity, redemption or retirement, is
determined by reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles or commodities
(collectively "Underlying Assets") or by another objective index, economic
factor or other measure, such as interest rates, currency exchange rates,
commodity indices, and securities indices (collectively "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Portfolio may wish to take advantage of expected declines
in interest rates in several European countries, but avoid the transactions
costs associated with buying and currency-hedging the foreign bond positions.
One solution would be to purchase a U.S. dollar- denominated Hybrid Instrument
whose redemption price is linked to the average three year interest rate in a
designated group of countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was lower than a
specified level, and payoffs of less than par if rates were above the specified
level. Furthermore, the Portfolio could limit the downside risk of the security
by establishing a minimum redemption price so that the principal paid at
maturity could not be below a predetermined minimum level if interest rates were
to rise significantly. The purpose of this arrangement, known as a structured
security with an embedded put option, would be to give the Portfolio the desired
European bond exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no guarantee that the
strategy will be successful and the Portfolio could lose money if, for example,
interest rates do not move as anticipated or credit problems develop with the
issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand for the Underlying Assets and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such 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
10
<PAGE>
latter scenario may result if "leverage" is used to structure the Hybrid
Instrument. Leverage risk occurs when the Hybrid Instrument is structured so
that a given change in a Benchmark or Underlying Asset is multiplied to produce
a greater value change in the Hybrid Instrument, thereby magnifying the risk of
loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
portfolio and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party or issuer of the Hybrid Instrument would be an additional risk
factor which the portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority. The various risks discussed above, particularly the market risk of
such instruments, may in turn cause significant fluctuations in the net asset
value of the Portfolio.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Hedging and Other Strategic
Transactions", an individual Portfolio may be authorized to use a variety of
investment strategies. These strategies will be used for hedging purposes only,
including hedging various market risks (such as interest rates, currency
exchange rates and broad or specific market movements), and managing the
effective maturity or duration of debt instruments held by the Portfolio, (such
investment strategies and transactions are referred to herein as "Hedging and
Other Strategic Transactions"). The description in the Prospectus of each
Portfolio indicates which, if any, of these types of transactions may be used by
the Portfolio.
A detailed discussion of Hedging and Other Strategic Transactions follows
below. No Portfolio which is authorized to use any of these investment
strategies will be obligated, however, to pursue any of such strategies and no
Portfolio makes any representation as to the availability of these techniques at
this time or at any time in the future. In addition, a Portfolio's ability to
pursue certain of these strategies may be limited by the Commodity Exchange Act,
as amended, applicable rules and regulations of the Commodity Futures Trading
Commission ("CFTC") thereunder and the federal income tax requirements
applicable to regulated investment companies which are not operated as commodity
pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging and Other Strategic Transactions
involving options require segregation of Portfolio assets in special accounts,
as described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
A Portfolio's purchase of a put option on a security, for example, might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
of such instrument by giving the Portfolio the right to sell the instrument at
the option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to sell,
the underlying instrument at the exercise price. A Portfolio's purchase of a
call option on a security, financial futures contract, index, currency or other
instrument might be intended to protect the Portfolio against an increase 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
11
<PAGE>
of a put option, the exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option.
A Portfolio's ability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed by
an exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guaranties and security, are determined by
negotiation of the parties. It is anticipated that any Portfolio authorized to
use OTC options will generally only enter into OTC options that have cash
settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Subadviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A
Portfolio will enter into OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers," or broker-dealers, domestic or foreign banks, or other
financial institutions that are deemed creditworthy by the Subadviser. In the
absence of a change in the current position of the staff of the Securities and
Exchange Commission (the "Commission"), OTC options purchased by a Portfolio and
the amount of the Portfolio's obligation pursuant to an OTC option sold by the
Portfolio (the cost of the sell-back plus the in-the-money amount, if any) or
the value of the assets held to cover such options will be deemed illiquid.
If a Portfolio sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments held by the Portfolio or
will increase the Portfolio's income. Similarly, the sale of put options can
also provide Portfolio gains.
If and to the extent authorized to do so, a Portfolio may purchase and sell
call options on securities and on Eurodollar instruments that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Portfolio must be
"covered," that is, the Portfolio must own the securities subject to the call,
must own an offsetting option on a futures position, or must otherwise meet the
asset segregation requirements described below for 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.
12
<PAGE>
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Portfolio may trade financial
futures contracts or purchase or sell put and call options on those contracts as
a hedge against anticipated interest rate, currency or market changes, for
duration management and for permissible non-hedging purposes. Futures contracts
are generally bought and sold on the commodities exchanges on which they are
listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by a Portfolio, as seller,
to deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to certain instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.
A Portfolio's use of financial futures contracts and options thereon will
in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC and generally will be entered
into only for bona fide hedging, risk management (including duration
management). Maintaining a futures contract or selling an option on a futures
contract will typically require a Portfolio to deposit with a financial
intermediary, as security for its obligations, an amount of cash or other
specified assets ("initial margin") that initially is from 1% to 10% of the face
amount of the contract (but may be higher in some circumstances). Additional
cash or assets ("variation margin") may be required to be deposited thereafter
daily as the mark-to-market value of the futures contract fluctuates. The
purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of a
Portfolio. If a Portfolio exercises an option on a futures contract it will be
obligated to post initial margin (and potentially variation margin) for the
resulting futures position just as it would for any futures position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
The value of all futures contracts sold by a Portfolio (adjusted for the
historical volatility relationship between such Portfolio and the contracts)
will not exceed the total market value of the Portfolio's securities. The
segregation requirements with respect to futures contracts and options thereon
are described below under "Use of Segregated and Other Special Accounts."
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
If and to the extent authorized to do so, a Portfolio may purchase and sell
call and put options on securities indices and other financial indices. In so
doing, the Portfolio can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, options on indices
settle by cash settlement; that is, an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments comprising the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
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
13
<PAGE>
position hedging. Transaction hedging is entering into a currency transaction
with respect to specific assets or liabilities of a Portfolio, which will
generally arise in connection with the purchase or sale of the Portfolio's
portfolio securities or the receipt of income from them. Position hedging is
entering into a currency transaction with respect to portfolio securities
positions denominated or generally quoted in that currency. A Portfolio will not
enter into a transaction to hedge currency exposure to an extent greater, after
netting all transactions intended wholly or partially to offset other
transactions, than the aggregate market value (at the time of entering into the
transaction) of the securities held by the Portfolio that are denominated or
generally quoted in or currently convertible into the currency, other than with
respect to proxy hedging as described below.
A Portfolio may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of its securities,
a Portfolio may also engage in proxy hedging. Proxy hedging is often used when
the currency to which a Portfolio's holdings is exposed is difficult to hedge
generally or difficult to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency, the changes in the value of
which are generally considered to be linked to a currency or currencies in which
some or all of a Portfolio's securities are or are expected to be denominated,
and to buy dollars. The amount of the contract would not exceed the market value
of the Portfolio's securities denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a Portfolio enters
into a currency hedging transaction, the Portfolio will comply with the asset
segregation requirements described below under "Use of Segregated and Other
Special Accounts."
COMBINED TRANSACTIONS
If and to the extent authorized to do so, a Portfolio may enter into
multiple transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Other Strategic Transaction, as part of a single or combined strategy when,
in the judgment of the Subadviser, it is in the best interests of the Portfolio
to do so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
will normally be entered into by a Portfolio based on the Subadviser's judgment
that the combined strategies will reduce risk or otherwise more effectively
achieve the desired portfolio management goal, it is possible that the
combination will instead increase the risks or hinder achievement of the
portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Portfolio may be authorized to enter into interest rate, currency and
index swaps, the purchase or sale of related caps, floors and collars and other
derivatives. A Portfolio will enter into these transactions primarily to seek
to preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities a
Portfolio anticipates purchasing at a later date. A Portfolio will use these
transactions for non-speculative purposes and will not sell interest rate caps
or floors if it does not own securities or other instruments providing the
income the Portfolio may be obligated to pay. Interest rate swaps involve the
exchange by a Portfolio with another party of their respective commitments to
pay or receive interest (for example, an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal). A currency
swap is an agreement to exchange cash flows on a 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
14
<PAGE>
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.
The liquidity of swap agreements will be determined by a Subadviser based
on various factors, including (1) the frequency of trades and quotations, (2)
the number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Portfolio's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed to be within the 10% restriction on investments in securities that are
not readily marketable.
Each Portfolio will maintain cash and appropriate liquid assets (i.e., high
grade debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If a Portfolio enters into a swap agreement
on a net basis, it will segregate assets with a daily value at least equal to
the excess, if any, of the Portfolio's accrued obligations under the swap
agreement over the accrued amount the Portfolio is entitled to receive under the
agreement. If a Portfolio enters into a swap agreement on other than a net
basis, it will segregate assets with a value equal to the full amount of the
Portfolio's accrued obligations under the agreement. See "Use of Segregated and
Other Special Accounts."
EURODOLLAR INSTRUMENTS
If and to the extent authorized to do so, a Portfolio may make investments
in Eurodollar instruments, which are typically dollar-denominated futures
contracts or options on those contracts that are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. A Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
MUNICIPAL BOND INDEX FUTURES CONTRACTS
The National Municipal Bond Fund may enter into municipal bond index
futures contracts. A municipal bond index futures contract is an agreement to
take or make delivery of an amount of cash equal to the difference between the
value of the index at the beginning and at the end of the contract period. The
National Municipal Bond Fund may enter into short municipal bond index futures
contracts in anticipation of or during a market decline to attempt to offset the
decrease in market value of securities in its respective portfolio that might
otherwise result. When the Portfolio is not fully invested in securities and
anticipates a significant market advance, it may enter into long municipal bond
index futures contracts in order to gain rapid market exposure that may wholly
or partially offset increases in the costs of securities that it intends to
purchase. In a substantial majority of these transactions, the Portfolio will
purchase such securities upon termination of the futures position but, under
unusual market conditions, a futures position may be terminated without the
corresponding purchase of securities.
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, liquid high
grade debt obligations or other assets with its custodian, or a designated sub-
custodian, to the extent the Portfolio's obligations are not otherwise "covered"
through ownership of the underlying security, financial instrument or currency.
In general, either the full amount of any obligation by a Portfolio to pay or
deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by a Portfolio,
for example, will require the Portfolio to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Portfolio on an index will require the Portfolio to own portfolio
securities that correlate with the index or to segregate liquid high grade debt
obligations equal to the excess of the index value over the exercise price on a
current basis. A put option on securities written by a Portfolio will require
the Portfolio to segregate liquid high grade debt obligations equal to the
exercise price. Except when a Portfolio enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the Portfolio to buy or sell a foreign currency
will generally require the Portfolio to hold an amount of that currency, liquid
securities denominated in that currency equal to a Portfolio's obligations or to
segregate liquid high grade debt obligations equal to the amount of the
Portfolio's obligations.
OTC options entered into by a Portfolio, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although a Portfolio
will not be required to do so. As a result, when a Portfolio sells these
instruments it will segregate an amount of assets equal to its obligations under
the options. OCC-issued and exchange-listed options sold by a Portfolio other
than those described above generally settle with physical delivery, and the
Portfolio will segregate an amount of assets equal to the full value of the
option. OTC options settling with physical delivery or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
16
<PAGE>
In the case of a futures contract or an option on a futures contract, a
Portfolio must deposit initial margin and, in some instances, daily variation
margin in addition to segregating assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of cash,
cash equivalents, liquid high grade debt or equity securities or other
acceptable assets. A Portfolio will accrue the net amount of the excess, if any,
of its obligations relating to swaps over its entitlements with respect to each
swap on a daily basis and will segregate with its custodian, or designated sub-
custodian, an amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to a Portfolio's net
obligation, if any.
Hedging and Other Strategic Transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. A
Portfolio may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding
obligation in related options and Hedging and Other Strategic Transactions. A
Portfolio could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Portfolio. Moreover, instead of segregating assets if it holds a futures
contracts or forward contract, a Portfolio could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Hedging and Other Strategic
Transactions may also be offset in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction, no segregation is
required, but if it terminates prior to that time, assets equal to any remaining
obligation would need to be segregated.
OTHER LIMITATIONS
No Portfolio will maintain open short positions in futures contracts, call
options written on futures contracts, and call options written on securities
indices if, in the aggregate, the current market value of the open positions
exceeds the current market value of that portion of its securities portfolio
being hedged by those futures and options plus or minus the unrealized gain or
loss on those open positions, adjusted for the historical volatility
relationship between that portion of the Portfolio and the contracts (e.g., the
Beta volatility factor). For purposes of the limitation stated in the
immediately preceding sentence, to the extent the Portfolio has written call
options on specific securities in that portion of its portfolio, the value of
those securities will be deducted from the current market value of that portion
of the securities portfolio. If this limitation should be exceeded at any time,
the Portfolio will take prompt action to close out the appropriate number of
open short positions to bring its open futures and options positions within this
limitation.
WARRANT TRANSACTIONS AND RISKS
Subject to certain restrictions described under "INVESTMENT RESTRICTIONS"
below, each of the Portfolios (other than the Money Market Fund) may purchase
warrants, including warrants traded independently of the underlying securities.
Such transactions entail certain risks. Warrants may be considered more
speculative than certain other types of investments in that prior to their
exercise they do not entitle a holder to dividends and voting rights with
respect to the securities which may be purchased by the exercise thereof, nor do
they represent any rights in the assets of the issuing company. Also, the value
of the warrant does not necessarily change with the value of the underlying
security. If a warrant expires unexercised, the Portfolio will lose the amount
paid for the warrant and any transaction costs.
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.
17
<PAGE>
All of the restrictions through restriction (8) are fundamental.
Restrictions (9) through (20) are nonfundamental.
Fundamental
The Fund may not issue senior securities, except to the extent that the
borrowing of money in accordance with restriction (3) may constitute the
issuance of a senior security. (For purposes of this restriction, purchasing
securities on a when-issued or delayed delivery basis and engaging in Hedging
and Other Strategic Transactions will not be deemed to constitute the issuance
of a senior security.) In addition, unless a Portfolio is specifically excepted
by the terms of a restriction, each Portfolio will not:
(1) Invest more than 25% of the value of its total assets in securities of
issuers having their principal activities in any particular industry, excluding
U.S. Government securities and, with respect to the Money Market Fund,
obligations of domestic branches of U.S. banks and with respect to the National
Municipal Bond Fund, obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities or by any state, territory or any possession
of the United States, the District of Columbia, or any of their authorities,
agencies, instrumentalities or political subdivisions, or with respect to
repurchase agreements collateralized by any of such obligations. For purposes
of this restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased by a
Portfolio.
(2) Purchase the securities of any issuer if the purchase would cause more
than 5% of the value of the Portfolio's total assets to be invested in the
securities of any one issuer (excluding U.S. Government securities) or cause
more than 10% of the voting securities of the issuer to be held by the
Portfolio, except that up to 25% of the value of each Portfolio's total assets
may be invested without regard to these restrictions. 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% (10% for the Emerging
Growth Fund) 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 may so invest up to 15%
its net assets.
(10) Purchase any security if as a result the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in securities
of companies (including predecessors) less than three years old.*
18
<PAGE>
(11) Sell securities short or purchase securities on margin except that it
may obtain such short-term credits as may be required to clear transactions.
For purposes of this restriction, collateral arrangements with respect to
Hedging and Other Strategic Transactions will not be deemed to involve the use
of margin.*
(12) Write or purchase options on securities, financial indices or
currencies except to the extent a Portfolio is specifically authorized to engage
in Hedging and Other Strategic Transactions.*
(13) Purchase securities for the purpose of exercising control or
management.*
(14) Purchase securities of other investment companies if the purchase
would cause more than 10% of the value of the Portfolio's total assets to be
invested in investment company securities, provided that (i) no investment will
be made in the securities of any one investment company if immediately after
such investment more than 3% of the outstanding voting securities of such
company would be owned by the Portfolio or more than 5% of the value of the
Portfolio's total assets would be invested in such company and (ii) no
restrictions shall apply to a purchase of investment company securities in
connection with a merger, consolidation or reorganization or in connection with
the investment of collateral received in connection with the lending of
securities in the Navigator Securities Lending Trust. For purposes of this
restriction, privately issued collateralized mortgage obligations will not be
treated as investment company securities if issued by "Exemptive Issuers".
Exemptive Issuers are defined as unmanaged, fixed-asset issuers that (a) invest
primarily in mortgage-backed securities, (b) do not issue redeemable securities
as defined in section 2(a)(32) of the 1940 Act, (c) operate under general
exemptive orders exempting them from "all provisions of the Investment Company
Act of 1940," and (d) are not registered or regulated under the 1940 Act as
investment companies.*
(15) Pledge, hypothecate, mortgage or transfer (except as provided in
restriction (8) as security for indebtedness) any securities held by the
Portfolio, except in an amount of not more than 10% (33 1/3% in the case of the
Equity-Income, 15% in the case of the International Small Cap, Growth Equity and
Balanced Funds) of the value of the Portfolio's total assets and then only to
secure borrowings permitted by restrictions (3) and (11). For purposes of this
restriction, collateral arrangements with respect to Hedging and Other Strategic
Transactions will not be deemed to involve a pledge of assets.*
(16) Invest in securities of any issuer if, to the knowledge of the
Portfolio, any officer or Trustee of the Fund or officer or director of the
Adviser owns more than 1/2 of 1% of the outstanding securities of such issuer,
and such Trustees, officers and directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such issuer.*
(17) Purchase interests in oil, gas or other mineral exploration or
development programs or leases, except that it may acquire the securities of
companies engaged in the production or transmission of oil, gas or other
minerals.*
(18) Purchase warrants if, as a result, the Portfolio would then have more
than 10% of its total net assets (taken at the lower of cost or current value)
invested in warrants, or if more than 5% of the value of the Portfolio's total
net assets would be invested in warrants which are not listed on a recognized
United States or foreign stock exchange, except for warrants included in units
or attached to other securities.*
(19) Purchase securities of foreign issuers, except that (A) the
International Small Cap, Global Equity, International Growth and Income and
Strategic Income Funds may each, without limitation, invest up to 100% of its
assets in securities issued by foreign entities and/or denominated in foreign
currencies, (B) the Balanced and Growth Equity Funds may each invest up to 30%
of its assets in such securities, (C) the Equity-Income Fund may invest up to
25% of its assets in such securities, and (D) each of the other portfolios
(other than the U.S. Government Securities and National Municipal Bond Funds)
may invest up to 20% of its assets in securities issued by foreign entities
and/or denominated in foreign currencies. (In the case of the Small/Mid Cap,
Growth Equity and Balanced Funds, ADRs and U.S. dollar denominated securities
are not included in the percentage limitation.)*
(20) Purchase or sell real estate limited partnership interests.*
In addition to the above policies, the Money Market Fund is subject to
certain restrictions required by Rule 2a-7 under the 1940 Act. In order to
comply with such restrictions, the Money Market Fund will, among other things,
not purchase the securities of any issuer if it would cause (i) more than 5% of
its total assets to be invested in the securities of any one issuer (excluding
U.S. Government securities and repurchase agreements fully collateralized by
U.S. Government securities), except as permitted by Rule 2a-7 for certain
securities for a period of up to three business days after purchase, (ii) more
than 5% of its total assets to be invested in
19
<PAGE>
"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.
___________________
* Does not apply to the Emerging Growth Fund or the Tax-Sensitive Equity
Fund.
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>
11/1/95 11/1/96
TO TO
10/31/96 10/31/97
<S> <C> <C>
Small/Mid Cap 92%**
International Small Cap 67%**
Growth Equity 450%**
Global Equity 165%
Equity-Income 169%
Growth and Income 49%
Balanced 253%
Strategic Income 68%
Investment Quality Bond 56%
U.S. Govt. Securities 477%
National Municipal Bond 49%
International Growth and Income 170%
</TABLE>
*For the period January 9, 1995 (commencement of operations) to October 31,
1995.
**For the period March 4, 1996 (commencement of operations) to October 31, 1996.
Prior rates of portfolio turnover do not provide an accurate guide as to
what the rate will be in any future year, and prior rates and estimated rates
are not a limiting factor when it is deemed appropriate to purchase or sell
securities for a Portfolio. Each Portfolio of the Fund intends to comply with
the various requirements of the Code so as to qualify as a "regulated investment
company" thereunder. One such requirement is that 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.
20
<PAGE>
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 Vice Chairman of the Boston Stock
c/o Cypress Holding Exchange and member of its Board of
Company, Inc. Governors. Retired Executive Vice
125 High Street President of Fidelity Capital Markets, a
Boston, MA 02110 division of National Financial Services
Age: 58 Corporation in 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 Capital
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>
21
<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
c/o Cypress Holding 1996 to date; Financial Analyst with
Company, Inc. Fleet 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.
TRUSTEE COMPENSATION TABLE
22
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================================
AGGREGATE PENSION OR ESTIMATED TOTAL COMPENSATION
TRUSTEE COMPENSATION FROM RETIREMENT ANNUAL FROM REGISTRANT AND
FUND FOR FISCAL YEAR BENEFITS ACCRUED BENEFITS UPON FUND COMPLEX PAID
ENDED OCTOBER 31, AS PART OF FUND RETIREMENT FOR FISCAL YEAR ENDED
1997* EXPENSES FOR OCTOBER 31, 1997*
FISCAL
YEAR ENDED
OCTOBER 31, 1997*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bradford K. Gallagher
- -----------------------------------------------------------------------------------------------------------------------
Don B. Allen
- -----------------------------------------------------------------------------------------------------------------------
William F. Achtmeyer
- -----------------------------------------------------------------------------------------------------------------------
William F. Devin
- -----------------------------------------------------------------------------------------------------------------------
Kenneth J. Lavery
- -----------------------------------------------------------------------------------------------------------------------
Charles L. Bardelis**
- -----------------------------------------------------------------------------------------------------------------------
Samuel Hoar**
- -----------------------------------------------------------------------------------------------------------------------
Robert J. Myers**
- -----------------------------------------------------------------------------------------------------------------------
F. David Rowling**
========================================================================================================================
</TABLE>
*COMPENSATION RECEIVED FOR SERVICES AS TRUSTEE.
**RESIGNED AS A TRUSTEE EFFECTIVE OCTOBER 1, 1997
PRINCIPAL HOLDERS OF SECURITIES
As of October 14, 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 1,823,323.861 shares 468,529.860 shares
Springhouse Corporate Center II 25% 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
466,049.129 shares 169,416.463 shares
30% of the fund class 25% of the fund class
- ----------------------------------------------------------------------------------------------------------
Equity Income Fund Balanced Fund
Class A Shares Class A Shares
499,044.938 shares 474,094.823 shares
24% of the fund class 48% of the fund class
- ----------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund
Class A Shares
408,801.371 shares
7% of the fund class
- ----------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
RECORD OR
BENEFICIAL OWNER PORTFOLIOS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Concord-Diablo Federal Credit Union Money Market Fund
1855 Second Street Class A Shares
Concord, CA 94519-2623 1,079,627.800 shares
15% 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 598,026.760 shares 29,130.628 shares
Palatine, Illinois 60067-7545 9% 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 19,906.251 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 411,160.507 shares
Englewood, California 80155-6580 6% 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 17% 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 549,608.528 shares
28% 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 11,310.171 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- 222,386.223 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. Keilar 30,903.158 shares
and Tammy Keilar JT WROS 5% of the fund class
2251 NW 4th Avenue
Boca Raton, Florida 33431-7434
- -------------------------------------------------------------------------------------------------------
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 91,996.466 shares
17% of the fund class
- -------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
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 TSEF and the EGF which are dated [ ] and were
approved [ ]. 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 Counselors, Inc. were approved by the Trustees on [ ]
in conjunction with the addition of the Tax-Sensitive Equity Fund and Emerging
Growth Fund portfolios.
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 [ ]
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*
International Small Cap NA 47,966*
Growth Equity NA 40,762*
Global Equity $1,185,949 1,174,747
Equity-Income $ 758,694 936,036
Growth and Income $ 521,769 784,990
International Growth and Income $ 102,022** 236,517
Strategic Income $ 195,046 415,019
Investment Quality Bond $ 99,260 127,602
U.S. Government $ 661,449 693,407
National Municipal Bond $ 68,638 121,407
Money Market $ 44,306 38,258
Balanced $ 687,562 718,609
</TABLE>
*For the period March 4, 1996 (commencement of operations) to October 31, 1996.
**For the period January 9, 1995 (commencement of operations) to October 31,
1995.
For information concerning waivers of advisory fees and expense
reimbursements, see note [ ] 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 [ ] respectively. The amounts
represented by each of the Portfolios are as follows:
25
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO 11/1/94 TO 10/31/95 11/1/94 TO 10/31/95 11/1/95 TO 10/3/196
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap N/A $ 36,022*
International Small Cap N/A $ 29,693*
Growth Equity N/A $ 22,646*
Global Equity $724,749 $709,960
Equity-Income $323,912 $396,204
Growth and Income $227,367 $334,666
International Growth and **$56,679 $131,398
Income
Strategic Income #$91,022 $192,079
Investment Quality Bond $ 37,223 $ 47,851
U.S. Government $248,043 $260,027
National Municipal Bond $ 40,125 $ 50,586
Money Market $ 16,615 $ 14,347
Balanced $294,932 $307,622
</TABLE>
*For the period March 4, 1996 (commencement of operations) to October 31, 1996.
**For the period January 9, 1995 (commencement of operations) to October 31,
1995.
#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 of the portion of the assets of the Strategic Income
Fund that SBAM Limited has been delegated to manage divided by the current value
of the net assets of the Portfolio. The Fund will not incur any additional
expenses in connection with SBAM Limited's services. SBAM Limited is a wholly
owned subsidiary of Salomon Brothers Europe Limited ("SBEL"). Salomon
(International) Finance A G ("SIF") owns 100% of SBEL's Convertible Redeemable
Preference Shares and 36.8% of SBEL's Ordinary Shares, while the remaining 63.2%
of SBEL's Ordinary Shares are owned by Salomon Brothers Holding Company Inc
("SBH"). SIF is wholly owned by SBH, which is in turn, a wholly owned
subsidiary of Salomon Inc.
For the year ended October 31, 1997 the net investment advisory fees
retained by the Adviser after payment of subadvisory fees was [ ],
allocated among the portfolios as follows:
Dollar Amount Annual Percentage of
------------- ---------------------
Portfolio Net Assets
--------------------
Small/Mid Cap Fund*
International Small Cap Fund*
Growth Equity Fund*
26
<PAGE>
Global 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 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 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
27
<PAGE>
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 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
28
<PAGE>
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
[ ] comprised of:
$ from the Small/Mid Cap Fund*,
$ from the International Small Cap Fund*,
$ from the Growth Equity Fund*,
$ from the Global Equity Fund,
$ from the Equity-Income Fund,
$ from the Growth and Income Fund,
$ from the Strategic Income Fund,
$ from the Balanced Fund,
$ from the Investment Quality Bond Fund,
$ from the U.S. Government Securities Fund,
$ from the International Growth and Income Fund, and
$ from the National Municipal Bond Fund.
Of the total, [ ] as paid by the Distributor to Wood Logan for
providing promotional and shareholder services. Of this latter amount,
approximately [ ]% was spent for sales literature and printing prospectuses
for other than current shareholders, [ ]% represented allocated overhead
expenses of Wood Logan and [ ]% 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, [ ] of
the total distribution fees for Class A were paid to securities dealers,
comprised of:
$ from the Small/Mid Cap Fund,
$ from the International Small Cap Fund,
$ from the Growth Equity Fund,
$ from the Global Equity Fund,
29
<PAGE>
$ from the Equity-Income Fund,
$ from the Growth and Income Fund,
$ from the Strategic Income Fund,
$ from the Balanced Fund,
$ from the Investment Quality Bond Fund
$ from the U.S. Government Securities Fund
$ from the International Growth and Income Fund and
$ 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
[ ] comprised of:
$ from the Small/Mid Cap Fund*,
$ from the International Small Cap Fund*,
$ from the Growth Equity Fund*,
$ from the Global Equity Fund,
$ from the Equity-Income Fund,
$ from the Growth and Income Fund,
$ from the Strategic Income Fund,
$ from the Balanced Fund,
$ from the Investment Quality Bond Fund,
$ from the U.S. Government Securities Fund,
$ from the International Growth and Income Fund and
$ from the National Municipal Bond Fund.
Of the total, [ ] was paid by the Distributor to Wood Logan for
providing promotional and shareholder services. Of this latter amount,
approximately [ ]% was spent for sales literature and printing prospectuses
for other than current shareholders, [ ]% represented allocated overhead
expenses of Wood Logan and [ ]% represented allocated compensation of
personnel of Wood Logan. The balance of the fees were, in accordance with the
Class B Plan, retained by the Distributor and used to fund shareholder
servicing, promotional activities and expenses. In addition, $[ ] of the
total distribution fees for Class B were paid to securities dealers, comprised
of:
$ from the Small/Mid Cap Fund,
$ from the International Small Cap Fund,
$ from the Growth Equity Fund,
$ from the Global Equity Fund,
$ from the Equity-Income Fund,
$ from the Growth and Income Fund,
$ from the Strategic Income Fund,
$ from the Balanced Fund,
$ from the Investment Quality Bond Fund,
$ from the U.S. Government Securities Fund,
$ from the International Growth and Income Fund and
$ 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
[ ], comprised of:
$ from the Small/Mid Cap Fund*,
$ from the International Small Cap Fund*,
$ from the Growth Equity Fund*,
$ from the Global Equity Fund,
$ from the Equity-Income Fund,
$ from the Growth and Income Fund,
$ from the Strategic Income Fund,
$ from the Balanced Fund,
$ from the Investment Quality Bond Fund,
30
<PAGE>
$ from the U.S. Government Securities Fund,
$ from the International Growth and Income Fund and
$ from the National Municipal Bond Fund.
Of the total, [ ] was paid by the Distributor to Wood Logan for
providing promotional and shareholder services. Of this latter amount,
approximately [ ]% was spent for sales literature and printing
prospectuses for other than current shareholders, [ ]% represented allocated
overhead expenses of Wood Logan and [ ]% 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, [
] of the total distribution fees for Class C were paid to securities dealers,
comprised of:
$ from the Small/Mid Cap Fund,
$ from the International Small Cap Fund,
$ from the Growth Equity Fund,
$ from the Global Equity Fund,
$ from the Equity-Income Fund,
$ from the Growth and Income Fund,
$ from the Strategic Income Fund,
$ from the Balanced Fund,
$ from the Investment Quality Bond Fund,
$ from the U.S. Government Securities Fund,
$ from the International Growth and Income Fund and
$ 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 [
], 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
International Small Cap NA *$47,504
Growth Equity NA *$51,483
Global Equity $172,487 $ 93,621
Equity-Income $138,334 $137,617
Growth and Income $123,745 $141,037
International Growth and Income **$100,890 $ 64,345
Strategic Income $ 65,693 $114,585
Investment Quality Bond $ 19,367 $ 23,097
U.S. Government $223,721 $218,181
National Municipal Bond $ 31,612 $ 32,640
Balanced $ 84,841 $ 44,656
</TABLE>
*For the period March 4, 1996 (commencement of operations) to October 31, 1996.
31
<PAGE>
**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 [ ], 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 size of the
transaction; the desired timing of the trade; the activity existing and expected
in the market for the particular security; confidentiality; the financial
stability of the brokers under consideration; actual or apparent operational
problems of any broker under consideration; and the negotiated commission rates
available at the time of the trade. The Subadvisers may also consider the
willingness of particular brokers to sell shares of the Fund and difficulty of
execution.
The Subadvisers also consider the nature and extent of research services
provided when they select brokers. Assuming equal execution capabilities as
described above, the Subadvisers may direct commission business to brokers who
provide research services. Such services include, but are not limited to:
analyses and reports concerning economic factors and trends, industries,
specific securities, portfolio strategy, and valuation and performance of
accounts; advice regarding critical factors supporting research recommendations
and special reports or information based on the specific requests of a
Subadviser's portfolio manager/analysts. The Subadvisers may also from time to
time obtain research services prepared by third parties and provided by brokers
in exchange for a predetermined amount of commission business. These services
include portfolio monitoring, analysis and performance measurement systems,
various economic forecasting and research services covering stocks and bonds,
research and trading conferences, and a source of information as to block
trading opportunities. Some third party arrangements are cancelable at any time
while others require notice. Such third party arrangements do not involve a
substantial amount of the Subadvisers' commission business on behalf of clients.
In accordance with industry practice, commission rates are normally
determined through negotiations with brokers conducted by the Subadvisers'
traders. These negotiations take into account industry norms for particular
transactions, the size and type of trades, the size and expertise of the
brokerage firm involved and the nature of brokerage and research services
provided, including special services in connection with a particular trade.
(Such special services could include, among other things, the assumption of
market risk in connection with a trade or series of trades or the facilitation
of trades in a thin or volatile market.) Commission rates paid by the
Subadvisers in those cases may be higher than those charged by brokers for
execution of similar trades without the provision of research and/or special
services.
No precise monetary value can be assigned to research and special execution
services furnished to the Subadvisers by brokers. The Subadvisers will review
all research services and will determine if the amounts of commissions directed
to brokers are reasonable in relation to the value of the brokerage and research
services provided, viewed in terms of both particular transactions 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.
32
<PAGE>
Research services furnished by brokers will generally be used in servicing
all of the Portfolios of the Fund advised by a Subadviser, although not all of
such services may be used in connection with any particular Portfolio that paid
commissions to the brokers providing such services.
The Subadvisers' practices in selecting brokers will be reviewed
periodically by the Trustees of the Fund.
The Subadvisers and/or their affiliates currently manage portfolios and
accounts other than those of the Fund. Although investment recommendations or
determinations for the Fund's Portfolios will be made by the Subadvisers
independently from the investment recommendations and determinations made by
them for any other portfolio or account or by the Subadvisers' affiliates for
the portfolios or accounts they manage, investments deemed appropriate for the
Fund's Portfolios by the Subadvisers may also be deemed appropriate by them or
affiliated advisers for other portfolios or accounts, so that the same security
may be purchased or sold at or about the same time for both the Fund's
Portfolios and such other portfolios or accounts. In such circumstances, the
Subadvisers may determine that orders for the purchase or sale of the same
security for the Fund's Portfolios and one or more other portfolios or accounts
should be combined, in which event the transactions will be priced and allocated
in a manner deemed by the Subadvisers to be equitable and in the best interests
of the Fund's Portfolios and such other portfolios or accounts. While in some
instances combined orders could adversely affect the price or volume of a
security, the Subadvisers and the Fund believe that its participation in such
transactions on balance will produce better overall results for the Fund.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Fund paid
brokerage commissions in connection with portfolio transactions of $1,039,631,
$1,768,058, and [ ], respectively. The amounts represented by each of
the Portfolios are as follows:
<TABLE>
<CAPTION>
PORTFOLIO 11/1/94 TO 10/31/95 11/1/95 TO 10/31/96 11/1/96 TO 10/31/97
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small/Mid Cap N/A *****$ 24,367
International Small Cap N/A *****$ 47,513
Growth Equity N/A *****$ 65,354
Global Equity* $509,668 $542,895
Equity-Income** $211,194 $605,408
Growth and Income $ 97,836 $141,134
International Growth and Income ***$ 12,558 $173,403
Balanced**** $208,375 $167,984
</TABLE>
* Formerly known as the Global Growth Fund.
**Formerly known as the Value Equity Fund and prior thereto the Growth Fund
*** For the period January 9, 1995 (commencement of operations) to October 31,
1995.
****Formerly known as the Asset Allocation Fund.
***** For the period March 4, 1996 (commencement of operations) to October 31,
1996.
Salomon Brothers Inc ("Salomon"), 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.
From November 1, 1994 to October 31, 1995, brokerage commission were paid to
Goldman, Sachs & Co. as follows:
- ---------------------
<TABLE>
<CAPTION>
PORTFOLIO 11/1/94 TO 10/31/95 % OF PORTFOLIO'S % OF AGGREGATE
BROKERAGE $ AMOUNT OF
COMMISSIONS TRANSACTIONS
REPRESENTED FOR FOR THE PERIOD
THE PERIOD
<S> <C> <C> <C>
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C> <C>
Global Equity $ 4,137 0.81% 0.67%
Equity-Income $23,638 11.19% 0.27%
Balanced $16,464 7.90% 0.26%
International Growth and Income* $ 1,690 13.46% 1.97%
Growth and Income $ 4,086 4.18% 0.36%
</TABLE>
*For the period January 9, 1995 (commencement of operations) to October 31, 1995
From November 1, 1995 to October 31, 1996, brokerage commissions were paid to
Goldman, Sachs & Co. as follows:
- -------------------
<TABLE>
<CAPTION>
PORTFOLIO 11/1/95 TO 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 and $ 1,744 1.01% 1.79%
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 % OF AGGREGATE
PORTFOLIO'S $ AMOUNT OF TRANSACTIONS
BROKERAGE FOR THE PERIOD
COMMISSIONS
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>
34
<PAGE>
From November 1, 1995 to October 31, 1996, brokerage commissions were paid
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>
From November 1, 1996 to October 31, 1997, brokerage commissions were paid to
Salomon Brothers Inc as follows:
- --------------------
<TABLE>
<CAPTION>
PORTFOLIO 11/1/96 TO 10/31/97 % OF PORTFOLIO'S BROKERAGE % OF AGGREGATE $
COMMISSIONS REPRESENTED AMOUNT OF
FOR THE PERIOD TRANSACTIONS FOR THE
PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity
Equity-Income
Growth & Income
Balanced
Investment Quality Bond
U.S. Government
Money Market
</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
OR 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>
35
<PAGE>
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
OR 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:
- ---------------------
<TABLE>
<CAPTION>
PORTFOLIO 1/9/96 TO 10/31/97 % OF PORTFOLIO'S BROKERAGE % OF AGGREGATE $
COMMISSIONS REPRESENTED AMOUNT OF
FOR THE PERIOD TRANSACTIONS FOR THE
PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity
Equity-Income
Growth & Income
Balanced
</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
36
<PAGE>
recognized statistical rating organization in one of the two highest rating
categories for short-term debt obligations or be of comparable quality. The
Money Market Fund will invest only in obligations that have remaining maturities
of 397 days or less.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, the Money Market Fund's price per share (for each
class) as computed for the purposes of sales and redemptions at $1.00. Such
procedures include a directive to the Adviser to establish procedures which will
allow for the monitoring of the propriety of the continued use of amortized cost
valuation to maintain a constant net asset value of $1.00 per share. Such
procedures also include a directive to the Adviser that requires that on
determining net asset value per share based upon available market quotations,
the Money Market Fund shall value weekly (a) all portfolio instruments for which
market quotations are readily available at market, and (b) all portfolio
instruments for which market quotations are not readily available or are not
obtainable from a pricing service, at their fair value as determined in good
faith by the Trustees, although the actual calculations may be made by persons
acting pursuant to the direction of the Trustees. If the fair value of a
security needs to be determined, the Subadviser will provide determinations, in
accordance with procedures and methods established by the Trustees of the Fund,
of the fair value of securities held by the Portfolios for which market
quotations are not readily available for purposes of enabling the Portfolio's
Custodian to calculate net asset value. The Adviser, with the Subadviser's
assistance, periodically (but no less frequently than annually) shall prepare a
written report to the Trustees verifying the accuracy of the pricing system or
estimate. A non-negotiable security which is not treated as an illiquid
security because it may be redeemed with the issuer, subject to a penalty for
early redemption, shall be assigned a value that takes into account the reduced
amount that would be received if it were currently liquidated. In the event
that the deviation from the amortized cost exceeds .50 of 1% or more or a
difference of $.005 per share in net asset value, the Adviser shall promptly
call a special meeting of the Trustees to determine what, if any, action should
be initiated. Where the Trustees believe the extent of any deviation from the
Fund's amortized cost price per share may result in material dilution or other
unfair results to investors or existing shareholders, it shall take such action
as it deems appropriate to eliminate or reduce to the extent reasonably
practical such dilution or unfair results. The actions that may be taken by the
Board include, but are not limited to: (a) redeeming shares in kind; (b) selling
portfolio instruments prior to maturity to realize capital gains or losses or to
shorten the average portfolio maturity of the Portfolio; (c) withholding or
reducing dividends;(d) utilizing a net asset value per share based on available
market quotations; and (e)investing all cash in instruments with a maturity on
the next business day.
PERFORMANCE INFORMATION
As indicated in the Prospectus, the Fund may advertise its yield and/or total
return performance for all classes of shares of one or more of the Portfolios,
calculated in accordance with the rules of the Commission. Such performance
information may include time periods prior to the implementation of the Multiple
Pricing System on April 1, 1994, and will be calculated as described below. For
purposes of quoting and comparing the performance of the classes of the
Portfolios to that of other mutual funds and to stock or other relevant indices
in advertisements or in reports to shareholders, performance will be stated in
terms of total return and yield. Both "total return" and "yield" figures are
based on historical performance, show the performance of a hypothetical
investment and are not intended to indicate future performance.
Under the rules of the Commission, funds advertising performance must include
total return quotes, "T" below, calculated according to the following formula:
P(1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the "n" year period (or fractional portion
thereof) at the end of such period.
The average annual total return will be calculated under the foregoing
formula and the time periods used in advertising will be based on rolling
calendar quarters, updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover one, five, and ten
year periods (if available) plus the time period since the effective date of the
Fund's
37
<PAGE>
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 .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 (03-04-96)*
International Small Cap (03-04-96)*
Growth Equity (03-04-96)*
Global Equity (11-07-90)
Equity-Income (08-28-89)
Growth & Income (05-01-91)
International Growth and Income (01-09-95)
Strategic Income (11-01-93)
Balanced (08-28-89)
Investment Quality Bond (05-01-91)
U.S. Government Securities (08-28-89)
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
National Municipal Bond (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 (03-04-96)*
International Small Cap (03-04-96)*
Growth Equity (03-04-96)*
Global Equity (11-07-90)
Equity-Income (08-28-89)
Growth & Income (05-01-91)
International Growth and Income (01-09-95)
Strategic Income (11-01-93)
Balanced (08-28-89)
Investment Quality Bond (05-01-91)
U.S. Government Securities (08-28-89)
National Municipal Bond (07-06-93)
</TABLE>
*Aggregate total return from March 4, 1996 (commencement of operations) to
October 31, 1997.
<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 (03-04-96)*
International Small Cap (03-04-96)*
Growth Equity (03-04-96)*
Global Equity (11-07-90)
Equity-Income (08-28-89)
Growth & Income (05-01-91)
International Growth and Income (01-09-95)
Strategic Income (11-01-93)
Balanced (08-28-89)
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
Investment Quality Bond (05-01-91)
U.S. Government Securities (08-28-89)
National Municipal Bond (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.
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 [ ]%,[ ]% and [ ]%, 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 [ ]%,[ ]% and [ ]%,
respectively. The yields for Classes A, B and C of the Strategic Income Fund
for the thirty day period ended October 31, 1997 were [ ]%,[ ]%
and [ ]%, 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
40
<PAGE>
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 [ ]%,[ ]% and [
]%, 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 [ ]%,
[ ]% and [ ]%, 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 [ ]%,[ ]% and [ ]%, respectively.
Yield and total return are calculated separately for each class of shares
of a Portfolio. As discussed above, these calculations adjust for the different
front end sales charges and CDSCs currently payable with respect to each class,
and are based on distribution and service fees and other expenses actually paid
by each Portfolio for the periods presented.
The Fund may also from time to time include in such advertising a total
aggregate return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare
performance more accurately with other measures of investment return. Each
class of a Portfolio may quote an aggregate total return figure in comparing
total return with data published by Lipper Analytical Services, Inc. or with the
performance of various indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Value Line
Composite Index, the Lehman Brothers Bond, Government Corporate, Corporate and
Aggregate Indices, Merrill Lynch Government & Agency Index, Merrill Lynch
Intermediate Agency Index, Morgan Stanley Capital International Europe,
Australia, Far East Index or the Morgan Stanley Capital International World
Index. For such purposes, aggregate total return is calculated for the
specified periods of time by assuming the investment of $1,000 in shares of a
class of a Portfolio and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. The Fund
does not, for these purposes, deduct from the initial value invested any amount
representing front end sales charges or CDSCs applicable to a class. To
calculate its average annual total return, the aggregate return is then
annualized according to the Commission's formula for total return quotes,
outlined above. When the period since inception is less than one year, the
total return quoted will be the aggregate return for the period. The Fund will,
however, disclose the maximum front end sales charge or CDSC applicable to each
class and will also disclose that the performance data does not reflect sales
charges and that the inclusion of sales charges would reduce the performance
quoted. Such alternative total return information will be given no greater
prominence in such advertising than the information prescribed under Commission
rules and all advertisements containing performance data will include a legend
disclosing that such performance data represent past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The Fund may also advertise the performance rankings assigned certain
Portfolios (or classes thereof) or their investment subadvisers by various
publications and statistical services, including but not limited to SEI, Lipper
Analytical Services, Inc.'s Mutual Fund Performance Analysis, Intersec Research
Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
and any other data which may be presented from time to time by such analysis as
Dow Jones, Morningstar, Chase Investment Performance, Wilson Associates,
Stanger, CDA Investment Technology, the Consumer Price Index ("CPI"), The Bank
Rate Monitor National Index, IBC/Donaghue's Average/U.S. Government and Agency,
or as they appear in various publications including but not limited to The Wall
Street Journal, Forbes, Barrons, Fortune, Money Magazine, The New York Times,
Financial World and Financial Services Week.
Calculated in the manner set forth immediately above, the average annual
total returns for each class of each Portfolio for the one and five year periods
ended October 31, 1997 and since inception to October 31, 1997 are as
follows:
41
<PAGE>
<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 (03-04-96)
International Small Cap (03-04-96)
Growth Equity (03-04-96)
Global Equity (11-07-90)
Equity-Income (08-28-89)
Growth & Income (05-01-91)
International Growth and Income (01-09-95)
Strategic Income (11-01-93)
Balanced (08-28-89)
Investment Quality Bond (05-01-91)
U.S. Government Securities (08-28-89)
National Municipal Bond (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 (03-04-96)
International Small Cap (03-04-96)
Growth Equity (03-04-96)
Global Equity (11-07-90)
Equity-Income (08-28-89)
Growth & Income (05-01-91)
International Growth and Income (01-09-95)
Strategic Income (11-01-93)
Balanced (08-28-89)
Investment Quality Bond (05-01-91)
U.S. Government Securities (08-28-89)
National Municipal Bond (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 (03-04-96)*
International Small Cap (03-04-96)*
Growth Equity (03-04-96)*
Global Equity (11-07-90)
Equity-Income (08-28-89)
Growth & Income (05-01-91)
</TABLE>
42
<PAGE>
<TABLE>
<S> <C>
International Growth and Income (01-09-95)
Strategic Income (11-01-93)
Balanced (08-28-89)
Investment Quality Bond (05-01-91)
U.S. Government Securities (08-28-89)
National Municipal Bond (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 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.
43
<PAGE>
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) 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
44
<PAGE>
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.
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
45
<PAGE>
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.
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
46
<PAGE>
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. 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.
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.
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.
47
<PAGE>
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.
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.
48
<PAGE>
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.
GROWTH EQUITY FUND. The investment objective of the Growth Equity Fund is
to seek long-term growth of capital. Founders manages the Growth Equity Fund and
will pursue this objective by investing at least 65% of its assets in common
stocks of well-established, high-quality growth companies. These companies tend
to have strong performance records, solid market positions and reasonable
financial strength, and have continuous operating records of three years or
more. The Portfolio may also invest up to 30% of its assets in foreign
securities, with no more than 25% invested in any one foreign country.
The Growth Equity Fund may invest in convertible securities, preferred
stocks, bonds, debentures and other corporate obligations when Founders believes
that these investments offer opportunities for capital appreciation. Current
income will not be a substantial factor in the selection of these securities.
The Portfolio will only invest in bonds, debentures and corporate obligations--
other than convertible securities and preferred stock--rated investment-grade
(BBB or higher by Moody's and Baa or higher by S&P) or, if unrated, of
comparable 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
49
<PAGE>
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 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.
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,
50
<PAGE>
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 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.
51
<PAGE>
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.
TAXABLE EQUIVALENT YIELDS [TO BE UPDATED]
<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
52
<PAGE>
example, matters pertaining to the plan of distribution relating to Class A
shares will only be voted on by Class A shares). Matters required by the 1940
Act to be voted upon by each affected series include changes to (i) the Advisory
Agreement, (ii) a Subadvisory Agreement and (iii) the fundamental investment
objectives and policies.
Shares of each class of a Portfolio represent interests in that Portfolio
in proportion to each share's net asset value. Certain operating expenses which
are specifically allocable to a class of a Portfolio may be so allocated by the
Trustees. Upon the Fund's liquidation, all shareholders of a class would share
pro rata in the net assets of that class available for distribution to
shareholders of the Portfolio, but, as shareholders of such class of such
Portfolio, would not be entitled to share in the distribution of assets
belonging to any other class or Portfolio. As of the date of this Statement of
Additional Information, the Trustees have designated thirty-two Portfolios of
the Fund and three classes of Shares in each Portfolio: Class A, Class B and
Class C shares.
Certificates representing shares are issued only upon written request to
the Fund.
REDEMPTION IN KIND
Although it is each of the Portfolios' present policy to make payment of
redemption proceeds in cash, if the Trustees determine it appropriate,
redemption proceeds may be paid in whole or in part by a distribution in kind of
marketable securities held by that Portfolio subject to the limitation that each
Portfolio is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Portfolio during any 90-day period
for any one account. If a redemption in kind is made, a shareholder might be
required to bear transaction costs, including brokerage commissions, to dispose
of such securities. The Fund will endeavor to only distribute securities for
which there is an active trading market.
REPURCHASE OF SHARES
The Distributor is authorized to repurchase Portfolio shares through
certain securities dealers who have entered into dealer agreements with the
Distributor. The offer to repurchase may be suspended by the Distributor at any
time. Dealers may charge for their services in connection with a repurchase, but
neither the Fund nor the Distributor makes any such charge. Repurchase
arrangements differ from redemptions in that the dealer buys the shares as
principal from his customer in lieu of tendering shares to the Fund for
redemption as agent for the customer. The proceeds to the shareholder will be
the net asset value of the shares repurchased as next determined after receipt
of the repurchase order by the dealer. By a repurchase, the customer should be
able to receive the sale proceeds from the dealer more quickly. Shareholders
should contact their dealers for further information as to how to effect a
repurchase and the dealer's charges applicable thereto.
PAYMENT FOR THE SHARES PRESENTED
Payment for shares presented for redemption will be based on the net asset
value of the applicable class of the applicable Portfolio next computed after a
request is received in proper form at the Transfer Agent's office. As described
in the Prospectus under the caption "PURCHASE OF SHARES -- Class B Shares",
certain redemptions of Class A, B and C shares may be subject to a CDSC, which
will be deducted from the redemption proceeds. Payment proceeds will be mailed
within seven days following receipt of all required documents. However, payment
may be postponed or the right of redemption suspended (i) for any period during
which the New York Stock Exchange is closed for other than customary weekend and
holiday closing or during which trading on the New York Stock Exchange is
restricted; (ii) for any period during which an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets; or (iii) for such other periods as the Commission
may by order permit for the protection of shareholders, provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions described in (i) and (ii) exist. Payment of proceeds may also be
delayed if the shares to be redeemed or repurchased were purchased by check and
that check has not cleared (which may be up to 15 days or more).
TRANSFER AGENT
State Street Bank and Trust Company acts as the Fund's transfer agent,
provides shareholder services and acts as dividend disbursing and redemption
agent. Its mailing address is P.O. Box 8505, Boston, Massachusetts 02266-8505.
State Street Bank and Trust Company also serves as the custodian for all
Portfolios of the Fund.
REPORTS TO SHAREHOLDERS
53
<PAGE>
[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. ]
54
<PAGE>
Item 24. Financial Statements and Exhibits
---------------------------------
(a) None
(b) Exhibits
(1) (a) Agreement and Declaration of Trust dated September 28, 1988 --
previously filed as Exhibit (b)(1) to North American Security
Trust's initial registration statement on Form N-1A (File No. 33-
27958) dated April 5, 1989.
(1) (b) Amended and Restated Agreement and Declaration of Trust dated
June 1, 1993 -- previously filed as Exhibit (b)(1)(b) to North
American Funds' Post-Effective Amendment No. 13 on Form N-1A
(File No. 33-27958) dated June 1, 1993.
(1) (c) Amended and Restated Agreement and Declaration of Trust dated
February 18, 1994 -- 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.
(1) (d) Declaration of Trust Amendment -- Establishment and Designation
of Additional Series of Shares for the International Growth and
Income Fund, dated December 28, 1994 -- 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.
(1) (e) 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.
(1) (f) Declaration of Trust Amendment - Establishment and Designation of
Additional Series of Shares for the Growth Equity, International
Small Cap, and Small/Mid Cap Funds dated February 28, 1996. --
previously filed as Exhibit (b)(1)(f) to North American Funds'
Post-Effective Amendment No. 25 on Form N-1A dated December 30,
1996.
(1) (g) 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'
1
<PAGE>
Post-Effective Amendment No. 25 on Form N-1A dated December 30,
1996.
(1) (h) Declaration of Trust Amendment - Redesignation of Series of
Shares of Beneficial Interest known as the Global Growth Fund and
the Asset Allocation Fund dated October 1, 1996. -- previously
filed as Exhibit (b)(1)(h) to North American Funds' Post-
Effective Amendment No. 25 on Form N-1A dated December 30,
1996.
(2) By-laws of North American Security Trust -- previously filed as
Exhibit (b)(2) to North American Security Trust's initial registration
statement on Form N-1A (File No. 33-27958) dated April 5, 1989.
(3) Not applicable.
(4) (a) Specimen Share Certificate for Global Growth Trust -- previously
filed as Exhibit No. (b)(4)(a) to North American Security Trust's
Post-Effective Amendment No. 3 on Form N-1A (File No. 33-27958)
dated February 1, 1991.
(b) Specimen Share Certificate for Growth Trust -- previously filed
as Exhibit (b)(4)(a) to North American Security Trust's Post-
Effective Amendment No. 1 on Form N-1A (File No. 33-27958) dated
December 29, 1989.
(c) Specimen Share Certificate for Growth and Income Trust --
previously filed as Exhibit (b)(4)(c) to North American Security
Trust's Post-Effective Amendment No. 4 on Form N-1A (File No. 33-
27958) dated February 22, 1991.
(d) Specimen Share Certificate for Investment Quality Bond Trust
previously filed as Exhibit (b)(4)(d) to North American Security
Trust's Post-Effective Amendment No. 6 on Form N-1A (File No. 33-
27958) dated April 22, 1991.
(e) Specimen Share Certificate for U.S. Government Securities Trust
-- previously filed as Exhibit (b)(4)(b) to North American
Security Trust's Post-Effective Amendment No. 1 on Form N-1A
(File No. 33-27958) dated December 29, 1989.
(f) Specimen Share Certificate for Money Market Trust -- previously
filed as Exhibit (b)(4)(c) to North American Security Trust's
Post-Effective Amendment No. 1 on Form N-1A (File No. 33-27958)
dated December 29, 1989.
2
<PAGE>
(g) Specimen Share Certificate for Asset Allocation Trust --
previously filed as Exhibit (b)(4)(g) to North American Security
Trust's Post-Effective Amendment No. 8 on Form N-1A (File No. 33-
27958) dated May 12, 1992.
(h) Forms of Specimen Share Certificates for Strategic Income Fund,
National Municipal Bond Fund, California Municipal Bond Fund,
Global Growth Fund, Growth Fund, Growth and Income Fund, U.S.
Government Securities Fund, Money Market Fund and Asset
Allocation Fund -- previously filed as Exhibit (b)(4)(h) to North
American Funds' Post-Effective Amendment No. 13 on Form N-1A
(File No. 33-27958) dated June 30, 1993.
(i) Forms of Specimen Share Certificates: for Strategic Income Fund -
A, Investment Quality Bond Fund - A, National Municipal Bond
Fund - A, California Municipal Bond Fund - A, Global Growth
Fund - A, Growth Fund -A, Growth and Income Fund - A, U.S.
Government Securities Fund - A, Money Market Fund - A, Asset
Allocation Fund -A; for Strategic Income Fund - B, Investment
Quality Bond Fund -B, National Municipal Bond Fund - B,
California Municipal Bond Fund -B, Global Growth Fund - B, Growth
Fund - B, Growth and Income Fund - B, U.S. Government Securities
Fund - B, Money Market Fund -B, Asset Allocation Fund - B; for
Strategic Income Fund - C, Investment Quality Bond Fund - C,
National Municipal Bond Fund - C, California Municipal Bond
Fund - C, Global Growth Fund - C, Growth Fund -C, Growth and
Income Fund - C, U.S. Government Securities Fund - C, Money
Market Fund - C, and Asset Allocation Fund - C --previously
filed as Exhibit (b)(4)(i) to North American Funds'
Post-Effective Amendment No. 17 on Form N-1A (File No. 33-27958)
dated April 1, 1994.
(j) Forms of Specimen Share Certificates for International Growth and
Income Fund: A, B, C and D -- previously filed as Exhibit
(b)(4)(j) to North American Funds' Post-Effective Amendment No.
18 on Form N-1A (File No. 33-27958) dated October 20, 1994.
(k) Forms of Specimen Share Certificates, for the Small/Mid Cap, the
International Small Cap and the Growth Equity Fund - A, B and C.
-- previously filed as Exhibit (b)(4)(k) to North American Funds
Post effective Amendment No. 21 on Form N1-A (File No. 33-27958)
dated December 15, 1995.
3
<PAGE>
(5) (a) Advisory Agreement dated October 1, 1997 between North American
Funds and CypressTree Asset Management Corporation, Inc. -- filed
herewith.
(b) Subadvisory Agreement Between CypressTree Asset Management
Corporation, Inc. and Wellington Management Company dated October
1, 1997 -- filed herewith.
(c) Subadvisory Agreement Between CypressTree Asset Management
Corporation, Inc. and Salomon Brothers Asset Management Inc dated
October 1, 1997 -- filed herewith.
(d) Subadvisory Consulting Agreement Between Salomon Brothers Asset
Management Inc and Salomon Brothers Asset Management Limited
dated October 1, 1997 -- filed herewith.
(e) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and J.P. Morgan Investment Management Inc.
dated October 1, 1997 -- filed herewith.
(f) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Fred Alger Management, Inc., dated October
1, 1997 --filed herewith.
(g) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Founders Asset Management, Inc., dated
October 1, 1997 -- filed herewith.
(h) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Morgan Stanley Asset Management Inc. dated
October 1, 1997 -- filed herewith.
(i) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and T. Rowe Price Associates Inc. dated October
1, 1997 -- filed herewith.
(j) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Manufacturers Adviser Corporation dated
October 1, 1997 -- filed herewith.
(k) Amendment to Advisory Agreement between North American Funds and
CypressTree Asset Management Corporation, Inc. -- to be filed by
amendment.
4
<PAGE>
(l) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Standish, Ayer & Wood, Inc. -- to be
filed by amendment.
(m) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Warburg, Pincus Counselors, Inc. -- to
be filed by amendment.
(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.
(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-- filed herewith.
(a)(iii) Distribution Agreement Between North American Funds and
CypressTree Funds Distributors, Inc. dated October 1, 1997
-- filed herewith.
(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) Form of Assignment from Wood Logan Associates, Inc. to Wood
Logan Distributors, Inc., dated July 27, 1990 -- previously
filed as Exhibit (b)(6)(b)(ii) to North American Security
Trust's Post-Effective Amendment No. 2 on Form N-1A (File
No. 33-27958) dated August 29, 1990.
(b)(iii) Promotional Agreement among CypressTree Funds Distributors,
Inc., Wood Logan Associates, Inc., and North American
Security Life Insurance Company dated October 1, 1997 --
filed herewith.
(c)(i) Form of Dealer Agreement Among NASL Financial Services,
Inc., Wood Logan Associates, Inc. and Selected
Broker-Dealer -- previously filed as Exhibit (b)(6)(c) to
North American Security Trust's initial registration
statement on Form N-1A (File No. 33-27958) dated April 5,
1989.
5
<PAGE>
(c)(ii) Form of Dealer Agreement -- previously filed as Exhibit
(b)(6)(c)(ii) to North American Fund's Post-Effective
Amendment 19 on Form N-1A (File No. 33-27958) filed December
29, 1994.
(c)(iii) Form of Dealer Agreement Among NASL Financial Services,
Inc., Wood Logan Associates, Inc. and Selected
Broker-Dealer -- previously filed as Exhibit (b)(6)(c)(iii)
to North American Fund's Post-Effective Amendment 20 on Form
N-1A (File No. 33-27958) filed June 30, 1995.
(c)(iv) Assignment of Dealer Agreement among CypressTree Funds
Distributors, Inc. Wood Logan Associates, Inc. and
Manufacturers Securities Services, LLC dated October 1,
1997-- filed herewith.
(c)(v) Form of Notice of Assignment of Dealer Agreement among
CypressTree Funds Distributors, Inc., Wood Logan Associates,
Inc. and Manufacturers Securities Services, LLC -- filed
herewith.
(7) Not applicable.
(8) (a) Custodian Agreement Between North American Security Trust
and Boston Safe Deposit and Trust Company -- previously
filed as Exhibit (b)(8)(a) to North American Security
Trust's initial registration statement on Form N-1A No. 33-
27958) dated November 1, 1991.
(b) Custodian Agreement Between North American Security Trust
and State Street Bank and Trust Company -- previously filed
as Exhibit (b)(8)(a) to North American Security Trust's
initial registration statement on Form N-1A (No. 33-27958)
dated April 5, 1989.
(c) Transfer and Shareholder Services Contract Between North
American Security Trust and State Street Bank and Trust
Company -- previously filed as Exhibit (b)(8)(b) to North
American Security Trust's initial registration statement on
Form N-1A (File No. 33-27958) dated April 5, 1989.
(d) Forms of Sub-Custodian Agreements Between State Street Bank
and Trust Company and the Bank of New York, Chemical Bank
and Bankers Trust --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.
6
<PAGE>
(10) (i) Opinion of counsel regarding the Tax-Sensitive Equity Fund and
the Emerging Growth Fund -- to be filed by amendment.
(11) Not applicable.
(12) Not applicable.
(13) Letter Containing Investment Undertaking of North American Life
Assurance Company -- previously filed as Exhibit (b)(13) to North
American Security Trust's Post-Effective Amendment No. 2 on Form N-1A
(File No. 33-27958) dated August 29, 1990.
(14) Model Plans Documents for Custodial IRAs -- previously filed as
Exhibit (b)(14) to North American Security Trust's Post-Effective
Amendment No. 1 on Form N-1A (File No. 33-27958) dated December 29,
1989.
(15) (a) Amended and Restated Rule 12b-1 Distribution Plan for Class A
shares dated September 26, 1997 -- filed herewith
(b) Amended and Restated Rule 12b-1 Distribution Plan shares for
Class B shares dated September 26, 1997 -- filed herewith.
(c) Amended and Restated Rule 12b-1 Distribution Plan for Class C
shares dated September 26, 1997 -- filed herewith.
(d) Form of Class D Distribution Plan -- previously filed as Exhibit
(15)(h) to North American Funds' Post-Effective Amendment No. 18
on Form N-1A (File No. 33-27958) dated October 20, 1994.
(16) (a) Schedule of Computations of Total Return and Yield Figures for
the Growth and Income, Investment Quality Bond and Global Growth
Trusts-- previously filed as Exhibit (b)(16)(a) to North American
Security Trust's Post-Effective Amendment No. 7 on Form N-1A
(File No. 33-27958) dated November 1, 1991.
(b) Schedule of Computations of Total Return and Yield Figures for
the Growth, U.S. Government and Asset Allocation Trusts --
previously filed as Exhibit (b)(16) to North American Security
Trust's Post-Effective Amendment No. 1 on Form N-1A (File No. 33-
27958) filed December 29, 1989.
7
<PAGE>
(c) Schedule of Computations of Total Return and Yield Figures for
Class A, Class B and Class C shares -- previously filed as Exhibit (16)(c)
to North American Funds' Post-Effective Amendment No. 17 on Form N-1A (File
No. 33-27958) dated April 1, 1994.
(d) Schedule of Computations of Total Return and Yield Figures for
Strategic Income Fund Class A, Class B and Class C shares --previously
filed as Exhibit (b)(16)(d) to North American Fund's Post-Effective
Amendment No. 19 on Form N-1A (File No. 33-27958) filed December 29, 1994.
(e) Schedule of Computations of Total Return Figures for the
International Growth and Income Fund, Class A, Class B and Class C Shares -
-previously filed as Exhibit (b)(16)(e) to North American Fund's Post-
Effective Amendment No. 20 on Form N-1A (File No. 33-27958) filed June 30,
1995.
(18) Amended and Restated Rule 18f-3 plan dated October 1, 1997 -- filed
herewith.
(19) (a) Power of Attorney of Bradford K. Gallagher -- filed herewith.
(b) Power of Attorney of William F. Achtmeyer -- filed herewith.
(c) Power of Attorney of Don B. Allen -- filed herewith.
(d) Power of Attorney of William F. Devin -- filed herewith.
(e) Power of Attorney of Kenneth J. Lavery -- filed herewith.
(f) Power of Attorney of Joseph T. Grause, Jr. -- filed herewith.
(g) Power of Attorney of Thomas J. Brown -- filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
No person is directly or indirectly controlled by the Registrant. With
respect to the portfolios of the Registrant, no person controls the Registrant
by virtue of share ownership in the Registrant.
8
<PAGE>
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 Distributions, Inc., a Delaware
corporation and the Registrant's distributor. CypressTree is an affiliate of
Cypress Holding Company, Inc., a Delware 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%
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
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
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
--------------- ------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
International Small Cap Fund 430 862 857
Shares of Beneficial Interest
Growth Equity Fund Shares of 484 845 1037
Beneficial Interest
</TABLE>
10
<PAGE>
Item 27. Indemnification
---------------
Sections 6.4 and 6.5 of the Agreement and Declaration of Trust of the
Registrant provide that the Registrant shall indemnify each of its Trustees and
officers against all liabilities, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and against
all expenses, including but not limited to accountants and counsel fees,
reasonably incurred in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such trustee or officer may be or
may have been involved as a party or otherwise or with which such person may be
or may have been threatened, while in office or thereafter, by reason of being
or having been such a trustee or officer, except that indemnification shall not
be provided if it shall have been finally adjudicated in a decision on the
merits by the court or other body before which the proceeding was brought that
such trustee or officer (i) did not act in good faith in the reasonable belief
that his or her action was in the best interests of the Registrant or (ii) is
liable to the Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office.
Registrant has previously provided the undertaking set forth in Rule 481
under the Securities Act of 1933.
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>
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
Bradford K.Gallagher* President Chairman & President
Joseph T. Grause, Jr.* Vice President & Treasurer
Treasurer
John I. Fitzgerald* None Secretary
Paul Foley* None Assistant Secretary
Leana D. Vacirca* Secretary None
</TABLE>
* 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 Counsellors, LLP 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, 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 286 Congress Street, Boston, Massachusetts
02210, 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
12
<PAGE>
adviser to the International Small Cap and Growth Equity Fund, at its offices at
2930 East Third Avenue, Denver, Colorado 80206, by the Registrant at its
principal business office located at 116 Huntington Avenue, Boston,
Massachusetts 02116, by T. Rowe Price Associates, Inc., the investment
subadviser to the 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. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
Not applicable
13
<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 16th day of October, 1997.
NORTH AMERICAN FUNDS
--------------------
Registrant
By: BRADFORD K. GALLAGHER*
---------------------
Bradford K. Gallagher, President
Attest:
/s/ Paul F. Foley
- ------------------------
Paul F. Foley
Assistant Secretary
*By: /s/ Thomas J. Brown
-------------------
Thomas J. Brown
Attorney-in-Fact
Pursuant to Power of Attorney
Filed Herewith
<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.
WILLIAM F. ACHTMEYER*
- -----------------------------
William F. Achtmeyer, Trustee
October 16, 1997
DON B. ALLEN*
- -----------------
Don B. Allen, Trustee
October 16, 1997
/s/ THOMAS J. BROWN
- -----------------------------
Thomas J. Brown, Assistant Treasurer
(Principal Accounting Officer)
October 16, 1997
WILLIAM F. DEVIN*
- -----------------------------
William F. Devin, Trustee
October 16, 1997
BRADFORD K. GALLAGHER*
- -----------------------------
Bradford K. Gallagher, Trustee, Chairman and President
October 16, 1997
JOSEPH T. GRAUSE, JR.*
- -----------------------------
Joseph T. Grause, Jr., Vice President and Treasurer
(Principal Financial Officer)
October 16, 1997
-2-
<PAGE>
KENNETH J. LAVERY*
- -----------------------------
Kenneth J. Lavery, Trustee
October 16, 1997
*By:
/s/ Thomas J. Brown
- ----------------------------------
Thomas J. Brown
Attorney-in-Fact
Pursuant to Powers
of Attorney
Filed Herewith
October 16, 1997
-3-
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -----------
<S> <C>
(b)(5)(a) Advisory Agreement
(b)(5)(b) Wellington Management Company
Subadvisory Agreement
(b)(5)(c) Salomon Brothers Asset Management, Inc.
Subadvisory Agreement
(b)(5)(d) Salomon Brothers Asset Management
Limited
Subadvisory Consulting Agreement
(b)(5)(e) J.P. Morgan Investment Management, Inc.
Subadvisory Agreement
(b)(5)(f) Fred Alger Management, Inc.
Subadvisory Agreement
(b)(5)(g) Founders Asset Management, Inc.
Subadvisory Agreement
(b)(5)(h) Morgan Stanley Asset Management, Inc.
Subadvisory Agreement
(b)(5)(i) T. Rowe Price Associates, Inc.
Subadvisory Agreement
(b)(5)(j) Manufacturers Adviser Corporation
Subadvisory Agreement
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
(b)(6)(a)(ii) Amendment to Distribution Agreement between
North American Funds and NASL Financial
Services, Inc.
(b)(6)(a)(iii) CypressTree Funds Distributors, Inc.
Distribution Agreement
(b)(6)(b)(iii) CypressTree Funds Distributors, Inc.
Promotional Agreement
(b)(6)(c)(iv) CypressTree Funds Distributors, Inc.
Assignment of Dealer Agreement
(b)(6)(c)(v) Cypress Tree Funds Distributors, Inc.
Form of Notice of Assignment of Dealer
Agreement
(b)(15)(a) Amended and Restated Rule 12b-1
Distribution Plan for Class A Shares
(b)(15)(b) Amended and Restated Rule 12b-1
Distribution Plan for Class B Shares
(b)(15)(c) Amended and Restated Rule 12b-1
Distribution Plan for Class C Shares
(b)(18) Amended and Restated Rule 18f-3 Plan
(b)(19)(a) Power of Attorney for
Bradford K. Gallagher
</TABLE>
15
<PAGE>
<TABLE> <C>
<S>
(b)(19)(b) Power of Attorney for
William F. Achtmeyer
(b)(19)(c) Power of Attorney for
Don B. Allen
(b)(19)(d) Power of Attorney for
William F. Devin
(b)(19)(e) Power of Attorney for
Kenneth J. Lavery
(b)(19)(f) Power of Attorney for
Joseph T. Grause, Jr.
(b)(19)(g) Power of Attorney for
Thomas J. Brown
</TABLE>
16
<PAGE>
ADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between North American Funds,
a Massachusetts business trust (the "Trust"), and CypressTree Asset Management
Corporation, Inc., a Delaware corporation ("Cypress" or the "Adviser"). In
consideration of the mutual covenants contained herein, the parties agree as
follows:
1. APPOINTMENT OF ADVISER
The Trust hereby appoints Cypress, subject to the supervision of the
Trustees of the Trust and the terms of this Agreement, as the investment adviser
for each of the portfolios of the Trust specified in Appendix A to this
Agreement as it shall be amended by the Adviser and the Trust from time to time
(the "Portfolios"). The Adviser accepts such appointment and agrees to render
the services and to assume the obligations set forth in this Agreement
commencing on its effective date. The Adviser will be an independent contractor
and will have no authority to act for or represent the Trust in any way or
otherwise be deemed an agent unless expressly authorized in this Agreement or
another writing by the Trust and Adviser.
2. DUTIES OF THE ADVISER
a. Subject to the general supervision of the Trustees of the Trust and the
terms of this Agreement, the Adviser will at its own expense select,
contract with, and compensate investment subadvisers ("Subadvisers") to
manage the investments and determine the composition of the assets of the
Portfolios; provided, that any contract with a Subadviser (the "Subadvisory
Agreement") shall be in compliance with and approved as required by the
Investment Company Act of 1940, as amended ("Investment Company Act").
Subject always to the direction and control of the Trustees of the Trust,
the Adviser will monitor compliance of each Subadviser with the investment
objectives and related investment policies, as set forth in the Trust's
registration statement as filed with the Securities and Exchange
Commission, of any Portfolio or Portfolios under the management of such
Subadviser, and review and report to the Trustees of the Trust on the
performance of such Subadviser.
b. The Adviser will oversee the administration of all aspects of the Trust's
business and affairs and in that connection will furnish to the Trust the
following services:
(1) Office and Other Facilities. The Adviser shall furnish to the
---------------------------
Trust office space in the offices of the Adviser or in such other
place as may be agreed upon by the parties hereto
<PAGE>
from time to time and such other office facilities, utilities and
office equipment as are necessary for the Trust's operations.
(2) Trustees and Officers. The Adviser agrees to permit individuals who
---------------------
are directors, officers or employees of the Adviser to serve (if duly
elected or appointed) as Trustees or President, Vice President,
Treasurer or Secretary of the Trust, without remuneration from or
other cost to the Trust.
(3) Other Personnel. The Adviser shall furnish to the Trust, at the
---------------
Trust's expense, any other personnel necessary for the operations of
the Trust.
<PAGE>
(4) Financial, Accounting, and Administrative Services. The Adviser shall
--------------------------------------------------
maintain the existence and records of the Trust; maintain the
registrations and qualifications of Trust shares under federal and
state law; and perform all administrative, financial, accounting,
bookkeeping and recordkeeping functions of the Trust except for any
such functions that may be performed by a third party pursuant to a
custodian, transfer agency or service agreement executed by the Trust.
The Trust shall reimburse the Adviser for its expenses associated with
all such services, including the compensation and related personnel
expenses and expenses of office space, office equipment, utilities and
miscellaneous office expenses, except any such expenses directly
attributable to officers or employees of the Adviser who are serving
as President, Vice President, Treasurer or Secretary of the Trust. The
Adviser shall determine the expenses to be reimbursed by the Trust
pursuant to expense allocation procedures established by the Adviser
in accordance with generally accepted accounting principles.
(5) Liaisons with Agents. The Adviser, at its own expense, shall maintain
--------------------
liaison with the various agents and other persons employed by the
Trust (including the Trust's transfer agent, custodian, independent
accountants and legal counsel) and assist in the coordination of their
activities on behalf of the Trust. Fees and expenses of such agents
and other persons will be paid by the Trust.
(6) Reports to Trust. The Adviser shall furnish to or place at the
----------------
disposal of the Trust such information, reports, valuations, analyses
and opinions as the Trust may, at any time or from time to time,
reasonably request or as the Adviser may deem helpful to the Trust,
provided that the expenses associated with any such materials
furnished by the Adviser at the request of the Trust shall be borne by
the Trust.
(7) Reports and Other Communications to Trust Shareholders. The
------------------------------------------------------
Adviser shall assist the Trust in developing (but not pay for) all
general shareholder communications including regular shareholder
reports.
3. EXPENSES ASSUMED BY THE TRUST
In addition to paying the advisory fee provided for in Section 5., the
Trust will pay all expenses of its organization, operations and business not
specifically assumed or agreed to be paid by the Adviser as provided in this
Agreement, by a Subadviser as provided in a Subadvisory Agreement, or by the
Distributor as provided in the Distribution
-3-
<PAGE>
Agreement. Without limiting the generality of the foregoing, the Trust, in
addition to certain expenses described in Section 2. above, shall pay or arrange
for the payment of the following:
a. Custody and Accounting Services. All expenses of the transfer, receipt,
-------------------------------
safekeeping, servicing and accounting for the Trust's cash, securities, and
other property, including all charges of depositories, custodians and other
agents, if any;
b. Shareholder Servicing. All expenses of maintaining and servicing
---------------------
shareholder accounts, including all charges of the Trust's transfer,
shareholder recordkeeping, dividend disbursing, redemption, and other
agents, if any;
c. Shareholder Communications. All expenses of preparing, setting in type,
--------------------------
printing, and distributing reports and other communications to
shareholders;
d. Shareholder Meetings. All expenses incidental to holding meetings of Trust
--------------------
shareholders, including the printing of notices and proxy material, and
proxy solicitation therefor;
e. Prospectuses. All expenses of preparing, setting in type, and printing of
------------
annual or more frequent revisions of the Trust's prospectus and statement
of additional information and any supplements thereto and of mailing them
to shareholders;
f. Pricing. All expenses of computing the net asset value per share for each
-------
of the Portfolios, including the cost of any equipment or services used for
obtaining price quotations and valuing its investment portfolio;
g. Communication Equipment. All charges for equipment or services used for
-----------------------
communication between the Adviser or the Trust and the custodian, transfer
agent or any other agent selected by the Trust;
h. Legal and Accounting Fees and Expenses. All charges for services and
--------------------------------------
expenses of the Trust's legal counsel and independent auditors;
i. Trustees and Officers. Except as expressly provided otherwise in paragraph
---------------------
2.b.(2), all compensation of Trustees and officers, all expenses incurred
in connection with the service of Trustees and officers, and all expenses
of meetings of the Trustees and Committees of Trustees;
j. Federal Registration Fees. All fees and expenses of registering and
-------------------------
maintaining the registration of the Trust under the Investment Company Act
and the registration of the Trust's shares under the
-4-
<PAGE>
Securities Act of 1933, as amended (the "1933 Act"), including all fees and
expenses incurred in connection with the preparation, setting in type,
printing and filing of any registration statement and prospectus under the
1933 Act or the Investment Company Act, and any amendments or supplements
that may be made from time to time;
k. State Registration Fees. All fees and expenses of qualifying and
-----------------------
maintaining qualification of the Trust and of the Trust's shares for sale
under securities laws of various states or jurisdictions, and of
registration and qualification of the Trust under all other laws applicable
to the Trust or its business activities (including registering the Trust as
a broker-dealer, or any officer of the Trust or any person as agent or
salesman of the Trust in any state);
l. Issue and Redemption of Trust Shares. All expenses incurred in connection
------------------------------------
with the issue, redemption, and transfer of Trust shares, including the
expense of confirming all share transactions, and of preparing and
transmitting certificates for shares of beneficial interest in the Trust;
m. Bonding and Insurance. All expenses of bond, liability and other insurance
---------------------
coverage required by law or regulation or deemed advisable by the Trust's
Trustees including, without limitation, such bond, liability and other
insurance expense that may from time to time be allocated to the Trust in a
manner approved by its Trustees;
n. Brokerage Commissions. All brokers' commissions and other charges incident
---------------------
to the purchase, sale, or lending of the Trust's portfolio securities;
o. Taxes. All taxes or governmental fees payable by or with respect to the
-----
Trust to federal, state, or other governmental agencies, domestic or
foreign, including stamp or other transfer taxes, and all expenses incurred
in the preparation of tax returns;
p. Trade Association Fees. All fees, dues, and other expenses incurred in
----------------------
connection with the Trust's membership in any trade association or other
investment organization; and
q. Nonrecurring and Extraordinary Expenses. Such nonrecurring expenses as may
---------------------------------------
arise, including the costs of actions, suits, or proceedings to which the
Trust is, or is threatened to be made, a party and the expenses the Trust
may incur as a result of its legal obligation to provide indemnification to
its Trustees, officers, agents and shareholders.
4. EXPENSE LIMITATION
-5-
<PAGE>
a. For purposes of this section the following definitions shall apply:
(1) "Computation Period" means the portion of the current fiscal year
ended on the date as of which a determination is being made whether
the Adviser's compensation should be reduced or it should reimburse
the Trust because of the Limitation Expenses of a Portfolio.
(2) "Regulatory Limit" means the limitation on investment company expenses
during a Computation Period imposed by any statute or regulatory
authority of any jurisdiction in which shares of a Portfolio are
qualified for offer and sale.
(3) "Fixed Limit" means the percent, specified in Appendix B to this
Agreement, on an annualized basis of the average net asset value of a
portfolio during a Computation Period.
(4) "Expense Limit" means either the Regulatory Limit or Fixed Limit or
both, as applicable.
(5) "Limitation Expenses," with respect to the Regulatory Limit, means all
the expenses of a Portfolio incurred during a Computation Period
excluding all expenses the exclusion of which may be permitted by the
Regulatory Limit and, with respect to the Fixed Limit, means all the
expenses of a Portfolio incurred during a Computation Period
excluding: (i) taxes, (ii) portfolio brokerage commissions, (iii)
interest, (iv) distribution expenses, and (v) litigation and
indemnification expenses and other extraordinary expenses not incurred
in the ordinary course of the Trust's business.
(6) "Excess Amount" means the amount, if any by which a Portfolio's
Limitation Expenses for a specified period exceed the amount of the
applicable Expense Limit for the same period. Where there is an Excess
Amount with respect to both the Regulatory Limit and the Fixed Limit,
Excess Amount means the greater of the two.
(7) "Maximum Advisory Compensation" means the total amount of the
compensation payable pursuant to section 5. of this Agreement to the
Adviser with respect to a Portfolio for a specified period without any
adjustment for an Excess Amount.
(8) "Current Advisory Compensation" means the amount of the compensation
payable pursuant to section 5. of this Agreement to the Adviser with
respect to a Portfolio for the last
-6-
<PAGE>
calendar month of a Computation Period without any adjustment for an
Excess Amount.
b. If in any fiscal year there is an Excess Amount with respect to a
Portfolio, the Maximum Advisory Compensation due the Adviser under this
Agreement with respect to that Portfolio shall be reduced by such Excess
Amount, and the Adviser shall reimburse the Trust for any portion of the
Excess Amount that exceeds the Maximum Advisory Compensation.
c. The amount of the reduction and reimbursement referred to in paragraph b.
shall be determined as follows:
(i) For each calendar day, each Portfolio shall adjust the amount of its
daily accrual for the Maximum Advisory Compensation to make the net
amount of the compensation actually paid and accrued for payment by
the Trust to the Adviser with respect to the Portfolio for the
Computation Period then ended equal to the amount determined by
subtracting the Excess Amount for the Computation Period from the
Maximum Advisory Compensation for the Computation Period, or if such
Excess Amount exceeds such Maximum Advisory Compensation, to make the
net amount of the reimbursement actually paid and accrued for payment
by the Adviser to the Trust equal to the amount of such excess.
(ii) Each month, the Trust shall reduce the amount of the Current Advisory
Compensation, or it shall accompany the payment of the Current
Advisory Compensation with an additional payment, or the Adviser
shall remit an amount to the Trust, which reduction, additional
payment or remittance shall be sufficient in amount, to make the net
amount of the compensation actually paid by the Trust to the Adviser
with respect to the Portfolio for the Computation Period ended as of
the last day of such month equal to the amount determined by
subtracting the Excess Amount for the Computation Period from the
Maximum Advisory Compensation for the Computation Period, or if such
Excess Amount exceeds such Maximum Advisory Compensation, to make the
net amount of the reimbursement actually paid by the Adviser to the
Trust equal to the amount of such excess.
(iii) If the Excess Amount for a fiscal year should exceed the amount of
the Maximum Advisory Compensation for the fiscal year, the excess shall be
treated as a contribution to the capital of the Trust by the Adviser to the
extent necessary to permit the Portfolio to maintain its status as a
regulated in vestment company under Subchapter M of the Internal Revenue
Code.
d. The provisions of section 4 of the Agreement shall continue in
-7-
<PAGE>
effect unless terminated by the Adviser on 30 days' written notice;
provided that if the Advisory Agreement or a Subadvisory Agreement with
respect to a portfolio is earlier terminated, the provisions of section 4
shall terminate on the effective date of such termination, but only with
respect to the Portfolio or Portfolios as to which the Advisory Agreement
or Subadvisory Agreement is terminated. Any termination shall be subject to
the settlement of obligations previously incurred pursuant to section 4 of
this Agreement, with the Computation Period ending on the effective date of
such termination being deemed to be a fiscal year for purposes of
paragraphs b and c (iii) of section 4. For purposes of this provision, a
termination shall not be deemed to have occurred with respect to a
Portfolio if the termination of a Subadvisory Agreement is conditioned upon
the effectiveness of another Subadvisory Agreement with respect to the same
Portfolio.
5. COMPENSATION OF ADVISER
Subject to the provisions of section 4. of this Agreement, the Trust will
pay the Adviser with respect to each Portfolio the compensation specified in
Appendix A of this Agreement.
6. NON-EXCLUSIVITY
The services of the Adviser to the Trust are not to be deemed to be
exclusive, and the Adviser shall be free to render investment advisory or other
services to others (including other investment companies) and to engage in other
activities. It is understood and agreed that the directors, officers, and
employees of the Adviser are not prohibited from engaging in any other business
activity or from rendering services to any other person, or from serving as
partners, officers, directors, trustees or employees of any other firm or
corporation, including other investment companies.
7. SUPPLEMENTAL ARRANGEMENTS
The Adviser may enter into arrangements with other persons affiliated with
the Adviser to better enable it to fulfill its obligations under this Agreement
for the provision of certain personnel and facilities to the Adviser.
8. CONFLICTS OF INTEREST
It is understood that Trustees, officers, agents and shareholders of the
Trust are or may be interested in the Adviser as directors, officers,
stockholders, or otherwise; that directors, officers, agents and stockholders of
the Adviser are or may be interested in the Trust as Trustees, officers,
shareholders or otherwise; that the Adviser 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
-8-
<PAGE>
of Trust of the Trust and the Articles of Incorporation of the Adviser,
respectively, or by specific provision of applicable law.
9. REGULATION
The Adviser 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.
10. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective on the later of its execution, the
effective date of the Trust's registration statement under the Securities Act of
1933 or the date of the meeting of the shareholders of the Trust, 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 each of the
Portfolios. 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 the vote of a majority of the outstanding voting securities of each of the
Portfolios, provided that in either event such continuance shall also be
approved by the vote of a majority of the Trustees of the Trust who are not
interested persons (as defined in the Investment Company Act) of any party to
this Agreement cast in person at a meeting called for the purpose of voting on
such approval. The required shareholder approval of the Agreement or of any
continuance of the Agreement shall be effective with respect to any Portfolio if
a majority of the outstanding voting securities of the series (as defined in
Rule 18f-2(h) under the Investment Company Act) of shares of that Portfolio
votes to approve the Agreement or its continuance, notwithstanding that the
Agreement or its continuance may not have been approved by a majority of the
outstanding voting securities of (a) any other Portfolio affected by the
Agreement or (b) all the Portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Adviser will continue to act as investment
adviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of a new contract with the Adviser or a
different adviser or other definitive action; provided, that the compensation
received by the Adviser in respect of such 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.
This Agreement may be terminated at any time, without the payment
-9-
<PAGE>
of any penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser, or by the Adviser on sixty days'
written notice to the Trust. This Agreement will automatically terminate,
without the payment of any penalty, in the event of its assignment (as defined
in the Investment Company Act).
11. PROVISION OF CERTAIN INFORMATION BY ADVISER
The Adviser will promptly notify the Trust in writing of the occurrence of
any of the following events:
a. the Adviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Adviser is required to be registered as an investment adviser in order to
perform its obligations under this Agreement;
b. the Adviser 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. the chief executive officer or controlling stockholder of the Adviser or
the portfolio manager of any Portfolio changes.
12. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of the series of shares of that Portfolio vote to approve the amendment,
notwithstanding that the amendment may not have been approved by a majority of
the outstanding voting securities of (a) any other Portfolio affected by the
amendment or (b) all the Portfolios of the Trust.
13. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
14. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
-10-
<PAGE>
15. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or Adviser
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 section.
16. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
17. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the laws
of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
18. LIMITATION OF LIABILITY
The Declaration of Trust establishing the Trust, dated September 29, 1988,
as amended and restated 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 Security Trust" [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.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] North American Funds
By:
---------------------------
[SEAL] CypressTree Asset Management
Corporation, Inc.
By:
---------------------------
-12-
<PAGE>
APPENDIX A
1. Equity-Income Fund: .800% of the first $50,000,000, .700% between
$50,000,000 and $200,000,000, .600% between $200,000,000 and $500,000,000
and .600% on the excess over $500,000,000 of the current net assets of the
Portfolio.
2. Growth and Income Fund: .725% of the first $50,000,000, .675% between
$50,000,000 and $200,000,000, .625% between $200,000,000 and $500,000,000
and .55% on the excess over $500,000,000 of the current net assets of the
Portfolio.
3. Balanced Fund: .775% of the first $50,000,000, .725% between $50,000,000
and $200,000,000, .675% between $200,000,000 and $500,000,000 and .625% on
the excess over $500,000,000 of the current net assets of the Portfolio.
4. U.S. Government Securities Fund: .60% of the first $50 million, .60%
between $50,000,000 and $200,000,000, .525% between $200,000,000 and
$500,000,000 and .475% on the excess over $500,000,000 of the current net
assets of the Portfolio.
5. Investment Quality Bond Fund: .60% of the first $50 million, .60% between
$50,000,000 and $200,000,000, .525% between $200,000,000 and $500,000,000
and .475% on the excess over $500,000,000 of the current net assets of the
Portfolio.
6. Money Market Fund: .20% of the first $50 million, .20% between $50,000,000
and $200,000,000, .20% between $200,000,000 and $500,000,000 and .145% on
the excess over $500,000,000 of the current net assets of the Portfolio.
7. Global Equity Fund: .90% of the first $50 million, .90% between $50,000,000
and $200,000,000, .70% between $200,000,000 and $500,000,000 and .70% on
the excess over $500,000,000 of the current net assets of the Portfolio.
8. National Municipal Bond Fund: .60% of the first $50 million, .60% between
$50,000,000 and $200,000,000, .60% between $200,000,000 and $500,000,000
and .60% on the excess over $500,000,000 of the current net assets of the
Portfolio.
9. Strategic Income Fund: .75% of the first $50 million, .70% between
$50,000,000 and $200,000,000, .65% between $200,000,000 and $500,000,000
and .60% on the excess over $500,000,000 of the current net assets of the
Portfolio.
10. International Growth and Income Fund: .90% of the first $50 million, .85%
between $50,000,000 and $200,000,000, .80% between $200,000,000 and
$500,000,000 and .75% on the excess over
-13-
<PAGE>
$500,000,000 of the current net assets of the Portfolio.
11. Small/Mid Cap Fund: .925% of the first $50,000,000, .900% between
$50,000,000 and $200,000,000, .875% between $200,000,000 and $500,000,000
and .850% on the excess over $500,000,000 of the current value of the net
assets of the Portfolio.
12. International Small Cap Fund: 1.05% of the first $50,000,000, 1.0% between
$50,000,000 and $200,000,000, .900% between $200,000,000 and $500,000,000
and .800% on the excess over $500,000,000 of the average daily value of the
net assets of the Portfolio.
13. Growth Equity Fund: .900% of the first $50,000,000, .850% between
$50,000,000 and $200,000,000, .825% between $200,000,000 and $500,000,000
and .800% on the excess over $500,000,000 of the average daily value of the
net assets of the Portfolio.
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 proportion which such period bears to the
full month in which such effectiveness or termination occurs.
-14-
<PAGE>
APPENDIX B
----------
The Fixed Limit for each Portfolio for purposes of paragraph 4.a.(3) shall
be:
<TABLE>
<CAPTION>
Portfolio
- ---------
<S> <C>
Money Market Fund .50%
Investment Quality Bond Fund .90%
U.S. Government Securities Fund .90%
Equity -Income Fund 1.065%
Growth and Income Fund .99%
Balanced Fund 1.04%
Global Equity Fund 1.40%
National Municipal Bond Fund .85%
Strategic Income Fund 1.15%
International Growth and Income Fund 1.40%
Small/Mid Cap Fund 1.325%
International Small Cap Fund 1.55%
Growth Equity Fund 1.30%
</TABLE>
-15-
<PAGE>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between CypressTree Asset
Management Corporation, Inc., a Massachusetts corporation ("Cypress" or the
"Adviser"), and Wellington Management Company, LLP a Massachusetts limited
liability partnership (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 each of the portfolios of the Trust specified in Appendix A to this Agreement
as it shall be amended by the Adviser and the Subadviser from time to time (the
"Portfolio" or "Portfolios"). The Subadviser will be an independent contractor
and will have no authority to act for or represent the Trust or Adviser in any
way or otherwise be deemed an agent unless expressly authorized in this
Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios. In fulfilling its obligations to manage the
investments and reinvestments of the assets of the Portfolios, the
Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and other
information affecting the economy generally and individual companies
or industries the securities of which are included in the Portfolios
or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each Portfolio
consistent with the investment objectives and related investment
policies for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these investment programs by
the purchase and sale of securities including the placing of orders
for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs;
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
<PAGE>
not readily available for purposes of enabling the Trust's Custodian
to calculate net asset value; and
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage commissions
if applicable. The Subadviser is directed at all times to seek to execute
brokerage transactions for the Portfolios in accordance with such policies
or practices as may be established by the Trustees and described in the
Trust's registration statement as amended. The Subadviser may pay a broker-
dealer which provides research and brokerage services a higher spread or
commission for a particular transaction than otherwise might have been
charged by another broker-dealer, if the Subadviser determines that the
higher spread or commission is reasonable in relation to the value of the
brokerage and research services that such broker-dealer provides, viewed in
terms of either the particular transaction or the Subadviser's overall
responsibilities with respect to accounts managed by the Subadviser. The
Subadviser may use for the benefit of the Subadviser's other clients, or
make available to companies affiliated with the Subadviser or to its
directors for the benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its partners or employees shall be liable
to the Adviser or Trust for any loss suffered by the Adviser or Trust resulting
from its acts or omissions as Subadviser to the Portfolios, except for losses
resulting from willful misfeasance, bad faith, or gross negligence in the
performance of, or from reckless disregard of, the duties of the Subadviser or
any of its partners or employees.
<PAGE>
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. 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.
7. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of its execution, the effective date of the registration statement of the
Portfolio and 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 out standing voting
securities of (a) any other Portfolio affected by the Agreement or (b) all the
portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
-3-
<PAGE>
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason.
8. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. the managing general partner or controlling partner of the Subadviser or
the portfolio manager of any Portfolio changes.
9. SALES LITERATURE
The Adviser will not use the Subadviser's name in Trust literature without
prior review and approval by the Subadviser, which will not be unreasonably
withheld or delayed.
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
-4-
<PAGE>
parties with respect to the Portfolios listed in Appendix A.
-5-
<PAGE>
12. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
13. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
14. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
15. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
16. LIMITATION OF LIABILITY
The Agreement and Declaration of Trust establishing the Trust, dated
September 28, 1988, 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.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] CypressTree Asset Management Corporation, Inc.
by:
-------------------------------------------
[SEAL] Wellington Management Company, LLP
by:
-------------------------------------------
-7-
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for each of the
following portfolios 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"):
1. Growth and Income Fund - .325% for the first $50,000,000, .275% for the
next $150,000,000, .225% for the next $300,000,000 and .15% on the excess
over $500,000,000 of the current value of the net assets of the Growth and
Income Fund.
2. Investment Quality Bond Fund - .225% for the first $200,000,000, .15% for
the next $300,000,000 and .10% on the excess over $500,000,000 of the
current value of the net assets of the Investment Quality Bond Fund.
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.
-8-
<PAGE>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between CypressTree Asset
Management Corporation, Inc. a Delaware corporation ("Cypress" or the
"Adviser"), and Salomon Brothers Asset Management Inc, a Delaware corporation
(the "Subadviser"). In consideration of the mutual convenants contained herein,
the parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the portfolios of the Trust specified in Appendix A to this Agreement as it
shall be amended by the Adviser and the Subadviser from time to time (the
"Portfolio" or "Portfolios"). The Subadviser will be an independent contractor
and will have no authority to act for or represent the Trust or Adviser in any
way or otherwise be deemed an agent unless expressly authorized in this
Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios. In fulfilling its obligations to manage the
investments and reinvestments of the assets of the Portfolios, the
Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial
and other information affecting the economy generally and individual
companies or industries the securities of which are included in the
Portfolios or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each
Portfolio consistent with the investment objectives and related
investment policies for each such portfolio as described in the
Trust's registration statement, as amended;
iii. take whatever steps are necessary to implement these investment
programs by the purchase and sale of securities including the placing
of orders for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide determinations of the fair value of certain securities
when market quotations are not readily available for purposes of
calculating net asset value for the Trust's Custodian
<PAGE>
in accordance with procedures and methods established by the Trustees
of the Trust.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all
necessary orders with brokers, dealers, or issuers, and will negotiate
brokerage commissions if applicable. The Subadviser is directed at all
times to seek to execute brokerage transactions for the Portfolios in
accordance with such policies or practices as may be established by the
Trustees and described in the Trust's registration statement as amended.
The Subadviser may pay a broker-dealer which provided research and
brokerage services a higher commission for a particular transaction than
otherwise might have been charged by another broker-dealer, if the
Subadviser determines that the higher commission is reasonable in relation
to the value of the brokerage and research services that such broker-dealer
provides, viewed in terms of either the particular transaction or the
Subadviser's overall responsibilities with respect to accounts managed by
the Subadviser. The Subadviser may use for the benefit of the Subadviser's
other clients, or make available to companies affiliated with the
Subadviser or to its directors for the benefit of its clients, any such
brokerage and research services that the Subadviser obtains from brokers or
dealers.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940, as
amended (the "Investment Company Act") and Investment Advisers Act of 1940,
as amended (the "Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its directors, officers or employees
shall be liable to the Adviser or Trust for any loss suffered by the Adviser or
Trust resulting from its acts or omissions as Subadviser to the Portfolios,
except for losses resulting from willful misfeasance, bad faith, or gross
negligence in the performance of, or from reckless disregard of, the duties of
the Subadviser or any of its directors, officers or employees.
<PAGE>
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers,
stockholders or otherwise; that directors, officers, agents and stockholders of
the Subadviser are or may be interested in the Trust as trustees, officers,
shareholders or otherwise; that the Subadviser may by 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
Trust's Agreement and Declaration of Trust and the Articles of Incorporation of
the Subadviser, respectively, or by specific provision of applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of its execution, the effective date of the registration statement of the
Portfolio and 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 specific 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.
-3-
<PAGE>
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 promulgated under the Investment Company
Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. the chief executive officer or controlling stockholder of the Subadviser or
the portfolio manager of any Portfolio changes.
10. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the specific
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
-4-
<PAGE>
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 with respect to the Portfolios listed in Appendix A.
12. HEADINGS
The headings in the sections of this Agreement are inserted for
convenience of reference only and shall not constitute a part hereof.
13. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
14. SEVERABILITY
Should any portion of this Agreement for any reason be held to void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
15. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
16. LIMITATION OF LIABILITY
The Declaration of Trust establishing the Trust, dated September 28,
1988, 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.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed under seal by their duly authorized officers as of the date first
written above.
[SEAL] CypressTree Asset Management Corporation, Inc.
by:
------------------------------------
[SEAL] Salomon Brothers Asset Management Inc
by:
------------------------------------
-6-
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment adviser for each of the following
portfolios 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"):
1. U.S. Government Securities Fund: .225% of the first $200,000,000, .15%
between $200,000,000 and $500,000,000 and .10% on the excess over
$500,000,000 of the current value of the net assets of the Portfolio.
2. National Municipal Bond Fund: .25% of the first $50 million, .25% between
$50,000,000 and $200,000,000, .25% between $200,000,000 and $500,000,000
and .25% on the excess over $500,000,000 of the current net assets of the
portfolio.
3. Strategic Income Fund: .35% of the first $50 million, .30% between
$50,000,000 and $200,000,000, .25% between $200,000,000 and $500,000,000
and .20% on the excess over $500,000,000 of the current net assets of the
portfolio.
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
currently effective 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 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.
-7-
<PAGE>
SUBADVISORY CONSULTING AGREEMENT
STRATEGIC INCOME PORTFOLIO
NORTH AMERICAN FUNDS
SUBADVISORY CONSULTING AGREEMENT made this 1st day of October, 1997, between
Salomon Brothers Asset Management Inc., a Delaware corporation ("SBAM") and
Salomon Brothers Asset Management Limited, a company incorporated under the laws
of England ("SBAM Limited").
In consideration of the mutual covenants contained herein, with effect on and
from the Effective Date (as defined in paragraph 5 of this Subadvisory
Consulting Agreement) the parties agree as follows:
1. APPOINTMENT OF SUBADVISORY CONSULTANT
Pursuant to paragraph 5 of the Subadvisory Agreement between CypressTree Asset
Management Corporation, Inc. a Massachusetts corporation (the "Adviser"), and
SBAM dated October 1, 1997 (the "Agreement"), SBAM Limited undertakes to act as
a subadviser and manage the investment and reinvestment of the assets or such
part of the assets of the Strategic Income Fund (the "Portfolio") of North
American Funds (the "Fund") as may be agreed between SBAM and SBAM Limited from
time to time (the "Delegated Assets"), subject to the supervision of SBAM and
the Trustees of the Fund and to the terms of this Subadvisory Consulting
Agreement. SBAM Limited will be an independent contractor and will have no
authority to act for or represent the Fund or the Adviser in any way or
otherwise be deemed an agent unless expressly authorized in this Subadvisory
Consulting Agreement or another writing by the Fund and the Adviser.
SBAM Limited is a member of the Investment Management Regulatory Organization
Limited ("IMRO") and is regulated in its conduct of Investment Business (as
defined in IMRO's rules) by IMRO and each of the Fund and SBAM will be a Non-
private Customer (as defined in IMRO's rules) of SBAM Limited.
2. SERVICES TO BE RENDERED BY THE SUBADVISORY CONSULTANT TO THE PORTFOLIO
Subject always to the direction and control of the Trustees of the Fund and
SBAM, SBAM Limited will manage the investments and determine the composition of
the Delegated Assets in accordance with the investment objectives, policies and
restrictions contained in the Fund's currently effective prospectus and
Statement of Additional Information in so far as they relate to the Portfolio
(both as amended from time to time) and in compliance with the provisions of the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
the rules promulgated thereunder and, so far as permitted thereby, is hereby
authorized to borrow money and to effect transactions on or off any exchange on
behalf of the Portfolio.
3. COMPENSATION OF SUBADVISER
SBAM will pay SBAM Limited such compensation as specified in Appendix A to this
Subadvisory Consulting Agreement.
APPLICABILITY OF PROVISIONS OF THE AGREEMENT
The provisions of paragraphs 2.c, 4, 7 and 9 of the Agreement are hereby
incorporated into this Subadvisory Consulting Agreement and shall be read
<PAGE>
herein as if references to "the Subadviser" were references to SBAM Limited. For
this purpose, the following further modifications shall be deemed to be made to
paragraph 4 of the Agreement. In that paragraph, references to "the Adviser"
shall be deemed to include references to SBAM, the number "(i)" shall be deemed
to be inserted between "resulting from" and "its acts" and at the end of that
paragraph the words "or (ii) any breach by SBAM Limited or any of its directors,
officers or employees of its duties or obligations under the Financial Services
Act of 1986 of the United Kingdom or under the regulatory system (as defined in
IMRO's rules)" shall be deemed to be inserted between "employees" and ".".
5. DURATION AND TERMINATION OF SUBADVISORY CONSULTING AGREEMENT
This Subadvisory Consulting Agreement shall become effective on the later of:
(i) the date of its execution,
(ii) the effective date of the registration statement of the Portfolio,
(iii) the date this Subadvisory Consulting Agreement is approved by the
Trustees of the Fund in accordance with the Investment Company Act,
(iv) the date of the meeting of the shareholders of the Portfolio, at which
meeting this Subadvisory Consulting Agreement is approved by the vote
of a majority of the outstanding voting securities (as defined in the
Investment Company Act)) of the Portfolio.
such date being referred to in this Subadvisory Consulting Agreement as the
"Effective Date".
The Subadvisory Consulting 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 Fund or
by a majority of the outstanding voting securities of the Portfolio, provided
that in either event such continuance shall also be approved by the vote of a
majority of the Trustees of the Fund who are not interested persons (as defined
in the Investment Company Act) of any party to this Subadvisory Consulting
Agreement cast in person at a meeting called for the purpose of voting on such
approval. The required shareholder approval of this Subadvisory Consulting
Agreement or of any continuance of this Subadvisory Consulting Agreement shall
be effective with respect to the 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 the Portfolio votes to approve this
Subadvisory Consulting Agreement or its continuance, notwithstanding that the
Subadvisory Consulting Agreement or its continuance may not have been approved
by a majority of the outstanding voting securities of (a) any other portfolio of
the Fund or (b) all the portfolios of the Fund.
This Subadvisory Consulting Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Portfolio, on sixty days'
written notice to SBAM and SBAM Limited or by SBAM or SBAM Limited on sixty
days' written notice to the Fund and the other party. This Subadvisory
Consulting Agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
<PAGE>
Act), in the event the Advisory Agreement between the Adviser and the Fund
terminates for any reason or in the event the shareholders of the Portfolio fail
to approve any continuance of the Agreement or the Agreement terminates for any
reason.
6. AMENDMENTS TO THE SUBADVISORY CONSULTING AGREEMENT
This Subadvisory Consulting 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 the Portfolio and by the vote of a majority of the Trustees
of the Fund who are not interested persons of any party to this Subadvisory
Consulting 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 the Portfolio if a majority of the outstanding voting securities
of the 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 of the Fund or (b) all the Portfolios of
the Fund.
7. COMPLAINTS
All formal complaints by SBAM or the Fund should in the first instance be made
in writing to the Compliance Officer of SBAM Limited in accordance with
paragraph 10 of this Subadvisory Consulting Agreement. In addition, SBAM and
the Fund have the right to complain directly to IMRO.
8. ENTIRE AGREEMENT
This Subadvisory Consulting Agreement contains the entire understanding and
agreement of the parties with respect to the Portfolio.
-3-
<PAGE>
9. HEADINGS
The headings in the sections of this Subadvisory Consulting Agreement are
inserted for convenience of reference only and shall not constitute a part
hereof.
10. NOTICES
All notices required to be given pursuant to this Subadvisory Consulting
Agreement shall be delivered or mailed to the last known business address of the
Fund 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.
11. SEVERABILITY
Should any portion of this Subadvisory Consulting Agreement for any reason be
held to be void in law or in equity, the Subadvisory Consulting Agreement shall
be construed insofar as is possible as if such portion had never been contained
herein.
12. GOVERNING LAW
The provisions of this Subadvisory Consulting Agreement shall be construed and
interpreted in accordance with the laws of The Commonwealth of Massachusetts, or
any of the applicable provisions of the Investment Company Act. To the extent
that the laws of The Commonwealth of Massachusetts, or any of the provisions in
this Subadvisory Consulting Agreement, conflict with applicable provisions of
the Investment Company Act, the latter shall control.
13. LIMITATION OF LIABILITY
The Amended and Restated Declaration of Trust of the Fund, 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 Security Trust" (now referred to as
"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 Fund 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
Fund or any portfolio thereof, but only the assets belonging to the Fund, or to
the particular portfolio with which the obligee or claimant dealt, shall be
liable.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Subadvisory
Consulting Agreement to be executed by their duly authorized officers as of the
date first written above.
Salomon Brothers Asset
Management Inc
By:
--------------------------------
Salomon Brothers Asset
Management Limited
By:
--------------------------------
-5-
<PAGE>
APPENDIX A
----------
SBAM will pay SBAM Limited, as full compensation for services provided under
this Subadvisory Consulting Agreement, a portion of the fee (such portion herein
referred to as the "Subadvisory Consulting Fee") payable to SBAM under the
Agreement being an amount equal to the fee payable under the Agreement
multiplied by the current value of the net assets of the Delegated Portion and
divided by the current value of the net assets of the Portfolio.
The Subadvisory Consulting Fee shall be accrued for each calendar day in the
period commencing with the Effective Date and ending on the date on which this
Subadvisory Consulting agreement terminates in accordance with its paragraph 5
and the sum of the daily fee accruals shall be paid to SBAM Limited by SBAM at
such times and for such periods as SBAM and SBAM Limited shall agree.
The Subadvisory Consulting Fee will be paid by SBAM out its fee paid pursuant to
the Agreement.
-6-
<PAGE>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between CypressTree Asset
Management Corporation, Inc., a Delaware corporation ("Cypress" or the
"Adviser"), and J.P. Morgan Investment Management Inc., a Delaware Corporation
(the "Subadviser"). In consideration of the mutual covenants contained herein,
the parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to
manage the investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and other
information affecting the economy generally and individual companies
or industries the securities of which are included in the Portfolios
or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each Portfolio
consistent with the investment objectives and related investment
policies for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these investment programs by
the purchase and sale of securities including the placing of orders
for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. assist in determinations, in accordance with procedures and methods
established by the Trustees of the Trust, of the fair value of
<PAGE>
securities held by the Portfolios for which market quotations are not
readily available for purposes of enabling the Trust's Custodian to
calculate net asset value.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage commissions
if ap plicable. The Subadviser is directed at all times to seek to execute
brokerage transactions for the Portfolios in ac cordance with such policies
or practices as may be established by the Trustees and described in the
Trust's registration statement as amended. The Subadviser may pay a broker-
dealer which provides research and brokerage services a higher spread or
commission for a particular transaction than otherwise might have been
charged by another broker-dealer, if the Subadviser determines that the
higher spread or commission is reasonable in relation to the value of the
brokerage and research services that such broker-dealer provides, viewed in
terms of either the particular transaction or the Subadviser's overall
responsibilities with respect to accounts managed by the Subadviser. The
Subadviser may use for the benefit of the Subadviser's other clients, or
make available to companies affiliated with the Subadviser or to its
directors for the benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its partners 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
<PAGE>
gross negligence of, or from reckless disregard of, the duties of the Subadviser
or any of its partners or employees; and neither the Subadviser nor any of its
partners 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 negligence in the performance of, or from disregard of, the duties of
the Subadviser or any of its partners or employees.
Promptly following execution of this Agreement, the Adviser will provide
the Subadviser with a Guideline specifying the requirements of Subsection 851
(b) (3) of the Internal Revenue Code (the "Code") as it pertains to the
Portfolios. With respect to the short-three limitations imposed under Subsection
851 (b)(3) of the Code, the Adviser will provide within fifteen days of the end
of each month a written Report dated the end of the previous month with respect
to each Portfolios' compliance for its current fiscal year with those
limitations. The Reports will include each Portfolios' gross income from the
beginning of the current fiscal year to the date of the Report and its
cumulative income and gains described in Subsection 851 (b)(3) of the Code for
such period. While the Subadviser is responsible for investing the Portfolio's
assets in accordance with the Portfolios' registration statement, including the
limitations imposed under Subsection 851 (b)(3) of the Code, the Adviser agrees
that the Subadviser may rely on, and will not be liable for failures
attributable to, information contained in the most recent Guideline and the
Reports.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers, partners
or otherwise; that directors, officers, agents and partners of the Subadviser
are or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested in the Trust; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Trust and the Certificate of Incorporation of the
Subadviser, respectively, or by specific provision of applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
-3-
<PAGE>
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 its execution, the effective date of the registration statement of the
Portfolio and 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 out standing voting
securities of (a) any other Portfolio affected by the Agreement or (b) all the
portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason. Without limiting in any way the requirements of the
foregoing provisions, the Adviser will provide the Subadviser 5 (five) days
written notice in the event the Advisory Agreement between the Adviser and the
Trust will be terminated.
-4-
<PAGE>
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. the managing general partner or controlling partner of the Subadviser or
the portfolio manager of any Portfolio changes.
10. INDEMNIFICATION
a. The Adviser agrees to indemnify and hold harmless the Subadviser from and
against any and all claims, losses, liabilities or damages (including
reasonable attorneys' fees and other related expenses) ("Losses") arising
from or in connection with this Agreement or the performance by the
Subadviser of its duties hereunder; provided, however, that the Subadviser
shall not be indemnified hereunder for Losses arising from or in connection
with this Agreement or the performance by the Subadviser of its duties
hereunder resulting from the Subadviser's or any of its employees' willful
misfeasance, bad faith, gross negligence or reckless disregard.
b. The Subadviser agrees to indemnify and hold harmless the Adviser from and
against any and all Losses arising from or in connection with this
Agreement or the performance by the Adviser of its duties hereunder;
provided, however, that the Adviser shall not be indemnified hereunder for
Losses arising from or in connection with this Agreement or the performance
by the Adviser of its duties hereunder resulting from the Adviser's or any
of its employees' willful misfeasance, bad faith, gross negligence, or
reckless disregard.
11. DISCLOSURE
Except as otherwise required by applicable law or this Agreement, neither
the Trust nor the Adviser shall, without the prior written consent of the
Subadviser (such consent not to be unreasonably withheld or delayed), make
available to the general public any representations regarding or references to
the Subadviser or any of its affiliates (in each case, "Disclosure") in any
disclosure document; provided, however, that the Subadviser shall be deemed to
have consented to the use of any Disclosure if (i) the Advisor has submitted
such Disclosure to the Subadviser for its approval a reasonable period of time
-5-
<PAGE>
prior to any regulatory filing date or other deadline for the use of the
Disclosure and (ii) the Subadviser does not, within three (3) business days of
the Subadviser's receipt of such Disclosure (or such other period of time as
agreed to by the Adviser and the Subadviser), provide the Adviser with (a)
notice of its disapproval of such Disclosure and (b) revised Disclosure,
reasonable acceptable to the Adviser, to be used in the place of such
disapproved Disclosure. Notwithstanding the preceding sentence, the Adviser
shall not be required to obtain the Subadviser's approval of any Disclosure if
obtaining such approval by the process described in the preceding sentence would
cause the Trust or the Adviser to violate any applicable law, rule or regulation
as reasonably determined by the Adviser or the Trustees of the Trust. For the
purposes of this Section 11, the term "affiliate" shall mean any person
controlling, controlled by or under common control with the Subadviser.
12. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the amendment or (b) all the
portfolios of the Trust.
-6-
<PAGE>
13. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
14. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
15. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
16. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
17. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
18. LIMITATION OF LIABILITY
The Agreement and Declaration of Trust establishing the Trust, dated
September 28, 1988, 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.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] CypressTree Asset Management Corporation, Inc.
by:
----------------------------------
[SEAL] J.P. Morgan Investment Management, Inc.
by:
----------------------------------
-8-
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the "Subadviser
Percentage Fee"):
International Growth and Income Fund - .50% of the first $50,000,000, .45%
between $50,000,000 and $200,000,000, .40% between $200,000,000 and
$500,000,000 and .35% on the excess over $500,000,000 of the current value
of the net assets of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
prospectus and statement of additional information as of the close of business
on the previous business day on which the Trust was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
-9-
<PAGE>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between CypressTree Asset
Management Corporation, Inc., a Delaware corporation ("Cypress" or the
"Adviser"), and Fred Alger Management Inc., a Delaware Corporation (the
"Subadviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to manage
the investments and reinvestments of the assets of the Portfolios, the
Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and other
information affecting the economy generally and individual companies
or industries the securities of which are included in the Portfolios
or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each Portfolio
consistent with the investment objectives and related investment
policies for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these investment programs by
the purchase and sale of securities including the placing of orders
for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide determinations, in accordance with procedures and methods
established by the Trustees of the Trust, of the fair
<PAGE>
value of securities held by the Portfolios for which market quotations
are not readily available for purposes of enabling the Trust's
Custodian to calculate net asset value.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers, including Fred Alger &
Company, Incorporated, an affiliate of the Subadviser, to effect all
transactions subject to the following conditions: The Subadviser will place
all orders with brokers, dealers, or issuers, and will negotiate brokerage
commissions if applicable. The Subadviser is directed at all times to seek
to execute brokerage transactions for the Portfolios in accordance with
such policies or practices as may be established by the Trustees and
described in the Trust's registration statement as amended. The Subadviser
may pay a broker-dealer which provides research and brokerage services a
higher spread or commission for a particular transaction than otherwise
might have been charged by another broker-dealer, if the Subadviser
determines that the higher spread or commission is reasonable in relation
to the value of the brokerage and research services that such broker-dealer
provides, viewed in terms of either the particular transaction or the
Subadviser's overall responsibilities with respect to accounts managed by
the Subadviser. The Subadviser may use for the benefit of the Subadviser's
other clients, or make available to companies affiliated with the
Subadviser or to its directors for the benefit of its clients, any such
brokerage and research services that the Subadviser obtains from brokers or
dealers.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its partners 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
<PAGE>
investments except for losses resulting from willful misfeasance, bad faith or
gross negligence of, or from reckless disregard of, the duties of the Subadviser
or any of its partners or employees; and neither the Subadviser nor any of its
partners 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 negligence in the performance of, or from disregard of, the duties of
the Subadviser or any of its partners or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers, partners
or otherwise; that directors, officers, agents and partners of the Subadviser
are or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested in the Trust; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Trust and the Certificate of Incorporation of the
Subadviser, respectively, or by specific provision of applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of its execution, the effective date of the registration statement of the
Portfolio and 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
-3-
<PAGE>
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 out
standing voting securities of (a) any other Portfolio affected by the Agreement
or (b) all the portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. the managing general partner or controlling partner of the Subadviser or
the portfolio manager of any Portfolio changes.
10. SERVICES TO OTHERS
-4-
<PAGE>
The Adviser understands, and has advised the Trust's Board of Trustees,
that the Subadviser now acts, or may in the future act, as an investment adviser
to fiduciary and other managed accounts, and as investment adviser or subadviser
to other investment companies. The Adviser has no objection to the Subadviser
acting in such capacities, provided that whenever the Portfolios and one or more
other investment advisory clients of the Subadviser have available funds for
investment, investments suitable and appropriate for each will be allocated in a
manner believed by the Subadviser to be equitable to each. The Adviser
recognizes, and has advised the Trust's Board of Trustees, that in some cases
this procedure may adversely affect the size of the position that the
participating Portfolio(s) may obtain in a particular security. In addition, the
Adviser understands, and has advised the Trust's Board of Trustees, that the
persons employed by the Subadviser to assist in the Subadviser's duties under
this Agreement will not devote their full time to such service and nothing
contained in this Agreement will be deemed to limit or restrict the right of the
Subadviser or any of its affiliates to engage in and devote time and attention
to other businesses or to render services of whatever kind or nature.
11. 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.
12. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
13. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
14. 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
-5-
<PAGE>
given on the date delivered or mailed in accordance with this paragraph.
15. 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.
16. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the laws
of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
17. LIMITATION OF LIABILITY
The Amended and Restated Agreement and Declaration of Trust dated February
18, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth of
Massachusetts, provides that the name "North American Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in connection
with the affairs of the Trust or any portfolio thereof, but only the assets
belonging to the Trust, or to the particular portfolio with which the obligee or
claimant dealt, shall be liable.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] CypressTree Asset Management Corporation, Inc.
by:
----------------------------------
[SEAL] Fred Alger Management, Inc.
by:
----------------------------------
-7-
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the "Subadviser
Percentage Fee"):
Small/Mid Cap Fund: .525% of the first $50,000,000, .500% between
$50,000,000 and $200,000,000, .475% between $200,000,000 and $500,000,000
and .450% on the excess over $500,000,000 of the current value of the net
assets of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
prospectus and statement of additional information as of the close of business
on the previous business day on which the Trust was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
-8-
<PAGE>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between CypressTree Asset
Management Corporation, Inc., a Delaware corporation ("Cypress" or the
"Adviser"), and Founders Asset Management, Inc., a Delaware Corporation (the
"Subadviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to
manage the investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and other
information affecting the individual companies or industries the
securities of which are included in the Portfolios or are under
consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each Portfolio
consistent with the investment objectives and related investment
policies for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these investment programs
by the purchase and sale of securities including the placing of
orders for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide recommendations, 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
<PAGE>
not readily available for purposes of enabling the Trust's Custodian
to calculate net asset value.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage commissions
if applicable. The Subadviser is directed at all times to seek to execute
brokerage transactions for the Portfolios in accordance with such policies
or practices as may be established by the Trustees and described in the
Trust's registration statement as amended. The Subadviser may pay a broker-
dealer which provides research and brokerage services a higher spread or
commission for a particular transaction than otherwise might have been
charged by another broker-dealer, if the Subadviser determines that the
higher spread or commission is reasonable in relation to the value of the
brokerage and research services that such broker-dealer provides, viewed in
terms of either the particular transaction or the Subadviser's overall
responsibilities with respect to accounts managed by the Subadviser. The
Subadviser may use for the benefit of the Subadviser's other clients, or
make available to companies affiliated with the Subadviser or to its
directors for the benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios in connection with the Subadviser's provision of services
under this Agreement as are required of an investment adviser of a
registered investment company pursuant to the Investment Company Act of
1940 (the "Investment Company Act") and Investment Advisers Act of 1940
(the "Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its partners 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
<PAGE>
investments except for losses resulting from willful misfeasance, bad faith or
gross negligence of, or from reckless disregard of, the duties of the Subadviser
or any of its partners or employees; and neither the Subadviser nor any of its
partners 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 negligence in the performance of, or from disregard of, the duties of
the Subadviser or any of its partners or employees.
5. SUPPLEMENTAL AND OTHER ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
The services of the Subadviser to the Trust are not to be deemed to be
exclusive, the Subadviser and any person controlled by or under common control
with the Subadviser being free to render investment advisory and other services
to any other person or entity.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers, partners
or otherwise; that directors, officers, agents and partners of the Subadviser
are or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested in the Trust; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Trust and the Certificate of Incorporation of the
Subadviser, respectively, or by specific provision of applicable law.
-3-
<PAGE>
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of its execution, the effective date of the registration statement of the
Portfolio and 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 out standing voting
securities of (a) any other Portfolio affected by the Agreement or (b) all the
portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason.
-4-
<PAGE>
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. the managing general partner or controlling partner of the Subadviser or
the portfolio manager of any Portfolio changes.
-5-
<PAGE>
10. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the amendment or (b) all the
portfolios of the Trust.
11. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
12. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
13. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
14. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
15. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
16. LIMITATION OF LIABILITY
The Amended and Restated Agreement and Declaration of Trust dated
-6-
<PAGE>
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.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] CypressTree Asset Management Corporation, Inc.
by: /s/
---------------------------------
[SEAL] Founders Asset Management, Inc.
.... by: /s/
-----------------------------
-8-
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolios 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"):
International Small Cap Fund: .650% of the first $50,000,000, .600%
between $50,000,000 and $200,000,000, .500% between $200,000,000 and
$500,000,000 and .400% on the excess over $500,000,000 of the average daily
value of the net assets of the Portfolio;
Growth Equity Fund: .500% of the first $50,000,000, .450% between
$50,000,000 and $200,000,000, .425% between $200,000,000 and $500,000,000
and .400% on the excess over $500,000,000 of the average daily value of the
net assets of the Portfolio;
Balanced Fund: .375% of the first $50,000,000, .325% between $50,000,000
and $200,000,000, .275% between $200,000,000 and $500,000,000 and .225% on
the excess over $500,000,000 of the average daily value of the net assets
of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day this Agreement is in force 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>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between CypressTree Asset
Management Corporation, Inc., a Delaware corporation ("Cypress" or the
"Adviser"), and Morgan Stanley Asset Management Inc., a Delaware corporation
(the "Subadviser"). In consideration of the mutual covenants contained herein,
the parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to manage
the investments and reinvestments of the assets of the Portfolios, the
Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and other
information affecting the economy generally and individual companies
or industries the securities of which are included in the Portfolios
or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each Portfolio
consistent with the investment objectives and related investment
policies for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these investment programs by
the purchase and sale of securities including the placing of orders
for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide determinations, in accordance with procedures and methods
established by the Trustees of the Trust, of the fair value of
<PAGE>
securities held by the Portfolios for which market quotations are not
readily available for purposes of enabling the Trust's Custodian to
calculate net asset value.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage commissions
if applicable. The Subadviser is directed at all times to seek to execute
brokerage transactions for the Portfolios in accordance with such policies
or practices as may be established by the Trustees and described in the
Trust's registration statement as amended. The Subadviser may pay a broker-
dealer which provides research and brokerage services a higher spread or
commission for a particular transaction than otherwise might have been
charged by another broker-dealer, if the Subadviser determines that the
higher spread or commission is reasonable in relation to the value of the
brokerage and research services that such broker-dealer provides, viewed in
terms of either the particular transaction or the Subadviser's overall
responsibilities with respect to accounts managed by the Subadviser. The
Subadviser may use for the benefit of the Subadviser's other clients, or
make available to companies affiliated with the Subadviser or to its
directors for the benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers. In accordance
with Section 11(a) of the Securities Exchange Act of 1934, as amended and
Rule 11a2-2(T) thereunder, and subject to any other applicable laws and
regulations including Section 17(e) of the Investment Company Act of 1940
(the "1940 Act") and Rule 17e-1 thereunder, the Subadviser may engage its
affiliates as broker-dealers to effect portfolio transactions in securities
for the Portfolios.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
<PAGE>
Neither the Subadviser nor any of its affiliates, officers, partners or
employees nor anyone who controls the Subadviser (or any of its affiliates,
officers, partners or employees) within the meaning of Section 15 of the
Securities Act of 1933 (the "1933 Act") shall be liable to the Adviser or Trust
for any loss suffered by the Adviser or Trust resulting from any error of
judgment made in the good faith exercise of the Subadviser's investment
discretion in connection with selecting Portfolio investments except for losses
resulting from willful misfeasance, bad faith or gross negligence of, or from
reckless disregard of, the duties of the Subadviser or any of its affiliates,
partners or employees; and neither the Subadviser nor any of its affiliates,
officers, partners or employees, nor anyone who controls the Subadviser (or any
of its affiliates, officers, partners or employees) within the meaning of
Section 15 of the 1933 Act shall be liable to the Adviser or Trust for any loss
suffered by the Adviser or Trust resulting from any other matters to which this
Agreement relates (i.e., those other matters specified in Sections 2 and 8 of
- -
this Agreement), except for losses resulting from willful misfeasance, bad
faith, or gross negligence in the performance of, or from disregard of, the
duties of the Subadviser or any of its affiliates, partners or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser, including, but not limited to, Morgan Stanley Asset
Management Limited, to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers, partners
or otherwise; that directors, officers, agents and partners of the Subadviser
are or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested in the Trust; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Trust and the Certificate of Incorporation of the
Subadviser, respectively, or by specific provision of applicable law.
-3-
<PAGE>
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of (i) its execution, (ii) the effective date of the registration
statement of the Portfolio and (iii) the date of the meeting of the shareholders
of the Portfolio, at which meeting this Agreement is approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Portfolio. The Agreement will continue in effect for a
period more than two years from the date of its execution only so long as such
continuance is specifically approved at least annually either by the Trustees of
the Trust or by a majority of the outstanding voting securities of each of the
Portfolios, provided that in either event such continuance shall also be
approved by the vote of a majority of the Trustees of the Trust who are not
interested persons (as defined in the Investment Company Act) of any party to
this Agreement cast in person at a meeting called for the purpose of voting on
such approval. The required shareholder approval of the Agreement or of any
continuance of the Agreement shall be effective with respect to any Portfolio if
a majority of the outstanding voting securities of the series (as defined in
Rule 18f-2(h) under the Investment Company Act) of shares of that Portfolio
votes to approve the Agreement or its continuance, notwithstanding that the
Agreement or its continuance may not have been approved by a majority of the
outstanding voting securities of (a) any other Portfolio affected by the
Agreement or (b) all the portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement that is submitted to shareholders for approval, the
Subadviser will continue to act as investment subadviser with respect to such
Portfolio pending the required approval of the Agreement or its continuance or
of any contract with the Subadviser or a different adviser or subadviser or
other definitive action; provided, that the compensation received by the
Subadviser in respect of such Portfolio during such period is in compliance with
Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the
-4-
<PAGE>
Adviser and the Trust terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust;
c. there is a change of control of the Subadviser which constitutes an
assignment of this Agreement under the 1940 Act;
d. the portfolio manager of any Portfolio changes.
10. The Adviser represents that the Trustees of the Trust have adopted
procedures pursuant to Rules 17a-7 and 17e-1 of the Investment Company Act
which comply with those rules
11. The Adviser acknowledges receipt of (i) the most current Form ADV of the
Subadviser and (ii) the most current Form ADV and the most current IMRO
terms of business letter of the Subadviser's affiliate, Morgan Stanley
Asset Management Limited.
12. The Adviser shall be responsible for voting all proxies received by the
Trust in connection with any of the securities held in the Portfolios
managed by the Subadviser.
13. 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.
14. HEADINGS
-5-
<PAGE>
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
15. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
16. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
17. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the laws
of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
18. LIMITATION OF LIABILITY
The Amended and Restated Agreement and Declaration of Trust dated February
18, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth of
Massachusetts, provides that the name "North American Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in connection
with the affairs of the Trust or any portfolio thereof, but only the assets
belonging to the Trust, or to the particular portfolio with which the obligee or
claimant dealt, shall be liable.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] CypressTree Asset Management Corporation, Inc..
by:
--------------------------
[SEAL] Morgan Stanley Asset Management Inc.
by:
--------------------------
-7-
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the "Subadviser
Percentage Fee"):
Global Equity Portfolio: .500% of the first $50,000,000, .450% between
$50,000,000 and $200,000,000, .375% between $200,000,000 and $500,000,000
and .325% on the excess over $500,000,000 of the current value of the net
assets of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
prospectus and statement of additional information as of the close of business
on the previous business day on which the Trust was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
-8-
<PAGE>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between CypressTree Asset
Management Corporation, Inc., a Delaware corporation ("Cypress" or the
"Adviser"), and T. Rowe Price Associates, Inc., a Maryland corporation (the
"Subadviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to
manage the investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and other
information affecting the economy generally and individual companies
or industries the securities of which are included in the Portfolios
or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each Portfolio
consistent with the investment objectives and related investment
policies for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these investment programs by
the purchase and sale of securities including the placing of orders
for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide assistance to the Trust's Custodian regarding the fair value of
securities held by the Portfolios for which market quotations are
<PAGE>
not readily available.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage commissions
if applicable. The Subadviser is directed at all times to seek to execute
brokerage transactions for the Portfolios in accordance with such policies
or practices as may be established by the Trustees and described in the
Trust's registration statement as amended. The Subadviser may pay a
broker-dealer which provides research and brokerage services a higher
spread or commission for a particular transaction than otherwise might have
been charged by another broker-dealer, if the Subadviser determines that
the higher spread or commission is reasonable in relation to the value of
the brokerage and research services that such broker-dealer provides,
viewed in terms of either the particular transaction or the Subadviser's
overall responsibilities with respect to accounts managed by the
Subadviser. The Subadviser may use for the benefit of the Subadviser's
other clients, or make available to companies affiliated with the
Subadviser or to its directors for the benefit of its clients, any such
brokerage and research services that the Subadviser obtains from brokers or
dealers.
d. On occasions when the Subadviser deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as other clients of the
Subadviser, the Subadviser to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities to be purchased or sold to attempt to obtain a more favorable
price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Subadviser in
the manner the Subadviser considers to be the most equitable and consistent
with its fiduciary obligations to the Portfolio and to its other clients.
e. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
<PAGE>
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its employees shall be liable to the
Adviser or Trust for any loss suffered by the Adviser or Trust resulting from
any error of judgment made in the good faith exercise of the Subadviser's
investment discretion in connection with selecting Portfolio investments except
for losses resulting from willful misfeasance, bad faith or gross negligence of,
or from reckless disregard of, the duties of the Subadviser or any of its
partners or employees; and neither the Subadviser nor any of its employees shall
be liable to the Adviser or Trust for any loss suffered by the Adviser or Trust
resulting from any other matters to which this Agreement relates (i.e., those
- -
other matters specified in Sections 2 and 8 of this Agreement), except for
losses resulting from willful misfeasance, bad faith, or gross negligence in the
performance of, or from disregard of, the duties of the Subadviser or any of its
partners or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers, partners
or otherwise; that directors, officers, agents and partners of the Subadviser
are or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested in the Trust; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Trust and the Certificate of Incorporation of the
Subadviser, respectively, or by specific provision of applicable law.
-3-
<PAGE>
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of (i) its execution, (ii) the effective date of the registration
statement of the Portfolio and (iii) the date of the meeting of the shareholders
of the Portfolio, at which meeting this Agreement is approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Portfolio. The Agreement will continue in effect for a
period more than two years from the date of its execution only so long as such
continuance is specifically approved at least annually either by the Trustees of
the Trust or by a majority of the outstanding voting securities of each of the
Portfolios, provided that in either event such continuance shall also be
approved by the vote of a majority of the Trustees of the Trust who are not
interested persons (as defined in the Investment Company Act) of any party to
this Agreement cast in person at a meeting called for the purpose of voting on
such approval. The required shareholder approval of the Agreement or of any
continuance of the Agreement shall be effective with respect to any Portfolio if
a majority of the outstanding voting securities of the series (as defined in
Rule 18f-2(h) under the Investment Company Act) of shares of that Portfolio
votes to approve the Agreement or its continuance, notwithstanding that the
Agreement or its continuance may not have been approved by a majority of the
outstanding voting securities of (a) any other Portfolio affected by the
Agreement or (b) all the portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the
-4-
<PAGE>
Investment Company Act) or in the event the Advisory Agreement between the
Adviser and the Trust terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. any change in actual control or management of the Subadviser or the
portfolio manager of any Portfolio.
-5-
<PAGE>
10. PROVISION OF CERTAIN INFORMATION BY THE ADVISER
The Adviser shall furnish the Subadviser with copies of the Trust's
Prospectus and Statement of Additional Information, and any reports made by the
Trust to its shareholders, as soon as practicable after such documents become
available. The Adviser shall furnish the Subadviser with any further documents,
materials or information that the Subadviser may reasonably request to enable it
to perform its duties pursuant to this Agreement.
11. SERVICES TO OTHER CLIENTS
The Adviser understand, and has advised the Trust's Board of Trustees, that
the Subadviser now acts, or may in the future act, as an investment adviser to
fiduciary and other managed accounts and as investment adviser or subadviser to
other investment companies. Further, the Adviser understands, and has advised
the Trust's Board of Trustees that the Subadviser and its affiliates may give
advice and take action for its accounts, including investment companies, which
differs from advice given on the timing or nature of action taken for the
Portfolio. The Subadviser is not obligated to initiate transaction for the
Portfolio in any security which the Subadviser, its principals, affiliates or
employees may purchase or sell for their own accounts or other clients.
12. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the amendment or (b) all the
portfolios of the Trust.
13. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
14. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
15. NOTICES
-6-
<PAGE>
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
16. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
17. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
18. LIMITATION OF LIABILITY
The Amended and Restated Agreement and Declaration of Trust dated February
18, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth of
Massachusetts, provides that the name "North American Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in connection
with the affairs of the Trust or any portfolio thereof, but only the assets
belonging to the Trust, or to the particular portfolio with which the obligee or
claimant dealt, shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] CypressTree Asset Management Corporation, Inc.
by:
-------------------------
-7-
<PAGE>
[SEAL] T. Rowe Price Associates, Inc.
by:
-------------------
-8-
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the "Subadviser
Percentage Fee"):
Equity-Income Portfolio: .400% of the first $50,000,000, .300% between
$50,000,000 and $200,000,000, .200% between $200,000,000 and $500,000,000
and .200% on the excess over $500,000,000 of the current value of the net
assets of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
prospectus and statement of additional information as of the close of business
on the previous business day on which the Trust was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
-9-
<PAGE>
NORTH AMERICAN FUNDS
SUBADVISORY AGREEMENT
AGREEMENT made this 1st day of October, 1997, between CypressTree Asset
Management Corporation, Inc., a Delaware corporation ("Cypress" or the
"Adviser"), and Manufacturers Adviser Corporation, a Colorado corporation (the
"Subadviser"). In consideration of the mutual covenants contained herein, the
parties agree as follows:
1. APPOINTMENT OF SUBADVISER
The Subadviser undertakes to act as investment subadviser to, and, subject
to the supervision of the Trustees of North American Funds (the "Trust") and the
terms of this Agreement, to manage the investment and reinvestment of the assets
of the Portfolios specified in Appendix A to this Agreement as it shall be
amended by the Adviser and the Subadviser from time to time (the "Portfolios").
The Subadviser will be an independent contractor and will have no authority to
act for or represent the Trust or Adviser in any way except as expressly
authorized in this Agreement or another writing by the Trust and Adviser.
2. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
a. Subject always to the direction and control of the Trustees of the Trust,
the Subadviser will manage the investments and determine the composition of
the assets of the Portfolios in accordance with the Portfolios'
registration statement, as amended. In fulfilling its obligations to
manage the investments and reinvestments of the assets of the Portfolios,
the Subadviser will:
i. obtain and evaluate pertinent economic, statistical, financial and other
information affecting the economy generally and individual companies
or industries the securities of which are included in the Portfolios
or are under consideration for inclusion in the Portfolios;
ii. formulate and implement a continuous investment program for each Portfolio
consistent with the investment objectives and related investment
policies for each such Portfolio as described in the Trust's
registration statement, as amended;
iii. take whatever steps are necessary to implement these investment programs by
the purchase and sale of securities including the placing of orders
for such purchases and sales;
iv. regularly report to the Trustees of the Trust with respect to the
implementation of these investment programs; and
v. provide determinations, in accordance with procedures and methods
established by the Trustees of the Trust, of the fair value of
<PAGE>
securities held by the Portfolios for which market quotations are not
readily available for purposes of enabling the Trust's Custodian to
calculate net asset value.
b. The Subadviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel required for it
to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Portfolios (excluding
determination of net asset value and shareholder accounting services).
c. The Subadviser will select brokers and dealers to effect all transactions
subject to the following conditions: The Subadviser will place all orders
with brokers, dealers, or issuers, and will negotiate brokerage commissions
if applicable. The Subadviser is directed at all times to seek to execute
brokerage transactions for the Portfolios in accordance with such policies
or practices as may be established by the Trustees and described in the
Trust's registration statement as amended. The Subadviser may pay a broker-
dealer which provides research and brokerage services a higher spread or
commission for a particular transaction than otherwise might have been
charged by another broker-dealer, if the Subadviser determines that the
higher spread or commission is reasonable in relation to the value of the
brokerage and research services that such broker-dealer provides, viewed in
terms of either the particular transaction or the Subadviser's overall
responsibilities with respect to accounts managed by the Subadviser. The
Subadviser may use for the benefit of the Subadviser's other clients, or
make available to companies affiliated with the Subadviser or to its
directors for the benefit of its clients, any such brokerage and research
services that the Subadviser obtains from brokers or dealers.
d. The Subadviser will maintain all accounts, books and records with respect
to the Portfolios as are required of an investment adviser of a registered
investment company pursuant to the Investment Company Act of 1940 (the
"Investment Company Act") and Investment Advisers Act of 1940 (the
"Investment Advisers Act") and the rules thereunder.
3. COMPENSATION OF SUBADVISER
The Adviser will pay the Subadviser with respect to each Portfolio the
compensation specified in Appendix A to this Agreement.
4. LIABILITY OF SUBADVISER
Neither the Subadviser nor any of its officers or employees shall be liable
to the Adviser or Trust for any loss suffered by the Adviser or Trust resulting
from any error of judgment made in the good faith exercise of the Subadviser's
investment discretion in connection with selecting Portfolio investments except
for losses resulting from willful misfeasance, bad faith or
<PAGE>
gross negligence of, or from reckless disregard of, the duties of the Subadviser
or any of its partners or employees; and neither the Subadviser nor any of its
officers or employees shall be liable to the Adviser or Trust for any loss
suffered by the Adviser or Trust resulting from any other matters to which this
Agreement relates (i.e., those other matters specified in Sections 2 and 8 of
- -
this Agreement), except for losses resulting from willful misfeasance, bad
faith, or gross negligence in the performance of, or from disregard of, the
duties of the Subadviser or any of its officers or employees.
5. SUPPLEMENTAL ARRANGEMENTS
The Subadviser may enter into arrangements with other persons affiliated
with the Subadviser to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Subadviser.
6. CONFLICTS OF INTEREST
It is understood that trustees, officers, agents and shareholders of the
Trust are or may be interested in the Subadviser as trustees, officers or
otherwise; that directors, officers, agents and partners of the Subadviser are
or may be interested in the Trust as trustees, officers, shareholders or
otherwise; that the Subadviser may be interested in the Trust; and that the
existence of any such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided in the Agreement and
Declaration of Trust of the Trust and the Certificate of Incorporation of the
Subadviser, respectively, or by specific provision of applicable law.
7. REGULATION
The Subadviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
-3-
<PAGE>
8. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective with respect to each Portfolio on the
later of (i) its execution, (ii) the effective date of the registration
statement of the Portfolio and (iii) the date of the meeting of the shareholders
of the Portfolio, at which meeting this Agreement is approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Portfolio. The Agreement will continue in effect for a
period more than two years from the date of its execution only so long as such
continuance is specifically approved at least annually either by the Trustees of
the Trust or by a majority of the outstanding voting securities of each of the
Portfolios, provided that in either event such continuance shall also be
approved by the vote of a majority of the Trustees of the Trust who are not
interested persons (as defined in the Investment Company Act) of any party to
this Agreement cast in person at a meeting called for the purpose of voting on
such approval. The required shareholder approval of the Agreement or of any
continuance of the Agreement shall be effective with respect to any Portfolio if
a majority of the outstanding voting securities of the series (as defined in
Rule 18f-2(h) under the Investment Company Act) of shares of that Portfolio
votes to approve the Agreement or its continuance, notwithstanding that the
Agreement or its continuance may not have been approved by a majority of the
outstanding voting securities of (a) any other Portfolio affected by the
Agreement or (b) all the portfolios of the Trust.
If the shareholders of any Portfolio fail to approve the Agreement or any
continuance of the Agreement, the Subadviser will continue to act as investment
subadviser with respect to such Portfolio pending the required approval of the
Agreement or its continuance or of any contract with the Subadviser or a
different adviser or subadviser or other definitive action; provided, that the
compensation received by the Subadviser in respect of such Portfolio during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees of the Trust, by the vote of a majority of the
outstanding voting securities of the Trust, or with respect to any Portfolio by
the vote of a majority of the outstanding voting securities of such Portfolio,
on sixty days' written notice to the Adviser and the Subadviser, or by the
Adviser or Subadviser on sixty days' written notice to the Trust and the other
party. This agreement will automatically terminate, without the payment of any
penalty, in the event of its assignment (as defined in the Investment Company
Act) or in the event the Advisory Agreement between the Adviser and the Trust
terminates for any reason.
9. PROVISION OF CERTAIN INFORMATION BY SUBADVISER
The Subadviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
-4-
<PAGE>
a. the Subadviser fails to be registered as an investment adviser under the
Investment Advisers Act or under the laws of any jurisdiction in which the
Subadviser is required to be registered as an investment adviser in order
to perform its obligations under this Agreement;
b. the Subadviser is served or otherwise receives notice of any action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any
court, public board or body, involving the affairs of the Trust; and
c. any change in actual control or management of the Subadviser or the
portfolio manager of any Portfolio.
10. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of each of the Portfolios affected by the amendment and by the vote
of a majority of the Trustees of the Trust who are not interested persons of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval. The required shareholder approval shall be effective
with respect to any Portfolio if a majority of the outstanding voting securities
of that Portfolio vote to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of (a) any other Portfolio affected by the amendment or (b) all the
portfolios of the Trust.
11. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
12. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
13. NOTICES
All notices required to be given pursuant to this Agreement shall be
delivered or mailed to the last known business address of the Trust or
applicable party in person or by registered mail or a private mail or delivery
service providing the sender with notice of receipt. Notice shall be deemed
given on the date delivered or mailed in accordance with this paragraph.
14. SEVERABILITY
Should any portion of this Agreement for any reason be held to be void in
law or in equity, the Agreement shall be construed, insofar as is possible, as
if such portion had never been contained herein.
-5-
<PAGE>
15. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of The Commonwealth of Massachusetts, or any of the
applicable provisions of the Investment Company Act. To the extent that the
laws of The Commonwealth of Massachusetts, or any of the provisions in this
Agreement, conflict with applicable provisions of the Investment Company Act,
the latter shall control.
16. LIMITATION OF LIABILITY
The Amended and Restated Agreement and Declaration of Trust dated February
18, 1994, a copy of which, together with all amendments thereto (the
"Declaration"), is on file in the office of the Secretary of The Commonwealth of
Massachusetts, provides that the name "North American Funds" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property, for the satisfaction of any obligation or claim, in connection
with the affairs of the Trust or any portfolio thereof, but only the assets
belonging to the Trust, or to the particular portfolio with which the obligee or
claimant dealt, shall be liable.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers as of the date first
mentioned above.
[SEAL] CypressTree Asset Management Corporation, Inc.
by:
-----------------
[SEAL] Manufacturers Adviser Corporation
by:
-----------------
-7-
<PAGE>
APPENDIX A
----------
The Subadviser shall serve as investment subadviser for the following
portfolio of the Trust. The Adviser will pay the Subadviser, as full
compensation for all services provided under this Agreement, the fee computed
separately for each such Portfolio at an annual rate as follows (the "Subadviser
Percentage Fee"):
Money Market Portfolio: .075% of the first $50,000,000, .075% between
$50,000,000 and $200,000,000, .075% between $200,000,000 and $500,000,000
and .020% on the excess over $500,000,000 of the current value of the net
assets of the Portfolio;
The Subadviser Percentage Fee for each Portfolio shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid monthly to the
Subadviser. The daily fee accruals will be computed by multiplying the fraction
of one over the number of calendar days in the year by the applicable annual
rate described in the preceding paragraph, and multiplying this product by the
net assets of the Portfolio as determined in accordance with the Trust's
prospectus and statement of additional information as of the close of business
on the previous business day on which the Trust was open for business.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.
-8-
<PAGE>
Amendment to NASL Distribution Agreement
----------------------------------------
Section 3 of the Distribution Agreement, dated as of January 1, 1996, between
NASL Financial Services, Inc. (the "Distributor") and North American Funds is
hereby amended to provide that the Distributor is entitled to all distribution
fees and contingent deferred sales charges payable in respect of assets
attributable to shares of the Funds sold during the term of such agreement and
restated in its entirety as follows:
"3. Sales Charges.
-------------
(a) The Distributor shall have the right to receive the sales charges
(including without limitation contingent deferred sales charges) in respect of
Shares (i) sold during the term of this Agreement or any continuation hereof
(ii) later issued in connection with reinvestment of dividends (whether
ordinary, capital gain or tax-exempt dividends, or return of capital) paid in
respect of Shares described in clause (i) or this clause (ii), (iii) later
acquired by a holder of Shares described in clause (i) or clause (ii) upon a
free exchange of such Shares for shares of another Fund and (iv) later issued in
connection with reinvestment of dividends paid in respect of Shares described in
clause (iii) (collectively, "Former Distributor Shares"), in each case under
the circumstances and upon the terms and conditions and in the amounts set forth
in the Trust's prospectus at the time of the sale.
(b) So long as the Trust's Distribution Plans pursuant to Rule 12b-1
under the Investment Company Act remain in effect, the Distributor shall have
the right to receive all amounts payable under such Distribution Plans with
respect to assets attributable to Former Distributor Shares.
(c) The sales charges referred to in Section 3(a) above and the amounts
payable under the Trust's Distribution Plans pursuant to Rule 12b-1 referred to
in Section 3(b) above are referred to herein collectively as "Distribution
Fees."
(d) The Distributor may transfer its right to receive Distribution Fees
(but not its obligations under this Agreement), and such transfer shall be
effective upon written notice from the Distributor to the Trust. In connection
with the foregoing, the Trust is authorized to pay all or a part of the
Distribution Fees directly to such transferee of the Distributor.
(e) The right of the Distributor to receive Distribution Fees with
respect to Former Distributor Shares shall survive the termination of this
Agreement."
<PAGE>
EXECUTED as of this 30th day of September, 1997.
---- ---------
North American Funds
by: /s/ J M Scott
-------------------------------
Manufacturers Securities Services, LLC
by: North American Security Life Insurance Company,
Managing Member
by: /s/ [SIGNITURE APPEARS HERE]
-------------------------------
by: /s/ [SIGNITURE APPEARS HERE]
-------------------------------
<PAGE>
DISTRIBUTION AGREEMENT
----------------------
AGREEMENT made as of October 1, 1997, by and between North American
Funds (the "Trust"), a Massachusetts business trust which intends to engage in
business as an open-end investment company under the Investment Company Act of
1940, as amended (the "Investment Company Act"), and CypressTree Funds
Distributors, Inc. (the "Distributor"), a Delaware corporation registered under
the Securities Exchange Act of 1934, as amended, as a broker-dealer.
1. Appointment of Distributor. The Trust hereby appoints the Distributor
--------------------------
as the principal underwriter and exclusive distributor of shares of each series
of shares of beneficial interest of the Trust (the "Shares") and the Distributor
hereby accepts that appointment.
2. Sale of Shares Through Distributor.
----------------------------------
(a) The Trust hereby grants to the Distributor the exclusive right to
sell, as agent for the Trust not as principal, and to arrange for the sale of
Shares upon the terms herein set forth. The exclusive right hereby granted
shall not apply to Shares issued or transferred or sold: (i) in connection with
the merger or consolidation of any other investment company or personal holding
company with the Trust or one of its portfolio series or the acquisition by
purchase or otherwise of all (or substantially all) the assets or the
outstanding shares of any such company by the Trust or one of its portfolio
series; or (ii) pursuant to reinvestment of dividends or capital gains
distributions; or (iii) pursuant to any reinstatement privilege afforded
redeeming shareholders. It is understood that shares may be purchased directly
through the Trust's transfer and dividend disbursing agent in the manner set
forth in the Trust's prospectus.
(b) The Distributor, either directly or through a promotional agent
selected and compensated by the Distributor, will devote research, time and
effort to effect sales of Shares through dealers, and will assist those dealers
and their associated persons to the extent and in whatever manner the
Distributor deems appropriate in order to enhance the sale of Shares, but the
Distributor does not undertake to arrange for the sale of any specific number of
Shares.
<PAGE>
Neither the Distributor nor any selected dealer nor any other person is
authorized by the Trust to give any information or to make any representations,
other than those contained in the registration statement or related prospectus
and statement of additional information and any sales literature specifically
approved by the Trust. The services of the Distributor to the Trust hereunder
are not to be deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other investment companies
so long as the performance of its obligations hereunder is not impaired thereby.
(c) The Distributor shall have the right, as agent of the Trust, to
order from the Trust the Shares needed, but not more than the Shares needed
(except for reasonable allowances for clerical errors, delays and errors of
transmission and cancellation of orders), to fill unconditional orders for
Shares received by the Distributor from dealers and investors. The price which
shall be paid to the Trust for the Shares so purchased shall be the net asset
value, determined as set forth in Section 2(e) hereof.
(d) The price at which the Distributor or dealer purchasing shares
through the Distributor may sell Shares to the public shall be the public
offering price determined in accordance with the method set forth in the Trust's
prospectus and statement of additional information.
(e) The net asset value of Shares of the Trust shall be determined by
the Trust or any agent of the Trust in accordance with the method set forth in
the prospectus and statement of additional information of the Trust and
guidelines established by the trustees of the Trust (the "Trustees").
(f) The Trust shall have the right to suspend the sale of its Shares
at times when redemption is suspended pursuant to the conditions set forth in
Section 8(c) hereof. The Trust shall also have the right to suspend the sale of
its Shares if a banking moratorium shall have been declared by federal or
applicable state authorities, or if there shall have been some other event,
which, in the judgment of the Trustees, makes it impracticable or inadvisable to
sell the Shares.
(g) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be advised promptly of all purchase orders for Shares received by
the Distributor. Any
-2-
<PAGE>
order may be rejected by the Trust; provided, however, that the Trust will not
arbitrarily or without reasonable cause refuse to accept or confirm orders for
the purchase of Shares. The Trust (or its agent) will confirm orders upon their
receipt, will make appropriate book entries and, upon receipt by the Trust (or
its agent) of payment therefor, will deliver deposit receipts or certificates
for such Shares pursuant to the instructions of the Distributor.
3. Sales Charges.
-------------
(a) For the purposes of this Section 3, "Distribution Fees" shall mean,
collectively, (A) the sales charges payable to the Distributor as set forth in
Section 3(b), below, and (B) the amounts payable to the Distributor under the
Distribution Plans as set forth in Section 3(c) and "Effective Date" shall mean
the date hereof.
(b) The Distributor shall have the right to receive the sales charges
(including, without limitation, contingent deferred sales charges) in respect of
Shares sold during the term of this Agreement or any continuation hereof
(including Shares into which such Shares convert) (collectively, "New
Distributor Shares") under the circumstances, upon the terms and conditions and
in the amounts set forth in the Trust's prospectus at the time of the sale, but
excluding "Former Distributor Shares" (as that term is defined in Section 3 of
the Distribution Agreement between NASL Financial Services, Inc. and the Trust
dated January 1, 1996, as amended on September 30, 1997 and as in effect on the
date hereof). The Distributor shall have no right to receive sales charges
(including, without limitation, contingent deferred sales charges) in respect of
Former Distributor Shares.
(c) So long as the Trust's Distribution Plans pursuant to Rule 12b-1
under the Investment Company Act remain in effect:
(i) with respect to assets attributable to Former Distributor Shares,
the Distributor, in its capacity as distributor, shall not have the right to
receive any amounts payable under such Distribution Plans; and
(ii) with respect to assets attributable to New Distributor Shares,
the Distributor shall have the right to receive one hundred percent (100%) of
the amounts payable under such Distribution Plans.
-3-
<PAGE>
(d) The Distributor may transfer its right to receive Distribution
Fees (but not its obligations under this Agreement), and such transfer shall be
effective upon written notice from the Distributor to the Trust. In connection
with the foregoing, the Trust is authorized to pay all or a part of the
Distribution Fees directly to such transferee of the Distributor.
(e) The right of the Distributor to receive Distribution Fees shall
survive the termination of this Agreement.
4. Duties of the Trust. The Trust shall:
-------------------
(a) Furnish to the Distributor copies of its prospectus and statement
of additional information, its annual and interim reports, and other
information, financial statements and papers, including one certified copy of
all financial statements prepared for the Trust by independent public
accountants, to the extent reasonably requested by the Distributor for use in
connection with the distribution of Shares of the Trust.
(b) Take, from time to time, any steps necessary to register the
Shares under the Securities Act of 1933 (the "Securities Act"), so that there
will be available for sale as many Shares as the Distributor reasonably may be
expected to sell.
(c) Use its best efforts to qualify and maintain the qualification of
an appropriate number of its Shares for sale under the securities laws of those
states approved by the Distributor and the Trust, and, if necessary or
appropriate in connection therewith, to qualify and maintain the qualification
of the Trust as a broker-dealer in those states; provided that any such
qualification may be terminated or withdrawn by the Trust at any time in its
discretion. The Distributor shall furnish information and other material
relating to its affairs and activities reasonably required by the Trust in
connection with any such qualification(s).
5. Duties of the Distributor. The Distributor shall:
-------------------------
(a) Use its best efforts in all respects duly to conform with the
requirements of all federal and state laws relating to the sale of the Shares of
the Trust and with all applicable rules and regulations of all regulatory
bodies, including the National Association of Securities Dealers, Inc. (the
"NASD").
-4-
<PAGE>
(b) Use its best efforts to obtain any approval or clearance required
from the NASD or other regulatory authorities with respect to sales material for
the Trust or any of its portfolio series.
6. Selected Dealer Agreements. The Distributor shall:
--------------------------
(a) Have the right to enter into a promotional agent agreement with
Wood Logan Associates, Inc. ("WLA") and selected dealer agreements with
securities dealers of its choice ("selected dealers") for the sale of Shares.
Shares sold to selected dealers shall be for resale by the selected dealers only
at the public offering price determined as set forth in Section 2(d) hereof. Any
agreement with WLA and the standard form of agreement with selected dealers
pertaining to sales of the Shares shall be approved by the Trustees.
(b) Offer and sell Shares, within the United States, only to selected
dealers that are members in good standing of the NASD.
(c) Act only as principal and not as agent for the Trust in making
agreements with selected dealers.
7. Payment of Expenses.
-------------------
(a) The Trust shall bear all costs and expenses of the Trust, except
for those expenses assumed by any investment adviser or subadviser of the Trust
or any other party contracting with the Trust or by the Distributor pursuant to
Section 7(b) of this Agreement.
(b) The Distributor shall bear the costs and expenses of: (i) any
payments made to WLA and to selected dealers; (ii) the printing and distributing
of any copies of prospectuses, statements of additional information and annual
and interim reports to be used in connection with the offering of Shares to
selected dealers or prospective investors pursuant to this Agreement after the
same have been prepared and set in type and copies have been printed and
distributed to regulatory bodies and existing shareholders as deemed necessary;
(iii) preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in connection with
the offering of the Shares for sale to the public; (iv) any advertising expenses
incurred by the Distributor in connection with the offering; and (v) the
registration or qualification of the Distributor as a broker-dealer under
federal and states laws and of continuing those registrations or qualifications.
-5-
<PAGE>
8. Redemption of Shares. Any of the outstanding Shares may be tendered
--------------------
for redemption at any time, and the Trust agrees to redeem the Shares so
tendered in accordance with its obligations as set forth in Article IV of its
Agreement and Declaration of Trust, as amended from time to time, in accordance
with the applicable provisions set forth in the prospectus and statement of
additional information of the Trust, and subject to the following conditions:
(a) The price to be paid to redeem the Shares shall be equal to the
net asset value calculated in accordance with the provisions of Section 2(e)
hereof.
(b) The Trust shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to receiving the notice of redemption in
proper form.
(c) Redemption of Shares or payment may be suspended at times when the
New York Stock Exchange is closed, when trading on that Exchange is suspended or
restricted, when an emergency exists as a result of which disposal by a
portfolio series of the Trust of its investment securities is not reasonably
practicable or it is not reasonably practicable for a portfolio series of the
Trust fairly to determine the value of its net assets, or during any other
period when the Securities and Exchange Commission, by order, so permits.
9. Repurchase of Shares. The Trust hereby authorizes the Distributor to
--------------------
repurchase upon the terms and conditions set forth in the Trust's prospectus and
statement of additional information (as supplemented by written instructions
given by the Trust to the Distributor from time to time), as the Trust's agent
and for the Trust's account, such Shares as may be offered for sale to the Trust
from time to time by holders of those Shares or their agents. No offers for
sale of Shares to the Trust shall be accepted by the Distributor during any time
when the redemption of Shares by the Trust shall have been suspended.
10. Indemnification.
---------------
(a) The Trust shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor, against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith),
-6-
<PAGE>
arising by reason of any person acquiring any Shares, which may be based upon
the Securities Act, or on any other statute or at common law, on the ground that
the registration statement or related prospectus and statement of additional
information, as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Trust, includes an untrue statement of
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, unless that
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the indemnity of the
Trust in favor of the Distributor and/or its controlling persons to be deemed to
protect the Distributor or any controlling persons thereof against any liability
to the Trust or its security holders to which the Distributor or any of its
controlling persons would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of their duties or by reason of
the reckless disregard of their obligations and duties under this Agreement; or
(ii) is the Trust to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Distributor or its
controlling persons, unless the Distributor or its controlling persons, as the
case may be, shall have notified the Trust in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the Distributor or its controlling
persons (or after the Distributor or its controlling persons shall have received
notice of service on any designated agent), but failure to notify the Trust of
any claim shall not relieve the Trust from any liability which it may have to
the person against whom the action is brought otherwise than on account of the
indemnity agreement contained in this paragraph. The Trust will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense, of any suit brought to enforce any such liability, but if the Trust
elects to assume the defense, that defense shall be conducted by counsel chosen
by it and satisfactory to the Distributor or the Distributor's controlling
person or persons, defendant or defendants in the suit. In the event the Trust
elects to assume the defense of a suit and retain satisfactory counsel, the
Distributor or its controlling person or persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional counsel retained by
-7-
<PAGE>
them, but, in case the Trust does not elect to assume the defense of such a
suit, it will reimburse the Distributor or the Distributor's controlling person
or persons, defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Trust shall promptly notify the
Distributor of the commencement of any litigation or proceedings against it or
any of its officers or Trustees in connection with the issuance or sale of any
of the Shares.
(b) The Distributor shall indemnify and hold harmless the Trust and
each of its Trustees and officers and each person, if any, who controls the
Trust against any loss, liability, claim, damage or expense described in the
foregoing indemnity contained in subsection (a) of this Section 10, but only
with respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Trust by or on behalf of the Distributor for
use in connection with the registration statement or related prospectus and
statement of additional information, as from time to time amended, or the annual
or interim reports to shareholders. In case any action shall be brought against
the Trust or any person so indemnified, in respect of which indemnity may be
sought against the Distributor, the Distributor shall have the rights and duties
given to the Trust, and the Trust and each person so indemnified shall have the
rights and duties given to the Distributor by the provisions of subsection (a)
of this Section 10.
11. Continuation, Amendment or Termination of the Agreement.
-------------------------------------------------------
(a) This Agreement shall become effective as of the date first
written above and shall continue in full force and effect from year to year so
long as continuance is approved at least annually (i) by the Trustees or by vote
of a majority of the outstanding voting securities of the Trust and (ii) by vote
of a majority of the Trustees who are not interested persons of the Distributor
or of the Trust cast in person at a meeting called for the purpose of voting on
such approval, provided, however, that (a) this Agreement may at any time be
terminated without the payment of any penalty either by vote of the Trustees or
by vote of a majority of the outstanding voting securities of the Trust, on
sixty (60) days' notice to the Distributor; (b) this Agreement shall immediately
terminate in the event of its assignment; and (c) this Agreement may be
terminated by the Distributor on ninety (90) days' written notice to the Trust.
-8-
<PAGE>
(b) This Agreement may be amended at any time by mutual consent of the
parties, provided that the consent on the part of the Trust shall have been
approved (i) by the Trustees or by vote of a majority of the outstanding voting
securities of the Trust and (ii) by vote of a majority of the Trustees who are
not interested persons of the Distributor or of the Trust cast in person at a
meeting called for the purpose of voting on the amendment.
(c) Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed post-paid, to the other party at the
principal office of the other party.
12. Definitions. For the purposes of this Agreement, the terms "vote of a
-----------
majority of the outstanding voting securities," "interested person" and
"assignment" shall have the respective meanings specified in the Investment
Company Act.
13. Agreement and Declaration of Trust. The Agreement and Declaration of
----------------------------------
Trust establishing the Trust, dated September 28, 1988, 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 Security Trust" 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 series thereof, but only the assets belonging to the
Trust, or to the particular portfolio series with which the obligee or claimant
dealt, shall be liable.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the day and year first above written.
NORTH AMERICAN FUNDS
By:
--------------------------------------
CYPRESSTREE FUNDS DISTRIBUTORS, INC.
By:
--------------------------------------
-10-
<PAGE>
EXECUTION COPY
PROMOTIONAL AGENT AGREEMENT
This PROMOTIONAL AGENT AGREEMENT ("Agreement") is made as of October
1, 1997 by and among CypressTree Funds Distributors, Inc. ("CFD"), a broker-
dealer registered under the Securities Exchange Act of 1934, as amended (the
"1934 Act") and a member of the National Association of Securities Dealers, Inc.
("NASD"), Wood Logan Associates, Inc. ("WLA"), also registered as a broker-
dealer under the 1934 Act and a member of the NASD, and North American Security
Life Insurance Company ("NASLIC"). Both NASLIC and WLA are wholly-owned
subsidiaries of NAWL Holding Company, Inc., a subsidiary of The Manufacturers
Life Insurance Company.
WHEREAS, CFD has entered into an agreement (the "Distribution
Agreement") with North American Funds ("NAF"), an open-end, diversified,
management investment company organized as a business trust under the laws of
The Commonwealth of Massachusetts, whereby CFD has been appointed the principal
underwriter of the shares of the Funds (as defined below);
WHEREAS, pursuant to the Distribution Agreement, CFD is authorized to
enter into selling agreements with brokers and dealers for the distribution of
shares of the Funds;
WHEREAS, CFD wishes to retain WLA as a Promotional Agent to assist CFD
in renewing and entering into selling agreements with brokers and dealers for
the distribution of shares of the Funds and in promoting the sale thereof
through such brokers and dealers;
WHEREAS, WLA is willing to serve as a Promotional Agent;
WHEREAS, WLA desires NASLIC to be a party to this Agreement;
NOW THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. Definitions
-----------
As used in this Agreement, the following terms shall have the meanings
set forth below:
Broker-Dealers - brokerage firms that have entered into Selling
--------------
Agreements to distribute NAF Products to retail customers.
<PAGE>
Closing Date - as defined in the Definitive Purchase and Sale Agreement.
------------
Commission - the U.S. Securities and Exchange Commission.
----------
Definitive Purchase and Sale Agreement - the Asset Purchase Agreement
--------------------------------------
between CypressTree Investments, Inc. ("CII"), CypressTree Asset Management
Corporation, Inc., CFD, NASLIC and NASL Financial Services, Inc. ("NASL"),
predecessor to Manufacturers Securities Services, LLC ("MSSLLC"), dated July
29, 1997.
Effective Date - The day and year of this Agreement as first above written.
--------------
Funds - all series of NAF now publicly offered.
-----
NAF Products - the shares of classes A, B and C of each Fund.
------------
Selling Agreements - contracts among Broker-Dealers and CFD providing for
------------------
the distribution of the NAF Products.
2. Representations of WLA
----------------------
a. Registration as a Broker-Dealer. WLA is duly registered under the 1934
-------------------------------
Act as a broker-dealer with the Commission and is in compliance in all
material respects with the 1934 Act and the rules and regulations
thereunder, including, but not limited to, the net capital requirements
thereof. WLA is a member in good standing of the NASD and is in
compliance in all material respects with all applicable rules and
regulations of the NASD, including without limitation the NASD's rules
of conduct (the "Conduct Rules"). WLA is duly registered as a broker-
dealer having a limited license for mutual funds under, and is in
compliance in all material respects with, the applicable laws of the
state of Connecticut and the rules and regulations thereunder. WLA is
not required to be registered, and, except as set forth in the
foregoing sentence, is not registered, as a broker or dealer under the
"Blue Sky" laws of any other state.
b. Litigation. Except as set forth on Schedule A attached hereto, there
---------- ----------
is no action, suit, or proceeding to which WLA is a party pending or,
to the knowledge of WLA, threatened, that would be reasonably likely to
result in any material adverse change in or interfere with the
operation of its business, or that questions the validity of this
Agreement or of any action taken or to be taken pursuant to or in
connection with the provisions of this Agreement nor, to the knowledge
of WLA, is there any basis for any such action, claim, suit, proceeding
or investigation. There are no judgments, orders, decrees, citations,
fines or penalties heretofore assessed against WLA affecting the
services to be performed by it pursuant to this Agreement under any
federal, state or local
-2-
<PAGE>
law.
c. Legal and Other Compliance. WLA is in compliance with all applicable
--------------------------
laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies
thereof) and the NASD, the violation of which, either singularly or in
the aggregate, could have a material adverse effect on its business,
and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against
it alleging any failure so to comply.
3. Representations of CFD
----------------------
a. Registration as a Broker-Dealer CFD is duly registered under the
-------------------------------
1934 Act as a broker-dealer with the Commission and is in compliance in
all material respects with the 1934 Act and the rules and regulations
thereunder, including, but not limited to, the net capital requirements
thereof. CFD is a member in good standing of the NASD and is in
compliance in all material respects with all applicable rules and
regulations of the NASD, including without limitation the Conduct
Rules. CFD is duly registered as a broker-dealer under, and is in
compliance in all material respects with, the applicable laws of the
states listed on Schedule C hereto and the rules and regulations
thereunder. CFD is not required to be registered, and, except as set
forth in the foregoing sentence, is not registered, as a broker or
dealer under the "Blue Sky" laws of any state.
b. Litigation. There is no action, suit, or proceeding to which CFD is a
----------
party pending or, to the knowledge of CFD, threatened, that would be
reasonably likely to result in any material adverse change in or
interfere with the operation of its business, or that questions the
validity of this Agreement or of any action taken or to be taken
pursuant to or in connection with the provisions of this Agreement nor,
to the knowledge of CFD, is there any basis for any such action, claim,
suit, proceeding or investigation. There are no judgments, orders,
decrees, citations, fines or penalties heretofore assessed against CFD
affecting the services to be performed by it pursuant to this Agreement
under any federal, state or local law.
c. Legal and Other Compliance. CFD is in compliance with all applicable
--------------------------
laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies
thereof) and the NASD, the violation of which, either singularly or in
the aggregate, could have a material adverse effect on its business,
and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against
it
-3-
<PAGE>
alleging any failure so to comply.
4. Appointment of WLA as Promotional Agent
---------------------------------------
CFD hereby appoints WLA as Promotional Agent to promote the sales of the
NAF Products through Broker-Dealers, and WLA accepts such appointment subject to
the terms and conditions set forth herein.
5. Exclusivity
-----------
a. During the term of this Agreement, WLA will have the exclusive right to
distribute the NAF Products to Broker-Dealers in the United States.
b. During the term of this Agreement, WLA shall not distribute any mutual
funds other than the NAF Products in the United States. This
restriction will not apply to WLA's distribution of any products
involving in any way life insurance or annuity features.
c. If, after this Agreement has terminated, WLA distributes in the United
States any mutual fund other than the Funds, then for a period of one
year from the date this Agreement is terminated or, if earlier, the
date on which Cypress Holding Company, Inc. sells its entire interest
in CypressTree Investments, Inc., NASLIC and its affiliates (including
but not limited to WLA) will use reasonable efforts not to directly
encourage in a targeted manner (a) the rollover of funds invested in
NAF to such alternative mutual funds, or (b) the termination of Selling
Agreements.
6. Duties of WLA
-------------
As Promotional Agent, WLA shall use reasonable efforts to promote the sale
of the NAF Products through Broker-Dealers, and in furtherance thereof WLA shall
to the extent it deems appropriate and at its own expense:
a. Secure duly qualified Broker-Dealers to enter into Selling Agreements
with CFD for the distribution of the NAF Products; provided, however,
that CFD may refuse to enter into a Selling Agreement with a Broker-
Dealer selected by WLA if such Broker-Dealer is deemed by CFD to be
unsuitable for any reason;
b. Assist the Broker-Dealers who have entered into Selling Agreements in
obtaining for their registered representatives all necessary licenses,
registrations and appointments required by applicable regulatory
authorities so as to enable such registered representatives to sell the
NAF Products;
-4-
<PAGE>
c. Arrange on a periodic basis and preside over educational meetings with
Broker-Dealers who have entered into Selling Agreements to familiarize
their registered representatives with the provisions and features of
the NAF Products;
d. Hold seminars and carry on other marketing activities to promote the
NAF Products to Broker-Dealers who have entered into Selling
Agreements; provided however, that all such seminars and marketing
activities shall be approved by CFD;
e. Include the NAF Products in all WLA marketing activities, including
"due diligence" meetings, special selling programs, marking programs,
telemarketing programs, and the Grand Prix Educational Conference;
f. Provide technical assistance at the time of sale of the NAF Products to
Broker-Dealers who have entered into Selling Agreements;
g. Provide assistance to Broker-Dealers who have entered into Selling
Agreements in the ongoing servicing of the NAF Products;
h. Provide assistance to CII and its affiliates in the design,
preparation, and distribution of sales and promotional materials
related to the NAF Products;
i. Assist CFD in resolving any disputes between CFD and Broker-Dealers
which have been recruited by WLA, provided, however, that WLA shall not
have the right to settle any disputes on behalf of CFD without first
obtaining CFD's written approval of such settlement; and
j. Furnish CFD, on a monthly basis, with the information relating to NAF
Products contained in the call reports generated by WLA's sales force
related to the activities described in this Agreement.
7. Duties of CFD
-------------
CFD shall to the extent it deems appropriate and at its own expense:
a. Manage, design, prepare, coordinate and print all marketing materials
for the NAF Products;
b. Ship and post marketing and collateral materials for the NAF Products;
c. Provide marketing support professionals to participate in educational
and marketing functions organized by WLA related to the NAF Products,
as reasonably agreed upon by WLA and CFD;
-5-
<PAGE>
d. Design and produce premiums and incentive items related to the NAF
Products; and
e. File with the NASD, as required, all marketing materials related to the
NAF Products prepared by CFD.
8. Compensation of WLA
-------------------
a. In consideration for providing the services it is required to provide
under this Agreement, CFD shall pay WLA the compensation detailed in
Schedule B attached hereto and as amended from time to time pursuant to
----------
Section 18 of this Agreement. Such compensation shall constitute the
only compensation to WLA for all the services that it performs and all
the expenses that it incurs in connection with this Agreement.
b. The sales targets, fees, and financial support detailed in Schedule B
----------
shall be effective for the first year of this Agreement. The parties
shall negotiate in good faith to establish new sales targets, fees, and
financial support for the second and any subsequent year of the
Agreement before the commencement of such year. If the parties are
unable to agree on new sales targets, fees, and financial support, the
original sales targets, base fees, and financial support shall apply in
subsequent years.
c. For avoidance of doubt, neither CFD nor any affiliate of CFD shall be
responsible for any compensation, including without limitation trail
commissions, owing or that may be owed to WLA by NASL or MSSLLC under
that certain promotional agent agreement dated as of April 13, 1995, or
any other agreement between WLA, NASL, MSSLLC or any of their
respective affiliates.
9. Covenants of WLA
----------------
a. WLA shall not sell the NAF Products directly to, or solicit
applications for the NAF Products directly from, retail customers or
prospective retail customers.
b. WLA will not use any marketing materials other than those that have
been furnished to it by CFD.
c. Neither WLA nor its representatives, employees and affiliates are
authorized to give any information or make any representations
concerning the NAF Products other than those contained in any
registration statement or any related prospectus or statement of
additional information filed with the Commission
-6-
<PAGE>
relating thereto or in marketing materials furnished to WLA by CFD.
d. WLA will keep confidential the names and addresses of all customers and
prospective customers of CFD and of its affiliates. Without the prior
written consent of CFD, neither WLA nor its affiliates shall use such
customer information for any purpose other than the services to be
provided under this Agreement; provided, however, that WLA and its
affiliates may use such information if the customers are or become
customers for other products sold by WLA.
10. Records
-------
WLA and CFD agree to keep all records that they are required to keep for
the NAF Products by applicable federal and state law and acceptable business
practices and to assist one another in the accurate and timely preparation of
such records, and to provide access to such records during normal business hours
and upon five (5) business days written notice, to the other party and its
representatives.
11. Indemnification
---------------
a. CFD agrees to indemnify and hold harmless WLA, NASLIC, their affiliates
and each of their respective officers, directors and employees against
any and all losses, claims, damages or liabilities to which they may
become subject under the Securities Act of 1933, as amended (the "1933
Act"), the 1934 Act or other federal or state statutory law or
regulation, the rules and regulations of the NASD, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon: (i) any
untrue statement or alleged untrue statement of a material fact or any
omission or alleged omission to state a material fact required to be
stated or necessary to make the statements made not misleading in any
registration statement for the NAF Products filed pursuant to the 1933
Act or any prospectus or statement of additional information included
as a part thereof, as from time to time amended and supplemented, or
any marketing materials furnished to WLA, NASLIC or their affiliates by
CFD, (ii) any oral or written misrepresentations by CFD or their
officers, directors, employees or agents unless the misrepresentation
is based upon information furnished to CFD or its officers, directors,
employees or agents by WLA, NASLIC, their affiliates or any of their
respective officers, directors, employees or agents, or (iii) the
failure of CFD or their officers, directors, employees or agents to
comply with any applicable provisions of this Agreement.
b. WLA and NASLIC jointly agree to indemnify and hold harmless CFD, its
affiliates, and their respective officers, directors and employees
against any and
-7-
<PAGE>
all losses, claims, damages or liabilities to which it may become
subject under the 1933 Act, the 1934 Act or other federal or state
statutory law or regulation, the rules and regulations of the NASD, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon: (i) any oral or written misrepresentation by WLA, NASLIC, their
affiliates or any of their officers, directors, employees or agents
unless such misrepresentation is contained in any registration
statement for the NAF Products, any prospectus or statement of
additional information included as a part thereof, as from time to time
amended and supplemented, or any marketing material furnished to WLA,
NASLIC or their affiliates by CFD, or (ii) the failure of WLA, NASLIC,
their affiliates or any of their respective officers, directors,
employees or agents to comply with any applicable provisions of this
Agreement.
12. Term
----
a. This Agreement shall remain in effect until terminated in accordance
with Section 12(b).
b. This Agreement may be terminated by NASLIC or CFD:
i. upon ten (10) days written notice upon a material breach by another
party of any provision of this Agreement or any other agreement
between CFD (or any affiliate of CFD) and NASLIC (or any affiliate
of NASLIC) if such breach has not been remedied within ten (10)
days after written notice of such breach to the party in breach of
the applicable agreement;
ii. upon six (6) months written notice, which can be given no earlier
than:
(1) eighteen (18) months after the Effective Date if the
$1,000,000 referred to in Section 2.5 of the Definitive
Purchase and Sale Agreement is paid within fifteen (15) days
of the first twelve (12) month anniversary of the Closing
Date; or
(2) if the condition described in Section 12(b)(ii)(1) is not
satisfied, at any time after the fifteenth day following the
first twelve (12) month anniversary of the Closing Date;
provided, however, that notice given under this Section
12(b)(ii)(2) shall be effective as if given twelve months
after the Effective Date.
c. This Agreement will terminate automatically if either CFD or WLA should
cease to be a registered broker-dealer under the 1934 Act or a member
of the
-8-
<PAGE>
NASD. Termination shall not affect the obligations of the parties under
Section 5(c), Section 10, or Section 11.
13. Compliance with Law
-------------------
All parties agree to observe and comply with all laws, rules and
regulations applicable to the business contemplated by this Agreement. WLA and
CFD agree to promptly notify each other of, and to cooperate fully in responding
to, any regulatory investigation, inquiry or proceeding, judicial proceeding or
customer complaint involving or affecting the NAF Products.
14. Notices
-------
All notices or communications to a party shall be sent to the address set
forth below or to such other address as a party may request by giving written
notice to the others:
CypressTree Funds Distributors, Inc.
125 High Street, 14th Floor
Boston, MA 02110
Attention: Mr. Joseph T. Grause, Jr.
---------
Fax: 617-946-5680
Wood Logan Associates, Inc.
1455 East Putnam Avenue
Old Greenwich, CT 06870
Attention: Mr. Scott Logan
---------
Fax: 203-698-0655
North American Security
Life Insurance Company
73 Tremont Street
Boston, MA 02108
Attention: Mr. John D. DesPrez III
---------
Fax: 617-854-8603
15. Governing Law
-------------
This Agreement shall be construed in accordance with and governed by the
laws of The Commonwealth of Massachusetts.
16. Waiver
------
The failure of any party to insist upon strict compliance with any of the
conditions of
-9-
<PAGE>
this Agreement shall not be construed as a waiver of any of the 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.
17. Binding Effect
--------------
This Agreement shall be binding on, and shall inure to the benefit of, the
parties to it and their respective successors and permitted assigns. This
Agreement or any rights or obligations hereunder may not be assigned without the
prior written consent of the other parties hereto.
18. Amendment
---------
This Agreement or any schedule annexed hereto may be amended only in
writing signed by all the parties hereto.
19. Counterparts
------------
This Agreement may be signed by the parties in counterparts.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
WOOD LOGAN ASSOCIATES, INC.
By:
------------------------------------
Name:
Title:
CYPRESSTREE FUNDS DISTRIBUTORS, INC.
By:
------------------------------------
Name:
Title:
NORTH AMERICAN SECURITY LIFE INSURANCE
COMPANY
By:
------------------------------------
Name:
Title:
<PAGE>
SCHEDULE A
----------
Litigation
WLA is currently a part-defendant in two separate actions brought by former
employees, namely ROGER V. WOOD LOGAN ASSOCIATES, ET AL AND WELLS V. WOOD LOGAN
ASSOCIATES, ET AL. Both cases have been removed from federal district court to
arbitration before the National Association of Securities Dealers (NASD). While
discovery into the merits of both cases as yet remains incomplete, it appears
from the current known facts in each case that any finding adverse to WLA is
unlikely to result in any material adverse change in or interfere with the
operation of WLA's business. Neither case is reasonably likely to question the
validity of this Agreement or any action taken or to be taken pursuant to or in
connection with the provisions of this Agreement.
A-1
<PAGE>
SCHEDULE B
----------
Statement of Expenses and Compensation
Effective October 1, 1997
In consideration of WLA's services to CFD in promoting the distribution of
shares of NAF pursuant to the foregoing Promotional Agent Agreement, CFD shall
compensate WLA as follows:
1. PROMOTIONAL AGENT FEES
----------------------
A. BASE FEE
CFD will pay WLA a base fee of fifty (50) basis points on gross sales
of shares of all classes of each Fund. This fee will be payable
monthly, within thirty (30) days after the end of each month.
B. BONUS BASED ON GROSS SALES OF ALL CLASSES
If gross sales of shares of all classes of each Fund exceed $180
million for the twelve (12) months following the Closing Date, CFD will
pay WLA an additional fee, payable at the end of the thirteenth month
following the Closing Date, of:
(i) twenty-five (25) basis points on gross sales of shares of
Classes A and B of each Fund, and
(ii) fifteen (15) basis points on gross sales of shares of Class C of
each Fund.
C. ADDITIONAL BONUS BASED ON GROSS SALES OF CLASS A SHARES
If gross sales of shares of all classes of all Funds exceed $180
million for the twelve (12) months following the Closing Date, and
gross sales of shares of Class A of all Funds exceed $75 million for
the twelve (12) months following the Closing Date, CFD will pay WLA an
additional fee, payable at the end of the thirteenth month following
the Closing Date, of fifteen (15) basis points on gross sales of shares
of Class A of such Funds.
D. ADDITIONAL BONUS BASED ON GROSS SALES OF CLASS B SHARES
B-1
<PAGE>
If gross sales of shares of all classes of all Funds exceed $180
million for the twelve (12) months following the Closing Date, and
gross sales of shares of Class B of all Funds exceed $100 million for
the twelve (12) months following the Closing Date, CFD will pay WLA an
additional fee, payable at the end of the thirteenth month following
the Closing Date, of fifteen (15) basis points on gross sales of shares
of Class B of such Funds.
E. CERTAIN EXCLUSIONS
No fees will be paid under 1(A) through 1(D) above in respect of (1)
sales of shares of Class A of any Fund for which the front-end sales
charge was waived, (2) sales of any class of shares of the Money Market
Fund, (3) sales of shares that are tendered for redemption within seven
business days of the date of the confirmation of the original purchase
by the selling dealer and (4) sales representing exchanges between
Funds.
2. FINANCIAL SUPPORT RELATED TO OVERHEAD
--------------------------------------
For the period commencing on the Effective Date through and including the
date which is twelve months after the Effective Date, CFD will pay WLA, in equal
monthly installments, four hundred and fifty thousand dollars ($450,000) as an
overhead contribution, which will cover participation in all seminars, marketing
meetings, and programs (including but not limited to Charitable Remainder Trust
Services) organized by WLA. For the avoidance of doubt, WLA shall not bear the
expense of printing, shipping or posting marketing or collateral materials for
the NAF Products.
B-2
<PAGE>
SCHEDULE C
----------
List of States
Alabama
Arizona
California
Connecticut
Florida
Georgia
Idaho
Illinois
Iowa
Louisiana
Massachusetts
New Jersey
New York
North Carolina
North Dakota
Ohio
Pennsylvania
Rhode Island
South Dakota
Texas
Virginia
Washington
Wisconsin
C-1
<PAGE>
<TABLE>
<S> <C>
Manufacturers Securities Services, LLC Wood Logan Associates, Inc.
(the successor to NASL Financial Services, Inc.) 1455 East Putnam Avenue
116 Huntington Avenue Old Greenwich,CT 06870
Boston, MA 02116 (800) 334-4437
(800) 872-8037
</TABLE>
ASSIGNMENT OF DEALER AGREEMENT
Effective October 1, 1997, Manufacturers Securities Services, LLC (the successor
to NASL Financial Services, Inc.) and Wood Logan Associates, Inc. hereby assign
all of their rights and interests in the North American Funds Dealer Agreements
for the dealers listed on the attached schedule to Cypress Tree Funds
Distributors, Inc.
Dated: October 1, 1997
Manufacturers Securities Services, LLC
by: North American Security Life Insurance Company,
Managing Member
by: /s/ [SIGNATURE APPEARS HERE] by: /s/ [SIGNATURE APPEARS HERE]
--------------------------------- ---------------------------------
Wood Logan Associates, Inc.
by: /s/ [SIGNATURE APPEARS HERE]
---------------------------------
Accepted and Agreed:
Cypress Tree Funds Distributors, Inc.
by: /s/ [SIGNATURE APPEARS HERE]
---------------------------------
<PAGE>
<TABLE>
<S> <C>
Manufacturers Securities Services, LLC Wood Logan Associates, Inc.
(the successor to NASL Financial Services, Inc.) 1455 East Putnam Avenue
116 Huntington Avenue Old Greenwich,CT 06870
Boston, MA 02116 (800) 334-4437
(800) 872-8037
</TABLE>
NORTH AMERICAN FUNDS
NOTICE OF ASSIGNMENT OF DEALER AGREEMENT
Reference is made to the Dealer Agreement, as amended, between us (the
"Agreement").
We wish to advise you that effective October 1, 1997 the Agreement is hereby
assigned by Manufacturers Securities, LLC (the successor to NASL Financial
Services, Inc.) and Wood Logan Associates, Inc. to CypressTree Funds
Distributors, Inc.
Any notices or communications for CypressTree Funds Distributors, Inc., shall be
sent to:
CypressTree Funds Distributors, Inc.
286 Congress Street
Boston, Massachusetts 02210
Manufacturers Securities Services, LLC
by: North American Security Life Insurance Company,
Managing Member
by: by:
------------------------------- -------------------------------
Wood Logan Associates, Inc.
by:
-------------------------------
CypressTree Funds Distributors, Inc.
by:
-------------------------------
<PAGE>
INITIALLY ADOPTED MARCH 18, 1994
AMENDED AND RESTATED SEPTEMBER 26, 1997
NORTH AMERICAN FUNDS
--------------------
DISTRIBUTION PLAN
-----------------
CLASS A SHARES
--------------
This Class A Shares Distribution Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by North American Funds, a Massachusetts
business trust (the "Fund"), with respect to the Class A shares of beneficial
interest (the "Class A Shares") of the Fund's ten investment portfolios:each
of the Fund's investment the Global Growth Fund, the Growth Fund, the Growth
and Income Fund, the Asset Allocation Fund, the Strategic Income Fund, the
Investment Quality Bond Fund, the U.S. Government Securities Fund, the National
Municipal Bond Fund, the California Municipal Bond Fund and the Money Market
Fundportfolios as set forth on Schedule I (each, a "Portfolio",
collectively, the "Portfolios"), subject to the following terms and conditions:
Section 1. Payments for Distribution -- Related Services
---------------------------------------------
The Fund may compensate the distributor of its shares, NASL Financial
Services, Inc., a Massachusetts corporation, or any entity that may in the
future act as a distributor for the Portfolios (the "Distributor") or its
assignees, for activities or expenses incurred in connection with the offering
and sale of Class A Shares of the Portfolios, and related expenses incurred, all
as described in Section 2 below. Payments by the Fund under this Section of the
Plan will be calculated and accrued daily and paid monthly and shall be paid at
the rate of (and not exceeding) .35% on an annualized basis of the average daily
net assets attributable to Class A Shares of each Portfolio (with the exception
of the Money Market Fund, for which no payments pursuant to this Section 1 shall
be made, and the National Municipal Bond Fund and the California Municipal Bond
Fund, for which the rate shall be (and shall not exceed) .15% on an annualized
basis of the average daily net assets attributable to Class A Shares of those
Portfolios). With respect to the Global Growth Fund, the Growth Fund, the
Growth and Income Fund, the Asset Allocation Fund, the Strategic Income Fund,
the Investment Quality Bond Fund and the U.S. Government Securities all
Portfolios except the National Municipal Bond Fund, an amount equal to (and
not exceeding) five-sevenths (.25% on an annualized basis of the average daily
net assets attributable to Class A Shares of those Portfolios) of the fee
prescribed above shall be used to provide payments to securities dealers for
ongoing account services to shareholders of such Portfolios and shall be deemed
to be a "service fee" as defined in Section 2830 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD"). With respect to
the National Municipal Bond Fund and the California Municipal Bond Fund, the
entire amount of the fee payable under this Section 1 (.15% on an annualized
basis of the average daily net assets attributable to Class A Shares of those
Portfolios) shall be used for such purposes and shall be deemed to be a "service
fee" as so defined. If there is any reduction in fees paid under the Plan
for any Portfolio, the service fee shall first be reduced and only after payment
of the service fee has been eliminated will non-service fees be reduced.
Section 2. Expenses Covered by Plan
------------------------
Payments payable under Section 1 of the Plan shall be used primarily
to compensate the Distributor for distribution services provided by it in
connection with the offering and sale of Class A Shares of the Portfolios, and
related expenses incurred, including payments by the Distributor to compensate
or reimburse brokers, dealers or financial institutions (collectively, "Selling
Agents"), for sales support services provided and related expenses incurred by
such Selling Agents. Such services and expenses may include, but are not
limited to, the following: (i) the development, formulation and implementation
of marketing and promotional activities, including direct mail promotions and
television, radio, magazine, newspaper and other mass media advertising for
Class A Shares of the Portfolios; (ii) the preparation, printing and
distribution of prospectuses for Class A Shares of the Portfolios and reports to
recipients other than existing shareholders; (iii) the preparation, printing and
distribution of sales literature; (iv) expenditures for support services such as
telephone facilities and expenses and shareholder services as the Fund may
reasonably request; (v) provision to the Fund of such information, analyses and
opinions with respect to marketing and promotional activities pertaining to
Class A Shares of the Portfolios as the Fund may, from time to time, reasonably
request; (vi) 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;
(vii) overhead and other office expenses of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; and
(viii) any other costs and expenses relating to distribution or sales support
activities in connection with the offering and sale of Class A Shares of the
Portfolios. In lieu of providing the distribution services described above
directly, the Distributor may retain a Promotional Agent to provide some or all
of the above services. Payments under Section 1 of the Plan may be made without
regard to expenses actually incurred and the Distributor may retain any excess
of the fees it receives pursuant to this Plan over its expenses incurred in
connection with providing the services described above.
<PAGE>
Section 3. Indirect Distribution Expense
-----------------------------
To the extent that any payments made by any of the Portfolios to the
Distributor or to the investment adviser to the Fund, including payment of any
administrative and other service fees or investment advisory fees, may be deemed
to be indirect payment of distribution expenses, those indirect payments shall
be deemed to be authorized by this Plan.
Section 4. Approval by Shareholders
------------------------
The Plan will not take effect, and no fee will be payable in
accordance with Section 1 of the Plan, with respect to the Class A Shares of a
particular Portfolio until the Plan has been approved by a vote of at least a
majority of the outstanding voting securities of the Class A Shares of such
Portfolio, if such approval is required pursuant to the Rule. The Plan will be
deemed to have been approved with respect to the Class A Shares of a Portfolio
so long as a majority of the outstanding voting securities of the Class A Shares
of such Portfolio votes for the approval of the Plan, notwithstanding that: (a)
the Plan has not been approved by a majority of the outstanding voting
securities of the Class A Shares or any other class of shares of any other
Portfolio or (b) the Plan has not been approved by a majority of the outstanding
Class A Shares or any other class of shares of the Fund.
Section 5. Approval by Trustees
--------------------
Neither the Plan nor any related agreements will take effect until
approved by a majority vote of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plan or in any
agreements related to it (the "Qualified Trustees"), cast in person at a meeting
called for the purpose of voting on the Plan and the related agreements.
Section 6. Continuance of the Plan/Additional Portfolios
---------------------------------------------
The Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Fund's Board of Trustees in the
manner described in Section 5 above.
In the event that the Fund establishes additional investment
portfolios, this Plan shall be effective with respect to the Class A Shares of
such portfolios, provided that the Plan has previously been approved for
continuation and the requisite Shareholder and Trustee approval has been
obtained in accordance with Sections 4 and 5 of this Plan.
Section 7. Termination
-----------
The Plan may be terminated at any time with respect to the Class A
Shares of any Portfolio by a majority vote of the Qualified Trustees or by vote
of a majority of the outstanding voting securities of the A Class of such
Portfolio. The Plan may remain in effect with respect to the Class A Shares of
a particular Portfolio even if the Plan has been terminated in accordance with
this Section 7 with respect to the Class A Shares of one or more of the other
Portfolios.
Section 8. Amendments
----------
The Plan may not be amended with respect to the Class A Shares of a
Portfolio so as to increase materially the amount of the fee described in
Section 1 above with respect to the Class A Shares of such Portfolio, unless the
amendment is approved by a vote of at least a majority of the outstanding voting
securities of the A Class of that Portfolio. In addition, no material amendment
to the Plan may be made unless approved by the Fund's Board of Trustees in the
manner described in Section 5 above.
Section 9. Selection of Certain Trustees
-----------------------------
<PAGE>
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be committed to
the discretion of the Trustees then in office who are not interested persons of
the Fund.
Section 10. Written Reports
---------------
In each year during which the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Fund's Board of Trustees, and the Trustees will review, at least quarterly,
written reports, complying with the requirements of the Rule, which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
Section 11. Preservation of Materials
-------------------------
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 10 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 12. Meanings of Certain Terms
-------------------------
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
Section 13. Limitation of Liability
-----------------------
The Declaration of Trust establishing the Trust, dated September 29,
1988, as amended and restated 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 Fund 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
Fund or any Portfolio thereof, but only the assets belonging to the Fund, or to
the particular Portfolio with which the obligee or claimant dealt, shall be
liable.
<PAGE>
Schedule I
----------
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
Date: September 26, 1997
<PAGE>
INITIALLY ADOPTED MARCH 18, 1994
AMENDED AND RESTATED SEPTEMBER 26, 1997
NORTH AMERICAN FUNDS
--------------------
DISTRIBUTION PLAN
-----------------
CLASS B SHARES
--------------
This Class B Shares Distribution Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by North American Funds, a Massachusetts
business trust (the "Fund"), with respect to the Class B shares of beneficial
interest (the "Class B Shares") of each of the Fund's investment portfolios as
listed on Schedule I (each, a "Portfolio", collectively, the "Portfolios"),
subject to the following terms and conditions:
Section 1. Payments for Distribution Related Services
------------------------------------------
The Fund may compensate the distributor of its shares, NASL Financial
Services, Inc., a Massachusetts corporation, or any entity that may in the
future act as a distributor for the Portfolios (the "Distributor") or its
assignees, for activities or expenses incurred in connection with the offering
and sale of Class B Shares of the Portfolios, and related expenses incurred, all
as described in Section 2 below. Payments by the Fund under this Section of the
Plan will be calculated and accrued daily and paid monthly and shall be paid at
the rate of (and not exceeding) 1.00% on an annualized basis of the average
daily net assets attributable to Class B Shares of each Portfolio (with the
exception of the Money Market Fund, for which no payments pursuant to this
Section 1 shall be made). An amount equal to (and not exceeding) one-fourth
(.25% on an annualized basis of the average daily net assets attributable to
Class B Shares of each Portfolio) of the fee prescribed above shall be used to
provide payments to securities dealers for ongoing account services to
shareholders of such Portfolios and shall be deemed to be a "service fee" as
defined in Section 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"). If there is any reduction in fees paid
under the Plan for any Portfolio, the service fee shall first be reduced and
only after payment of the service fee has been eliminated will non-service fees
be reduced.
Section 2. Expenses Covered by Plan
------------------------
Payments payable under Section 1 of the Plan shall be used primarily
to compensate the Distributor for distribution services provided by it in
connection with the offering and sale of Class B Shares of the Portfolios, and
related expenses incurred, including payments by the Distributor to compensate
or reimburse brokers, dealers or financial institutions (collectively, "Selling
Agents"), for sales support services provided and related expenses incurred by
such Selling Agents. Such services and expenses may include, but are not
limited to, the following: (i) the development, formulation and implementation
of marketing and promotional activities, including direct mail promotions and
television, radio, magazine, newspaper and other mass media advertising for
Class B Shares of the Portfolios; (ii) the preparation, printing and
distribution of prospectuses for Class B Shares of the Portfolios and reports to
recipients other than existing shareholders; (iii) the preparation, printing and
distribution of sales literature; (iv) expenditures for support services such as
telephone facilities and expenses and shareholder services as the Fund may
reasonably request; (v) provision to the Fund of such information, analyses and
opinions with respect to marketing and promotional activities pertaining to
Class B Shares of the Portfolios as the Fund may, from time to time, reasonably
request; (vi) 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;
(vii) overhead and other office expenses of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; and
(viii) any other costs and expenses relating to distribution or sales support
activities in connection with the offering and sale of Class B Shares of the
Portfolios. In lieu of providing the distribution services described above
directly, the Distributor may retain a Promotional Agent to provide some or all
of the above services. Payments under Section 1 of the Plan may be made without
regard to expenses actually incurred and the Distributor may retain any excess
of the fees it receives pursuant to this Plan over its expenses incurred in
connection with providing the services described above.
<PAGE>
Section 3. Indirect Distribution Expense
-----------------------------
To the extent that any payments made by any of the Portfolios to the
Distributor or to the investment adviser to the Fund, including payment of any
administrative and other service fees or investment advisory fees, may be deemed
to be indirect payment of distribution expenses, those indirect payments shall
be deemed to be authorized by this Plan.
Section 4. Approval by Shareholders
------------------------
The Plan will not take effect, and no fee will be payable in
accordance with Section 1 of the Plan, with respect to the Class B Shares of a
particular Portfolio until the Plan has been approved by a vote of at least a
majority of the outstanding voting securities of the Class B Shares of such
Portfolio, if such approval is required pursuant to the Rule. The Plan will be
deemed to have been approved with respect to the Class B Shares of a Portfolio
so long as a majority of the outstanding voting securities of the Class B Shares
of such Portfolio votes for the approval of the Plan, notwithstanding that: (a)
the Plan has not been approved by a majority of the outstanding voting
securities of the Class B Shares or any other class of shares of any other
Portfolio or (b) the Plan has not been approved by a majority of the outstanding
Class B Shares or any other class of shares of the Fund.
Section 5. Approval by Trustees
--------------------
Neither the Plan nor any related agreements will take effect until
approved by a majority vote of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plan or in any
agreements related to it (the "Qualified Trustees"), cast in person at a meeting
called for the purpose of voting on the Plan and the related agreements.
Section 6. Continuance of the Plan/Additional Portfolios
---------------------------------------------
The Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Fund's Board of Trustees in the
manner described in Section 5 above.
In the event that the Fund establishes additional investment
portfolios, this Plan shall be effective with respect to the Class B Shares of
such portfolios, provided that the Plan has previously been approved for
continuation and the requisite Shareholder and Trustee approval has been
obtained in accordance with Sections 4 and 5 of this Plan.
Section 7. Termination
-----------
The Plan may be terminated at any time with respect to the Class B
Shares of any Portfolio by a majority vote of the Qualified Trustees or by vote
of a majority of the outstanding voting securities of the B Class of such
Portfolio. The Plan may remain in effect with respect to the Class B Shares of
a particular Portfolio even if the Plan has been terminated in accordance with
this Section 7 with respect to the Class B Shares of one or more of the other
Portfolios.
Section 8. Amendments
----------
The Plan may not be amended with respect to the Class B Shares of a
Portfolio so as to increase materially the amount of the fee described in
Section 1 above with respect to the Class B Shares of such Portfolio, unless the
amendment is approved by a vote of at least a majority of the outstanding voting
securities of the B Class of that Portfolio. In addition, no material amendment
to the Plan may be made unless approved by the Fund's Board of Trustees in the
manner described in Section 5 above.
<PAGE>
Section 9. Selection of Certain Trustees
-----------------------------
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be committed to
the discretion of the Trustees then in office who are not interested persons of
the Fund.
Section 10. Written Reports
---------------
In each year during which the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Fund's Board of Trustees, and the Trustees will review, at least quarterly,
written reports, complying with the requirements of the Rule, which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
Section 11. Preservation of Materials
-------------------------
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 10 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 12. Meanings of Certain Terms
-------------------------
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
Section 13. Limitation of Liability
-----------------------
The Declaration of Trust establishing the Trust, dated September 29,
1988, as amended and restated 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 Fund 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
Fund or any Portfolio thereof, but only the assets belonging to the Fund, or to
the particular Portfolio with which the obligee or claimant dealt, shall be
liable.
<PAGE>
Schedule I
----------
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
Date: September 26, 1997
<PAGE>
INITIALLY ADOPTED MARCH 18, 1994
AMENDED AND RESTATED SEPTEMBER 26, 1997
NORTH AMERICAN FUNDS
--------------------
DISTRIBUTION PLAN
-----------------
CLASS C SHARES
--------------
This Class C Shares Distribution Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by North American Funds, a Massachusetts
business trust (the "Fund"), with respect to the Class C shares of beneficial
interest (the "Class C Shares") of the Fund's ten investment portfolios:each
of the Fund's investment the Global Growth Fund, the Growth Fund, the Growth
and Income Fund, the Asset Allocation Fund, the Strategic Income Fund, the
Investment Quality Bond Fund, the U.S. Government Securities Fund, the National
Municipal Bond Fund, the California Municipal Bond Fund and the Money Market
Fundportfolios as set forth on Schedule I (each, a "Portfolio", collectively,
the "Portfolios"), subject to the following terms and conditions:
Section 1. Payments for Distribution -- Related Services
---------------------------------------------
The Fund may compensate the distributor of its shares, NASL Financial
Services, Inc., a Massachusetts corporation, or any entity that may in the
future act as a distributor for the Portfolios (the "Distributor") or its
assignees, for activities or expenses incurred in connection with the offering
and sale of Class C Shares of the Portfolios, and related expenses incurred, all
as described in Section 2 below. Payments by the Fund under this Section of the
Plan will be calculated and accrued daily and paid monthly and shall be paid at
the rate of (and not exceeding) 1.00% on an annualized basis of the average
daily net assets attributable to Class C Shares of each Portfolio (with the
exception of the Money Market Fund, for which no payments pursuant to this
Section 1 shall be made). An amount equal to (and not exceeding) one-fourth
(.25% on an annualized basis of the average daily net assets attributable to
Class C Shares of each Portfolio) of the fee prescribed above shall be used to
provide payments to securities dealers for ongoing account services to
shareholders of such Portfolios and shall be deemed to be a "service fee" as
defined in Section 2830 of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"). If there is any reduction in fees
paid under the Plan for any Portfolio, the service fee shall first be reduced
and only after payment of the service fee has been eliminated will non-service
fees be reduced.
Section 2. Expenses Covered by Plan
------------------------
Payments payable under Section 1 of the Plan shall be used primarily
to compensate the Distributor for distribution services provided by it in
connection with the offering and sale of Class C Shares of the Portfolios, and
related expenses incurred, including payments by the Distributor to compensate
or reimburse brokers, dealers or financial institutions (collectively, "Selling
Agents"), for sales support services provided and related expenses incurred by
such Selling Agents. Such services and expenses may include, but are not
limited to, the following: (i) the development, formulation and implementation
of marketing and promotional activities, including direct mail promotions and
television, radio, magazine, newspaper and other mass media advertising for
Class C Shares of the Portfolios; (ii) the preparation, printing and
distribution of prospectuses for Class C Shares of the Portfolios and reports to
recipients other than existing shareholders; (iii) the preparation, printing and
distribution of sales literature; (iv) expenditures for support services such as
telephone facilities and expenses and shareholder services as the Fund may
reasonably request; (v) provision to the Fund of such information, analyses and
opinions with respect to marketing and promotional activities pertaining to
Class C Shares of the Portfolios as the Fund may, from time to time, reasonably
request; (vi) 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;
(vii) overhead and other office expenses of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; and
(viii) any other costs and expenses relating to distribution or sales support
activities in connection with the offering and sale of Class C Shares of the
Portfolios. In lieu of providing the distribution services described above
directly, the Distributor may retain a Promotional Agent to provide some or all
of the above services. Payments under Section 1 of the Plan may be made without
regard to expenses actually incurred and the Distributor may retain any excess
of the fees it receives pursuant to this Plan over its expenses incurred in
connection with providing the services described above.
<PAGE>
Section 3. Indirect Distribution Expense
-----------------------------
To the extent that any payments made by any of the Portfolios to the
Distributor or to the investment adviser to the Fund, including payment of any
administrative and other service fees or investment advisory fees, may be deemed
to be indirect payment of distribution expenses, those indirect payments shall
be deemed to be authorized by this Plan.
Section 4. Approval by Shareholders
------------------------
The Plan will not take effect, and no fee will be payable in
accordance with Section 1 of the Plan, with respect to the Class C Shares of a
particular Portfolio until the Plan has been approved by a vote of at least a
majority of the outstanding voting securities of the Class C Shares of such
Portfolio, if such approval is required pursuant to the Rule. The Plan will be
deemed to have been approved with respect to the Class C Shares of a Portfolio
so long as a majority of the outstanding voting securities of the Class C Shares
of such Portfolio votes for the approval of the Plan, notwithstanding that: (a)
the Plan has not been approved by a majority of the outstanding voting
securities of the Class C Shares or any other class of shares of any other
Portfolio or (b) the Plan has not been approved by a majority of the outstanding
Class C Shares or any other class of shares of the Fund.
Section 5. Approval by Trustees
--------------------
Neither the Plan nor any related agreements will take effect until
approved by a majority vote of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plan or in any
agreements related to it (the "Qualified Trustees"), cast in person at a meeting
called for the purpose of voting on the Plan and the related agreements.
Section 6. Continuance of the Plan/Additional Portfolios
---------------------------------------------
The Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Fund's Board of Trustees in the
manner described in Section 5 above.
In the event that the Fund establishes additional investment
portfolios, this Plan shall be effective with respect to the Class C Shares of
such portfolios, provided that the Plan has previously been approved for
continuation and the requisite Shareholder and Trustee approval has been
obtained in accordance with Sections 4 and 5 of this Plan.
Section 7. Termination
-----------
The Plan may be terminated at any time with respect to the Class C
Shares of any Portfolio by a majority vote of the Qualified Trustees or by vote
of a majority of the outstanding voting securities of the C Class of such
Portfolio. The Plan may remain in effect with respect to the Class C Shares of
a particular Portfolio even if the Plan has been terminated in accordance with
this Section 7 with respect to the Class C Shares of one or more of the other
Portfolios.
Section 8. Amendments
----------
The Plan may not be amended with respect to the Class C Shares of a
Portfolio so as to increase materially the amount of the fee described in
Section 1 above with respect to the Class C Shares of such Portfolio, unless the
amendment is approved by a vote of at least a majority of the outstanding voting
securities of the C Class of that Portfolio. In addition, no material amendment
to the Plan may be made unless approved by the Fund's Board of Trustees in the
manner described in Section 5 above.
<PAGE>
Section 9. Selection of Certain Trustees
-----------------------------
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be committed to
the discretion of the Trustees then in office who are not interested persons of
the Fund.
Section 10. Written Reports
---------------
In each year during which the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Fund's Board of Trustees, and the Trustees will review, at least quarterly,
written reports, complying with the requirements of the Rule, which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
Section 11. Preservation of Materials
-------------------------
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 10 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 12. Meanings of Certain Terms
-------------------------
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
Section 13. Limitation of Liability
-----------------------
The Declaration of Trust establishing the Trust, dated September 29,
1988, as amended and restated 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 Fund 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
Fund or any Portfolio thereof, but only the assets belonging to the Fund, or to
the particular Portfolio with which the obligee or claimant dealt, shall be
liable.
<PAGE>
Schedule I
----------
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
Date: September 26, 1997
<PAGE>
NORTH AMERICAN FUNDS
MULTICLASS PLAN PURSUANT OT RULE 18F-3
UNDER THE INVESTMENT COMPANY ACT OF 1940
October 1, 1997
I. Background
----------
This plan (the "Plan") pertains to the issuance by the North American Funds
(the "Trust") on behalf of the investment portfolios listed on Schedule A hereto
(each a "Fund") of multiple classes of shares of beneficial interest and is
being adopted by the Trust pursuant to Rule 18f-3 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Plan amends and restates the
Trust's previous Multiclass Plan (dated June 28, 1995) in order to modify the
conversion features of the Funds' Class B shares, as described herein.
Distribution/service arrangements and expense allocations previously approved by
the Trust's Board of Trustees in accordance with an exemptive order (the
"Order") granted by the Securities and Exchange Commission to the Trust on
February 28, 1994, along with other features of the Trust's multiple class
structure, are set forth below. Reference should be made to the Trust's
prospectus for further information about the Trust's multiple class structure.
II. Creation of Classes.
-------------------
The Trust's Declaration of Trust authorizes the Trust to issue multiple
classes of shares. Pursuant to action taken by the Board of Trustee of the
Trust at its March 17-18, 1994 meeting and in accordance with the terms of the
Order, the Trust on April 1, 1994 established three classes of shares for each
of the Funds, designated "Class A" shares, "Class B" shares and "Class C"
shares. The shares of the Strategic Income, Investment Quality Bond, U.S.
Government Securities, National Municipal Bond and Money Market Funds
outstanding on April 1, 1994 were reclassified as "Class A" shares and the
shares of the Global Growth, Growth, Growth and Income and Asset Allocation
Funds outstanding on April 1, 1994 were reclassified as "Class C" shares.
III. Sales Charges
-------------
Class A shares are offered for sale at net asset value per share plus a
front end sales charge (with the exception of Class A shares of the Money Market
Fund, which are offered without a sales charge). Certain purchases of Class A
shares qualify for a waived or reduced front end sales charge. In addition,
purchases of Class A shares above a certain dollar amount are offered for sale
at net asset value subject to a CDSC (currently 1% of the dollar amount subject
thereto during the first year after purchase).
Class B shares are sold at net asset value per share without a front end
sales charge but
<PAGE>
are subject to a CDSC (currently 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 (with the exception of Class B shares of
the Money Market Fund, which are not subject to any CDSC upon redemption)).
Class C shares are sold at net asset value without a front end sales charge
but for Class C shares purchased after May 1, 1995 subject to a CDSC (currently
1% of the dollar amount subject thereto on redemptions made within one year of
purchase (with the exception of Class C shares of the Money Market fund, which
are not subject to any CDSC upon redemption)).
The CDSC for each class of shares is assessed in compliance with Rule 6c-10
under the 1940 Act.
IV. Distribution and Service Fees
-----------------------------
According to a plan adopted pursuant to Rule 12b-1 under the 1940 Act
("Rule 12b-1"), Class A shares are subject to a service fee and a distribution
fee (with the exception of Class A shares of the Money Market Fund, which bear
no such fees).
According to a plan adopted pursuant to Rule 12b-1, Class B shares are
subject to a service fee and a distribution fee which is higher than the Class A
service and distribution fee (with the exception of Class B shares of the Money
Market Fund, which bear no such fees).
According to a plan adopted pursuant to Rule 12b-1, Class C shares are
subject to a service fee and a distribution fee which is higher than the Class A
service and distribution fee (with the exception of Class C shares of the Money
Market Fund, which bear no such fees).
V. Exchange and Conversion Features
--------------------------------
Shares of a particular class of a Fund are exchangeable only for shares of
the same class of another Fund as set forth in the Trust's prospectus.
Class B shares (except for shares of the Money Market Fund) purchased prior
to October 1, 1997 will automatically convert, based upon relative net asset
value, to Class A shares of the same Fund six years after purchase. Class B
shares (except for shares of the Money Market Fund) purchased on or after
October 1, 1997 will automatically convert, based upon relative net asset value,
to Class A shares of the same Fund eight years after purchase. Upon conversion,
these shares will no longer be subject to the higher 12b-1 service and
distribution fee of Class B shares.
Class C shares (except for shares of the Money Market Fund) will
automatically convert, based upon relative net asset value, to Class A shares of
the same Fund ten years after purchase. Upon conversion, these shares will no
longer be subject to the higher 12b-1 service
-2-
<PAGE>
and distribution fee of Class C shares.
There are no automatic conversion features for Class A shares.
VI. Allocation of Expenses
----------------------
Expenses of each Fund are borne by the various classes of the Fund on the
basis of relative net assets. The fees identified as "class expenses" (see
below) are to be allocated to each class based on actual expenses incurred, to
the extent that such expenses can properly be so allocated. To the extent that
such expenses cannot be properly allocated, such expenses are to be borne by all
classes on the basis of relative net assets.
The following are "class expenses":
(i) transfer and shareholder servicing agent fees and shareholder
servicing costs;
(ii) printing and postage expenses related to preparing and distribution
to the shareholders of a specific class materials such as shareholder reports,
prospectuses and proxies;
(iii) Blue Sky and SEC registration fees incurred by a class;
(iv) professional fees relating solely to such class;
(v) Trustees' fees, including independent counsel fees, relating to one
class; and
(vi) shareholder meeting expenses for meetings of a particular class.
VII. Voting Rights
-------------
All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law or
where the matter involved affects only one class.
VIII. Amendments
----------
No material amendment to this Plan may be made unless it is first
approved by a majority of both (a) the full Board of Trustees of the Trust and
(b) those Trustees who are not interested persons of the Trust, as that term is
defined in the 1940 Act.
-3-
<PAGE>
SCHEDULE A
INVESTMENT PORTFOLIOS
Global Equity Fund
Growth Equity Fund
Growth and Income Fund
International Growth and Income Fund
International Small Cap Fund
Small/Mid Cap Fund
Balanced Fund
Equity-Income Fund
Strategic Income Fund
Investment Quality Bond Fund
U.S. Government Securities Fund
National Municipal Bond Fund
Money Market Fund
-4-
<PAGE>
POWER OF ATTORNEY
-----------------
I, the undersigned, hereby constitute Joseph T. Grause, Jr., Leana D.
Vacirca and Thomas J. Brown, each of them singly, my true and lawful attorneys,
with full power to them and each of them to sign for me, and in my name in the
capacity indicated below, any and all registration statements and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time investment companies of which I am
now or hereafter a Director or Trustee and for which CypressTree Investments,
Inc., CypressTree Asset Management Corporation, Inc., CypressTree Funds
Distributors, Inc. and/or any other affiliate of Cypress Holding Company, Inc.
serves as distributor, adviser, sub-adviser or co-adviser, registering the
shares of such companies and generally to do all such things in my name and in
my behalf to enable such registered investment companies to comply with the
provisions of the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, and all requirements and regulations of the Securities
and Exchange Commission, hereby ratifying and confirming my signature as it may
be signed by my said attorneys and any and all registration statements and
amendments thereto.
Witness my hand on the 1st day of October, 1997.
/s/ Bradford K. Gallagher
-----------------------------
Bradford K. Gallagher
<PAGE>
POWER OF ATTORNEY
-----------------
I, the undersigned, hereby constitute Bradford K. Gallagher, Joseph T.
Grause, Jr., Leana D. Vacirca and Thomas J. Brown, each of them singly, my true
and lawful attorneys, with full power to them and each of them to sign for me,
and in my name in the capacity indicated below, any and all registration
statements and any and all amendments thereto to be filed with the Securities
and Exchange Commission for the purpose of registering from time to time
investment companies of which I am now or hereafter a Director or Trustee and
for which CypressTree Investments, Inc., CypressTree Asset Management
Corporation, Inc., CypressTree Funds Distributors, Inc. and/or any other
affiliate of Cypress Holding Company, Inc. serves as distributor, adviser, sub-
adviser or co-adviser, registering the shares of such companies and generally to
do all such things in my name and in my behalf to enable such registered
investment companies to comply with the provisions of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming my signature as it may be signed by my said attorneys
and any and all registration statements and amendments thereto.
Witness my hand on the 1st day of October, 1997.
/s/ William F. Achtmeyer
---------------------------
William F. Achtmeyer
<PAGE>
POWER OF ATTORNEY
-----------------
I, the undersigned, hereby constitute Bradford K. Gallagher, Joseph T.
Grause, Jr., Leana D. Vacirca and Thomas J. Brown, each of them singly, my true
and lawful attorneys, with full power to them and each of them to sign for me,
and in my name in the capacity indicated below, any and all registration
statements and any and all amendments thereto to be filed with the Securities
and Exchange Commission for the purpose of registering from time to time
investment companies of which I am now or hereafter a Director or Trustee and
for which CypressTree Investments, Inc., CypressTree Asset Management
Corporation, Inc., CypressTree Funds Distributors, Inc. and/or any other
affiliate of Cypress Holding Company, Inc. serves as distributor, adviser, sub-
adviser or co-adviser, registering the shares of such companies and generally to
do all such things in my name and in my behalf to enable such registered
investment companies to comply with the provisions of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming my signature as it may be signed by my said attorneys
and any and all registration statements and amendments thereto.
Witness my hand on the 1st day of October, 1997.
/s/ Don B. Allen
-----------------------------
Don B. Allen
<PAGE>
POWER OF ATTORNEY
-----------------
I, the undersigned, hereby constitute Bradford K. Gallagher, Joseph T.
Grause, Jr., Leana D. Vacirca and Thomas J. Brown, each of them singly, my true
and lawful attorneys, with full power to them and each of them to sign for me,
and in my name in the capacity indicated below, any and all registration
statements and any and all amendments thereto to be filed with the Securities
and Exchange Commission for the purpose of registering from time to time
investment companies of which I am now or hereafter a Director or Trustee and
for which CypressTree Investments, Inc., CypressTree Asset Management
Corporation, Inc., CypressTree Funds Distributors, Inc. and/or any other
affiliate of Cypress Holding Company, Inc. serves as distributor, adviser, sub-
adviser or co-adviser, registering the shares of such companies and generally to
do all such things in my name and in my behalf to enable such registered
investment companies to comply with the provisions of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming my signature as it may be signed by my said attorneys
and any and all registration statements and amendments thereto.
Witness my hand on the 1st day of October, 1997.
/s/ William F. Devin
-----------------------------
William F. Devin
<PAGE>
POWER OF ATTORNEY
-----------------
I, the undersigned, hereby constitute Bradford K. Gallagher, Joseph T.
Grause, Jr., Leana D. Vacirca and Thomas J. Brown, each of them singly, my true
and lawful attorneys, with full power to them and each of them to sign for me,
and in my name in the capacity indicated below, any and all registration
statements and any and all amendments thereto to be filed with the Securities
and Exchange Commission for the purpose of registering from time to time
investment companies of which I am now or hereafter a Director or Trustee and
for which CypressTree Investments, Inc., CypressTree Asset Management
Corporation, Inc., CypressTree Funds Distributors, Inc. and/or any other
affiliate of Cypress Holding Company, Inc. serves as distributor, adviser, sub-
adviser or co-adviser, registering the shares of such companies and generally to
do all such things in my name and in my behalf to enable such registered
investment companies to comply with the provisions of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming my signature as it may be signed by my said attorneys
and any and all registration statements and amendments thereto.
Witness my hand on the 1st day of October, 1997.
/s/ Kenneth J. Lavery
-----------------------------
Kenneth J. Lavery
<PAGE>
POWER OF ATTORNEY
-----------------
I, the undersigned, hereby constitute Bradford K. Gallagher, John I.
Fitzgerald, Leana D. Vacirca and Thomas J. Brown, each of them singly, my true
and lawful attorneys, with full power to them and each of them to sign for me,
and in my name in the capacity indicated below, any and all registration
statements and any and all amendments thereto to be filed with the Securities
and Exchange Commission for the purpose of registering from time to time
investment companies of which I am now or hereafter a Director or Trustee and
for which CypressTree Investments, Inc., CypressTree Asset Management
Corporation, Inc., CypressTree Funds Distributors, Inc. and/or any other
affiliate of Cypress Holding Company, Inc. serves as distributor, adviser,
sub-adviser or co-adviser, registering the shares of such companies and
generally to do all such things in my name and in my behalf to enable such
registered investment companies to comply with the provisions of the Securities
Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and
all requirements and regulations of the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by my said
attorneys and any and all registration statements and amendments thereto.
Witness my hand on the 1st day of October, 1997.
/s/ Joseph T. Grause, Jr.
___________________________
Joseph T. Grause, Jr.
<PAGE>
POWER OF ATTORNEY
-----------------
I, the undersigned, hereby constitute Bradford K. Gallagher, John I.
Fitzgerald, Leana D. Vacirca and Thomas J. Brown, each of them singly, my true
and lawful attorneys, with full power to them and each of them to sign for me,
and in my name in the capacity indicated below, any and all registration
statements and any and all amendments thereto to be filed with the Securities
and Exchange Commission for the purpose of registering from time to time
investment companies of which I am now or hereafter a Director or Trustee and
for which CypressTree Investments, Inc., CypressTree Asset Management
Corporation, Inc., CypressTree Funds Distributors, Inc. and/or any other
affiliate of Cypress Holding Company, Inc. serves as distributor, adviser, sub-
adviser or co-adviser, registering the shares of such companies and generally to
do all such things in my name and in my behalf to enable such registered
investment companies to comply with the provisions of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming my signature as it may be signed by my said attorneys
and any and all registration statements and amendments thereto.
Witness my hand on the 1st day of October, 1997.
/s/ Thomas J. Brown
_________________________
Thomas J. Brown
