<PAGE>
North American Funds
Prospectus 2000
Class A Shares
Class B Shares
Class C Shares
<TABLE>
<S> <C>
U.S. Equity Funds Balanced Funds
Growth & Income Fund Balanced Fund
Large Cap Growth Fund LifeStyle Funds
Mid Cap Growth Fund Aggressive Growth LifeStyle Fund
Mid Cap Value Fund Conservative Growth LifeStyle Fund
Science & Technology Fund Moderate Growth LifeStyle Fund
Small Cap Growth Fund Income Funds
Small Cap Index Fund Core Bond Fund
Socially Responsible Fund High Yield Bond Fund
Stock Index Fund Municipal Bond Fund
International/Global Equity Funds Strategic Income Fund
Global Equity Fund U.S. Government Securities Fund
International Equity Fund Money Market Funds
International Small Cap Fund Money Market Fund
Municipal Money Market Fund
</TABLE>
The Securities and Exchange Commission has not approved or disapproved of these
securities or passed on the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
July 7, 2000
AMERICAN GENERAL FINANCIAL GROUP
<PAGE>
[LOGO]
Table of Contents
Organization of Information
This Prospectus includes information about 23 different Funds.
.Section I includes a summary of each Fund.
.Section II includes additional information about the Funds' investment
strategies, additional risk information and information about the Funds'
management.
.Section III includes information about how to invest and manage your
North American Funds account.
<TABLE>
<S> <C>
Section I: Summaries of the Funds............. Page 1
.Investment Objective
.Principal Investment Strategies
.Main Risks
.Investment Performance
.Description of Main Risks
North American Funds
U.S. Equity Funds
Growth & Income Fund Page 2
Large Cap Growth Fund Page 3
Mid Cap Growth Fund Page 4
Mid Cap Value Fund Page 5
Science & Technology Fund Page 6
Small Cap Growth Fund Page 8
Small Cap Index Fund Page 9
Socially Responsible Fund Page 10
Stock Index Fund Page 11
International/Global Equity Funds
Global Equity Fund Page 12
International Equity Fund Page 13
International Small Cap Fund Page 14
Balanced Funds
Balanced Fund Page 15
Lifestyle Funds
Aggressive Growth LifeStyle Fund Page 16
Conservative Growth LifeStyle Fund Page 18
Moderate Growth LifeStyle Fund Page 20
Income Funds
Core Bond Fund Page 22
High Yield Bond Fund Page 23
Municipal Bond Fund Page 24
Strategic Income Fund Page 25
U.S. Government Securities Fund Page 26
Money Market Funds
Money Market Fund Page 27
Municipal Money Market Fund Page 28
Section II: Other Information About Each Page 32
Fund..........................................
.Fees and Expenses
.More Information About Investment
Strategies
.Other Risks of Investing
.Fund Management
Section III: Investing in the Funds........... Page 55
</TABLE>
This section includes the information you need about how to invest and how to
redeem shares. It also includes other important information about sales
charges, taxes and account privileges.
Additional Information
If you'd like information additional to that included in this Prospectus, the
back cover lists a number of places to call or to visit for
additional materials.
<PAGE>
Section I:
Fund Summaries
North American Funds (the "Trust") is a group of mutual funds that includes 23
separate investment portfolios, or Funds. Each Fund has a specific investment
objective. Each Fund also has a subadvisor, a firm responsible for making
investment decisions for the Fund.
The summaries on the next 28 pages describe each Fund's investment objective
and principal investment strategies, list the main risks of investing in the
Fund, and show the Fund's past investment performance. Explanations of the main
risks of investing in each Fund starts on page 29.
Below the Funds' descriptions are a chart and a table. The bar chart shows how
the investment returns of one class of each Fund's shares have varied in the
past ten years, or in the years since the Fund began if it is less than ten
years old. The bar chart does not reflect sales charges; if it did, performance
would be less than shown.
The table (the Average Annual Total Return Table) following each bar chart
shows how that Fund's average annual returns for each Class of shares for the
last one, five and ten years (or since the Fund began, for newer Funds) com-
pared to returns of a broad-based securities market index. The table reflects
sales charges, including the maximum initial sales charge for Class A shares,
and the maximum applicable Deferred Sales Charge for Class B shares and Class C
shares. Certain Funds do not show performance information for Class C shares
because a full calendar year of performance information does not exist with
respect to Class C shares of such Funds.
Each Fund's bar chart and Average Annual Total Return Table provides indica-
tions of the historical risk/return of an investment in the Fund.
It is important to remember that past performance does not predict future per-
formance and that, as with any investment, it is possible to lose money by
investing in the Funds. An investment in any of the Funds is not a deposit in a
bank and is not insured by the Federal Deposit Insurance Corporation or any
other government agency.
------
1
<PAGE>
Growth & Income Fund
Investment Goal and Strategies
The investment objective of the Growth & Income Fund is to provide long-term
growth of capital and income consistent with prudent investment risk.
Wellington Management Company, LLP ("Wellington Management"), the Fund's
subadvisor, pursues this objective by investing mostly in a diversified
portfolio of common stocks of U.S. issuers that Wellington Management believes
are of high quality. High quality companies are companies that Wellington
Management believes have solid balance sheets, strong management teams,
consistent earnings growth and market leadership in their industry. The Fund
will typically invest in dividend-paying stocks of larger companies. The Fund
may invest up to 20% of its total assets in foreign securities.
To select stocks for the Fund, Wellington Management assesses a company and its
business environment, management, balance sheet, income statement, anticipated
earnings and dividends, and other related measures of fundamental value. Wel-
lington Management will also monitor and evaluate the economic and political
climate and the principal securities markets of the country in which each com-
pany is located.
Main Risks
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with value
stocks and the risk that the stocks the Fund buys may stop paying dividends)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and
table provide an
indication of risk
by showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for C Shares
Annual Total Return
'91 0%
'92 8.29%
'93 9.20%
'94 2.11%
'95 26.78%
'96 20.90%
'97 31.64%
'98 25.39%
'99 16.74%
Best quarter: quarter ended 12/31/98 20.07%
Worst quarter: quarter ended 9/30/98 -9.81%
---------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund* Life of Fund*
(Class A & B) (Class C)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 10.02% 23.47% 20.95% N/A
----------------------------------------------------------------------
Class B 11.73% 24.05% 21.49% N/A
----------------------------------------------------------------------
Class C 15.74% 24.18% N/A 17.17%
----------------------------------------------------------------------
S&P 500 21.04% 28.54% 25.52% 19.80%
Index(TM)
</TABLE>
---------------------------------------------------
*Inception dates: Class A and Class B - 4/1/94; Class C - 5/1/91
------
2
<PAGE>
Large Cap Growth Fund (formerly Growth Equity Fund)
Investment Goal and Strategies
The investment objective of the Large Cap Growth Fund is to seek long-term cap-
ital growth. To achieve this goal, Founders Asset Management LLC ("Founders"),
the Fund's subadvisor, invests at least 65% of the Fund's total assets in the
common stocks of well-established, high-quality growth companies whose earnings
are expected by Founders to increase faster than the market average.
High quality companies are companies that Founders believe have solid balance
sheets, strong management teams, consistent earnings growth and market leader-
ship in their industry.
The Fund may invest in other types of equity securities, such as preferred
stocks and convertible securities, that offer opportunities for capital appre-
ciation. The Fund may also invest in high-quality
bonds. The Fund may invest up to 100% of its total assets in American Deposi-
tary Receipts ("ADRs") and up to 30% of its total assets in foreign securities
(other than ADRs). The Fund may not invest more than 25% of its total assets in
any one foreign country.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with growth
stocks)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and
table provide an
indication of risk
by showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 25.37%
'98 25.13%
'99 38.37%
Best quarter: quarter ended 12/31/99 31.53%
Worst quarter: quarter ended 9/30/98 -13.75%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 3/4/96)
-----------------------------------------
<S> <C> <C>
Class A 30.42% 24.49%
-----------------------------------------
Class B 32.60% 25.24%
-----------------------------------------
Class C 36.58% 25.64%
-----------------------------------------
S&P 500 21.04% 26.26%
Index(TM)
</TABLE>
--------------------------------------------------------------------------------
------
3
<PAGE>
Mid Cap Growth Fund (formerly Small/Mid Cap Fund)
Investment Goal and Strategies
The investment objective of the Mid Cap Growth Fund is to seek long term capi-
tal appreciation. INVESCO Funds Group, Inc. ("INVESCO"), the Fund's subadvisor,
invests primarily in common stocks of mid-sized companies--those with market
capitalizations ranging from approximately $2 billion to $15 billion at the
time of purchase--but also has the flexibility to invest in other types of
securities including preferred stocks, convertible securities and bonds. The
core of the
Fund's portfolio will be invested in securities of established companies that
are leaders in attractive growth markets with a history of strong returns. The
remainder of the portfolio will be invested in securities of companies that
show accelerating growth, driven by product cycles, favorable industry or sec-
tor conditions and other factors that the subadviser believes will lead to
rapid sales or earnings growth. The Fund's strategy relies on many short-term
factors including current information about a company, investor interest, price
movements of a company's securities and general market and monetary conditions.
Consequently, the Fund's investments will usually be bought and sold frequent-
ly, which may cause the Fund to incur higher trading costs and/or to have a
relatively high amount of short-term capital gains, which are generally taxable
to you at your ordinary income tax rate.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with invest-
ing in smaller companies)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table
provide an indication
of risk by showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 15.89%
'98 29.65%
'99 32.20%
Best quarter: quarter ended 12/31/99 30.15%
Worst quarter: quarter ended 9/30/98 -16.39%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 3/4/96)
------------------------------------------------------
<S> <C> <C>
Class A 24.60% 19.33%
------------------------------------------------------
Class B 26.29% 19.83%
------------------------------------------------------
Class C 30.29% 20.35%
------------------------------------------------------
S&P MidCap 14.72% 20.64%
400 Index(TM)
------------------------------------------------------
Russell 2000 Index(TM) 21.26% 13.70%
</TABLE>
--------------------------------------------------------------------------------
------
4
<PAGE>
Mid Cap Value Fund
Investment Goal and Strategies
The investment objective of the Mid Cap Value Fund is to seek capital growth.
Neuberger Berman Management, Inc. ("NBM"), the Fund's subadvisor, pursues this
objective by investing at least 65% of the Fund's total assets in equity secu-
rities of medium capitalization companies using a value-oriented investment
approach.
Medium capitalization companies include companies with the characteristics of
companies included in the Russell MidcapTM Index. As of December 31, 1999, the
largest company included in the Russell MidcapTM Index had an approximate mar-
ket capitalization of $36.84 billion, while the average market capitalization
was approximately $4.4 billion.
NBM chooses securities it believes are undervalued based on strong fundamen-
tals, including a low price-to-earnings ratio, consistent cash flow, and the
company's track record through all parts of the market cycle. When selecting
securities for this Fund, NBM also considers other factors, including ownership
by a company's management of the company's stock and the dominance of a company
in its particular field. Up to 35% of the Fund's total assets may be invested
in other equity securities, including common and preferred stocks, convertible
securities, and related equities. The Fund may invest in derivatives.
The Fund may participate in the initial public offering ("IPO") market, and a
portion of the Fund's returns may be attributable to the Fund's investments in
IPOs. There is no guarantee that as the Fund's assets grow that it will be able
to experience significant improvement in performance by investing in IPOs. The
Fund will be actively traded, which will be reflected in its portfolio turnover
rate. The Fund's active trading strategy may cause the Fund to incur higher
trading costs and/or to have a relatively high amount of short-term capital
gains, which are generally taxable to you at your ordinary income tax rate.
Main Risks
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular
issuers or financial markets generally including, in particular, the risks of
investing in IPOs)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also subadvised by NBM.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 23.96%
Best quarter: quarter ended 6/30/99 16.58%
Worst quarter: quarter ended 9/30/99 -11.34%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<S> <C> <C>
Life of Fund
Past One Year (since 11/4/98)
---------------------------------------------------------------
Class A 16.83% 21.73%
---------------------------------------------------------------
Class B 17.29% 23.15%
---------------------------------------------------------------
Russell Midcap Value Index(TM) (0.11)% 5.57%
</TABLE>
--------------------------------------------------------------------------------
------
5
<PAGE>
Science & Technology Fund
Investment Goal and Strategies
The objective of the Science & Technology Fund is long-term growth of capital.
The Fund's subadvisor, T. Rowe Price Associates, Inc. ("T. Rowe Price"), pur-
sues this objective by investing at least 65% of the Fund's total assets in the
common stocks and equity-related securities of companies that are expected to
benefit from scientific breakthroughs and advancements in technology. Some of
the industries that are likely to be included in the portfolio are:
.Chemicals and synthetic materials, including pharmaceuticals
.Computers, including hardware and software
.Defense and aerospace
.E-Commerce
.Electronics, including hardware, software and components
.Media and information services
.Telecommunications
Stock selection reflects a growth approach and is based on intensive research
that assesses a company's fundamental prospects for above average earnings.
Holdings can range from small companies developing new technologies to blue
chip firms with established track records of developing and marketing technolo-
gy. Investments may also include companies that are expected to benefit from
technological advances even if they are not directly involved in research and
development.
The Fund may invest up to 30% of its assets in foreign securities, including
American Depositary Receipts ("ADRs") and other dollar-denominated foreign
securities. The Fund may invest up to 25% in other equity-related securities of
science and technology companies, including convertible debt securities and
convertible preferred stock. In addition, the Fund may invest in money market
securities in order to have cash available for redemptions. The Fund may invest
in derivatives.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Science & Technology Company Risk (the risk that the prices of securities of
science and technology companies will be particularly volatile)
-------
6
<PAGE>
Prior Performance of Similar Accounts
The Fund commenced operations on July 7, 2000, when a corresponding series of
American General Series Portfolio Company 2 (the "AGSPC2 Fund") was reorganized
into the Fund. The performance information shown below is for the AGSPC1 Sci-
ence & Technology Fund and the T. Rowe Price Science & Technology Fund, and not
that of the Fund, or the AGSPC2 Fund, which had not completed a full year of
operations on July 7, 2000.
The Fund's investment objective, policies, and strategies are substantially
similar to those employed by T. Rowe Price Associates, Inc. for the AGSPC (1)
Science & Technology Fund, and for the T. Rowe Price Science & Technology Fund.
These are the only substantially similar funds for which T. Rowe Price is the
investment advisor or subadvisor.
The AGSPC 1 Science & Technology Fund is sold as an annuity only to registered
and unregistered separate accounts of The Variable Annuity Life Insurance Cor-
poration ("VALIC") and its affiliates or employee thrift plans maintained by
VALIC or American General Corporation. The returns shown reflect investment
management fees and other Fund expenses, and do not reflect any charges
included in the annuity contract or variable life insurance policy for mortal-
ity and expenses guarantees, administrative fees or surrender charges. The T.
Rowe Price Science & Technology Fund is sold to the general public.
Investments made by the Fund, may not be the same as those made by the AGSPC 1
Science & Technology Fund or the T. Rowe Price Science & Technology Fund. Each
of the funds will have different performance results, due to factors such as
the cash flow in and out, different fees and expenses, and diversity in portfo-
lio size and positions. Past performance shown below is no guarantee of similar
future performance for the Fund.
The bar charts show the annual returns and performance for each full calendar
year since inception of the AGSPC 1 Science & Technology Fund, and for the past
ten years for the T. Rowe Price Science & Technology Fund, assuming reinvest-
ment of dividends and distributions.
[GRAPH]
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 61.66%
'96 13.81%
'97 2.61%
'98 42.13%
'99 100.95%
AGSPC1 Science & Technology Fund
Best quarter: quarter ended 12/31/98 48.04%
Worst quarter: quarter ended 9/30/98 -17.28%
[GRAPH]
Annual Total Return
'90 -1.33%
'91 60.17%
'92 18.76%
'93 24.25%
'94 15.79%
'95 55.53%
'96 14.23%
'97 1.71%
'98 42.35%
'99 100.99%
T. Rowe Price Science & Technology Fund
Best quarter: quarter ended 12/31/98 47.89%
Worst quarter: quarter ended 9/30/98 -29.53%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Since inception
------------------------------------------------------------
<S> <C> <C> <C> <C>
AGSPC 1 Science
& Technology 100.95% 40.07% N/A 40.13% (4/29/94)
------------------------------------------------------------
T. Rowe Price
Science &
Technology Fund 100.99% 38.90% 30.16% 38.73% (9/30/87)
------------------------------------------------------------
S&P 500 Index 21.04% 28.56% 18.21% --
</TABLE>
--------------------------------------------------------------------------------
------
7
<PAGE>
Small Cap Growth Fund (formerly Emerging Growth Fund)
Investment Goal and Strategies
The investment objective of the Small Cap Growth Fund is maximum capital appre-
ciation. Credit Suisse Asset Management, LLC ("CSAM"), the Fund's subadvisor,
pursues this objective by investing primarily in equity securities of U.S. com-
panies. The focus of the Fund is emerging growth companies, which often are
small or medium-size companies (those with market capitalizations of $250 mil-
lion to $4 billion, with growth characteristics such as positive earnings and
potential for accelerated growth.
The Fund may also invest in high-quality bonds, and, to a certain extent, in
foreign securities.
The Fund is not "diversified," which means that it may invest in
a relatively small number of issuers of securities, and its value
may be affected very significantly by the change in value of a single security.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with invest-
ing in smaller companies)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Non-Diversification Risk (the risk that investing in a smaller number of secu-
rities increases investment risks)
The bar chart and table
provide an indication
of risk by showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 73.13%
Best quarter: quarter ended 12/31/99 45.94%
Worst quarter: quarter ended 9/30/98 -22.58%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 1/6/98)
------------------------------------------------------
<S> <C> <C>
Class A 63.18% 28.58%
------------------------------------------------------
Class B 65.41% 29.15%
------------------------------------------------------
Class C 69.44% 31.17%
------------------------------------------------------
Russell 2000 Growth 43.09% 20.35%
Index(TM)
</TABLE>
--------------------------------------------------------------------------------
------
8
<PAGE>
Small Cap Index Fund
Investment Goal and Strategies
The Small Cap Index Fund seeks to provide investment results that are similar
to the total return of the Russell 2000(TM) Index (the "Index"). American Gen-
eral Investment Management, L.P. ("AGIM") acts as the subadvisor to the Fund.
The Index is a sub-index of the Russell 3000(TM) Index, which follows the 3,000
largest U.S. companies based on total market capitalization. The Index measures
the performance of the 2,000 smallest companies in the Russell 3000(TM) Index,
and represents about 8% of the total market capitalization of the Russell
3000(TM) Index. The average market capitalization in the Index was $650 million
as of December 31, 1999. As of the same date, the largest company in the Index
had a market capitalization of nearly $13.04 billion.
Generally, an index fund tries to mirror the target index and its performance.
An index fund's performance will not exactly match that of an index because the
index fund incurs operating expenses and other investment overhead as part of
its normal operations. The index is an unmanaged group of securities, so it
does not have these expenses. These differences between an index fund and its
index are called tracking differences.
The tracking differences are reviewed monthly by AGIM for the Fund. If the Fund
does not accurately track an index, AGIM will rebalance the Fund's portfolio by
selecting securities which will provide a more representative sampling of the
securities in the index as a whole or the sector diversification within the
index, as appropriate.
Financial futures will be used to hedge cashflows and maintain liquidity in the
Fund's portfolio.
Main Risks
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation).
Although financial futures track the underlying Index fairly closely there is
the risk that, at times, their results will diverge from the Index.
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with invest-
ing in smaller companies)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Index Risk (the risk that the Fund's performance will not match that of the
underlying index)
The bar chart and table provide indication of risk by showing the variability
of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also managed by the same portfolio managers.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 18.35%
Best quarter: quarter ended 6/30/99 17.15%
Worst quarter: quarter ended 9/30/99 -6.44%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/4/98)
--------------------------------------------------------
<S> <C> <C>
Class A 11.54% 19.06%
--------------------------------------------------------
Class B 12.63% 21.08%
--------------------------------------------------------
Russell 2000 Index(TM): 21.26% 29.65%
</TABLE>
--------------------------------------------------------------------------------
------
9
<PAGE>
Socially Responsible Fund
Investment Goal and Strategies
The investment objective of the Socially Responsible Fund is to seek to obtain
growth of capital.
To achieve this objective, American General Investment Management, L.P.
("AGIM"), the Fund's subadvisor, invests at least 80% of the Fund's total
assets in the equity securities of companies meeting social criteria estab-
lished for the Fund. To find out which companies meet the Fund's social crite-
ria, AGIM relies on industry classifications and research services such as the
Investor Responsibility Research Center ("IRRC").
The Fund does not invest in companies that are significantly engaged in:
.the production of nuclear energy;
.the manufacture of weapons or delivery systems;
.the manufacture of alcoholic beverages or tobacco products;
.the operation of gambling casinos; or
.business practices or the production of products that significantly pollute
the environment.
Up to 20% of the Fund's total assets may be invested in high quality money mar-
ket securities and warrants, or in other types of equity securities of compa-
nies meeting social criteria, including American Depositary Receipts ("ADRs"),
foreign securities, preferred stock, and convertible securities. The Fund may
invest in derivatives.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Social Criteria Risk (the risk that securities of companies meeting the Fund's
social criteria will underperform the market generally)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also managed by the same portfolio managers.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 18.30%
Best quarter: quarter ended 6/30/99 14.11%
Worst quarter: quarter ended 9/30/99 -6.97%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/4/98)
--------------------------------------------------
<S> <C> <C>
Class A 11.50% 19.64%
--------------------------------------------------
Class B 12.38% 21.58%
--------------------------------------------------
S&P 500 Index(TM) 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
------
10
<PAGE>
Stock Index Fund
Investment Goal and Strategies
The Stock Index Fund seeks to provide investment results that are similar to
the total return of the S&P 500 Index (the "Index"). American Investment Man-
agement, L.P. ("AGIM") acts as the subadvisor to the Fund.
The Index is composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The Index approximates the general distribution of indus-
tries in the U.S. economy, and captures the price performance of a large cross-
section of the publicly traded stock market. The Index is capitalization-
weighted, meaning that it holds each stock in proportion to its total value in
the stock market.
Generally, an index fund tries to mirror the target index and its performance.
An index fund's performance will not exactly match that of an index because the
index fund incurs operating expenses and other investment overhead as part of
its normal operations. The index is an unmanaged group of securities, so it
does not have these expenses. These differences between an index fund and its
index are called tracking differences.
The tracking differences are reviewed monthly by AGIM for the Fund. If the Fund
does not accurately track an index, AGIM will rebalance the Fund's portfolio by
selecting securities which will provide a more representative sampling of the
securities in the index as a whole or the sector diversification within the
index, as appropriate.
Financial futures will be used to hedge cashflows and maintain liquidity in the
Fund's portfolio.
Main Risks
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation).
Although financial futures track the underlying Index fairly closely there is
the risk that, at times, their results will diverge from the Index.
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Index Risk (the risk that the Fund's performance will not match that of the
underlying Index)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also managed by the same portfolio managers.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 20.39%
Best quarter: quarter ended 12/31/99 14.39%
Worst quarter: quarter ended 9/30/99 -6.38%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/4/98)
--------------------------------------------------
<S> <C> <C>
Class A 13.46% 22.15%
--------------------------------------------------
Class B 13.72% 23.53%
--------------------------------------------------
S&P 500 Index(TM) 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
------
11
<PAGE>
Global Equity Fund
Investment Goal and Strategies
The investment objective of the Global Equity Fund is long-term capital appre-
ciation. To achieve this objective, Founders Asset Management, LLC ("Found-
ers"), the Fund's subadvisor, invests in a globally diversified portfolio of
equity securities.
The Fund normally invests at least 65% of total assets in equity securities of
growth companies in a variety of markets throughout the world. The Fund may
purchase securities in any foreign country, as well as the United States, and
emphasizes common stocks of both emerging and established growth companies that
generally have proven performance records and strong market positions. The
Fund's portfolio will always invest at least 65% of its total assets in three
or more countries. The Fund will not invest more than 50% of its total assets
in the securities of any one foreign country.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with invest-
ments in growth stocks)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table
provide an indication of
risk by showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for C Shares
Annual Total Return
'91 11.34%
'92 -2.87%
'93 29.56%
'94 1.20%
'95 6.43%
'96 10.71%
'97 19.98%
'98 10.59%
'99 2.33%
Best quarter: quarter ended 12/31/98 15.23%
Worst quarter: quarter ended 9/30/98 -14.52%
---------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund* Life of Fund*
(Class A & B) (Class C)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A -3.00% 9.19% 7.58% N/A
-----------------------------------------------------------------------
Class B -2.73% 9.58% 7.98% N/A
-----------------------------------------------------------------------
Class C 1.33% 9.85% N/A 9.37%
-----------------------------------------------------------------------
MSCI WORLD
Index(TM) 24.93% 19.76% 17.86% 14.88%
</TABLE>
---------------------------------------------------
*Inception dates: Class A and Class B - 4/1/94; Class C - 11/1/90
------
12
<PAGE>
International Equity Fund
Investment Goal and Strategies
The investment objective of the International Equity Fund is to seek long-term
capital appreciation. Morgan Stanley Asset Management ("MSAM"), the Fund's
subadvisor, pursues this objective by investing primarily in accordance with
country and sector weightings determined by MSAM in equity securities of non-
U.S. issuers which, in the aggregate, replicate broad market indices.
MSAM seeks to maintain a diversified portfolio of international equity securi-
ties based on a top-down approach that emphasizes country and sector selection
and weighting rather than individual stock selection. MSAM capitalizes on the
significance of country and sector selection in international equity portfolio
returns by over- and underweighting countries based on three factors: (i) valu-
ation, (ii) fundamental change, and (iii) market momentum/technicals.
The Fund may use various instruments that derive their values from those of
specified securities, indices, currencies or other points of reference for both
hedging and non-hedging purposes. Derivatives may include futures, options,
forward contracts, swaps, and structured notes. These derivatives, including
those used to manage risk, are themselves subject to risks of the different
markets in which they trade and, therefore, may not serve their intended
purposes.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation). In
particular, the Fund may, but is not required to, buy or sell foreign curren-
cies and options and futures contracts on foreign currencies for hedging pur-
poses in connection with its foreign investments.
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and
table provide an
indication of risk by
showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 12.12%
'97 -0.47%
'98 8.19%
'99 28.29%
Best quarter: quarter ended 12/31/98 20.89%
Worst quarter: quarter ended 9/30/98 -20.56%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 1/9/95)
------------------------------------------------------
<S> <C> <C>
Class A 20.91% 9.55%
------------------------------------------------------
Class B 22.37% 9.95%
------------------------------------------------------
Class C 26.37% 10.21%
------------------------------------------------------
MSCI All Country World 30.91% 12.38%
EX-US Index(TM)
------------------------------------------------------
MSCI EAFE Index(TM) 26.96% 12.83%
</TABLE>
--------------------------------------------------------------------------------
------
13
<PAGE>
International Small Cap Fund
Investment Goal and Strategies
The investment objective of the International Small Cap Fund is to seek capital
appreciation. To achieve this objective, Founders Asset Management, LLC
("Founders"), the Fund's subadvisor, invests primarily in equity securities
issued by foreign companies with market capitalization or annual revenue of $1
billion or less.
These companies are located in both established and emerging economies
throughout the world. Founders selects securities based on its evaluation of
their potential to offer capital appreciation opportunities. Small companies
are still in the developing stages of their life cycles and may have limited
product lines, markets or financial resources and/or lack management depth.
The Fund may invest in derivatives.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with invest-
ing in smaller companies)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and
table provide an
indication of risk by
showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 -0.36%
'98 10.18%
'99 94.45%
Best quarter: quarter ended 12/31/99 64.58%
Worst quarter: quarter ended 9/30/98 -20.28%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 2/20/96)
-----------------------------------------------
<S> <C> <C>
Class A 83.27% 23.09%
-----------------------------------------------
Class B 87.74% 23.67%
-----------------------------------------------
Class C 92.00% 24.16%
-----------------------------------------------
MSCI WORLD(TM) 27.93% 13.18%
ex-U.S. Index
</TABLE>
--------------------------------------------------------------------------------
-------
14
<PAGE>
Balanced Fund
Investment Goal and Strategies
The investment objective of the Balanced Fund is current income and capital
appreciation. To achieve this goal, INVESCO Funds Group, Inc. ("INVESCO"), the
Fund's subadvisor, invests in a combination of common stocks and fixed-income
securities, including preferred stocks, convertible securities and bonds. The
Fund normally invests the majority of its total assets in U.S. and foreign com-
mon stocks and approximately 25% of its total assets in investment grade debt
securities. The portion of the Fund's portfolio invested in equity securities
emphasizes companies INVESCO believes to have better-than-average earnings
growth potential, as well as companies within industries that INVESCO believes
are well-positioned for the current and expected economic climate. Since cur-
rent income is a component of total return, INVESCO also considers companies'
dividend payout records. Most of these holdings are traded on national stock
exchanges or in the over-the-counter market.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and
table provide an
indication of risk by
showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for C Shares
Annual Total Return
'91 21.45%
'92 12.89%
'93 10.07%
'94 -2.80%
'95 23.53%
'96 10.15%
'97 16.30%
'98 13.12%
'99 -3.78%
Best quarter: quarter ended 6/30/97 10.31%
Worst quarter: quarter ended 9/30/99 -4.30%
-----------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund* Life of Fund*
(Class A & B) (Class C)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A -8.68% 10.91% 9.19% N/A
-------------------------------------------------------------------
Class B -8.55% 11.24% 9.56% N/A
-------------------------------------------------------------------
Class C -4.74% 11.49% N/A 9.99%
-------------------------------------------------------------------
S&P 500
Index(TM) 21.04% 28.54% 25.52% 21.24%
-------------------------------------------------------------------
Lehman Brothers -0.83% 7.73% 6.68% 6.62%
Aggregate Bond
Index(TM)
</TABLE>
-----------------------------------------
*Inception dates: Class A and Class B - 4/1/94; Class C - 8/28/89
-------
15
<PAGE>
Aggressive Growth Lifestyle Fund
Investment Goal and Strategies
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
seeks growth through investments in a combination of the North American Funds
("Underlying Funds"). This Fund is suitable for investors seeking the potential
for capital growth that a fund investing predominately in equity securities may
offer.
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as
an investor. Selecting the appropriate combination should be based on your per-
sonal investment goals, time horizons and risk tolerance. The chart below
reflects the projected asset allocation ranges and Underlying Fund choices for
this Fund.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Derivatives Risk (the risk that the Fund's derivative investments will decline
as a result of imperfect correlation or improper valuation)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Non-Diversification Risk (the risk that investing in a smaller number of secu-
rities increases investment risks)
International Equity Securities
15%-35%
Underlying Fund:
International Equity Fund
(This Fund invests at least 65% in non-U.S. companies.)
Domestic Equity Securities 60%-80%
Underlying Funds:
Small Cap Growth Fund
(This Fund invests in the equity securities of small capitalization
companies.)
Mid Cap Value Fund
Mid Cap Growth Fund
(These Funds invest in the equity securities of medium capitalization
companies.)
Large Cap Growth Fund
Growth & Income Fund
(These Funds invest in the equity securities of large capitalization
companies.)
Bonds 5%-15%
Underlying Funds:
Core Bond Fund
High Yield Bond Fund
(These Funds invest in fixed-income securities.)
------
16
<PAGE>
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also managed by the same portfolio managers.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 28.92%
Best quarter: quarter ended 12/31/99 20.47%
Worst quarter: quarter ended 9/30/99 -2.27%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Life of Fund
Past One Year (since 11/4/98)
------------------------------------------------------------------------------
<S> <C> <C>
Class A 21.50% 22.15%
------------------------------------------------------------------------------
Class B 23.89% 23.53%
------------------------------------------------------------------------------
Aggressive Growth LifeStyle Blended Benchmark 18.43% 25.12%
Index
------------------------------------------------------------------------------
S&P 500 Index(TM) 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
-------
17
<PAGE>
Conservative Growth Lifestyle Fund
Investment Goal and Strategies
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
seeks current income and low to moderate growth of capital through investments
in a combination of the North American Funds ("Underlying Funds"). This Fund is
suitable for investors who wish to invest in equity securities, but who are not
willing to assume the market risks of either the Aggressive Growth Lifestyle
Fund or the Moderate Growth Lifestyle Fund.
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as
an investor. Selecting the appropriate combination should be based on your per-
sonal investment goals, time horizons and risk tolerance. The chart below
reflects the projected asset allocation ranges and Underlying Fund choices for
this Fund.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Derivatives Risk (the risk that the Fund's derivative investments will decline
as a result of imperfect correlation or improper valuation)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Non-Diversification Risk (the risk that investing in a smaller number of secu-
rities increases investment risks)
International Equity Securities 5%-
15%
Underlying Fund:
International Equity Fund
(This Fund invests at least 65% in non-U.S. companies.)
Domestic Equity Securities 20%-50%
Underlying Funds:
Small Cap Growth Fund
(This Fund invests in the equity securities of small capitalization
companies.)
Mid Cap Value Fund
Mid Cap Growth Fund
(These Funds invest in the equity securities of medium capitalization
companies.)
Large Cap Growth Fund
Growth & Income Fund
(These Funds invest in the equity securities of large capitalization
companies.)
Bonds 45%-65%
Underlying Funds:
Core Bond Fund
High Yield Bond Fund
(These Funds invest in fixed-income securities.)
------
18
<PAGE>
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000l. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also managed by the same portfolio managers.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 13.70%
Best quarter: quarter ended 12/31/99 10.88%
Worst quarter: quarter ended 9/30/99 -2.95%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Life of Fund
Past One Year (since 11/4/98)
----------------------------------------------------------------------
<S> <C> <C>
Class A: 7.16% 12.18%
----------------------------------------------------------------------
Class B: 8.71% 14.68%
----------------------------------------------------------------------
Conservative Growth LifeStyle Blended 10.63% 15.27%
Benchmark Index
----------------------------------------------------------------------
S&P 500 Index(TM) 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
------
19
<PAGE>
Moderate Growth Lifestyle Fund
Investment Goal and Strategies
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
seeks growth and current income through investments in a combination of the
North American Funds ("Underlying Funds"). This Fund is suitable for investors
who wish to invest in equity securities, but who are not willing to assume the
substantial market risks of the Aggressive Growth Lifestyle Fund.
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as
an investor. Selecting the appropriate combination should be based on your per-
sonal investment goals, time horizons and risk tolerance. The chart below
reflects the projected asset allocation ranges and Underlying Fund choices for
this Fund.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Derivatives Risk (the risk that the Fund's derivative investments will decline
as a result of imperfect correlation or improper valuation)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Non-Diversification Risk (the risk that investing in a smaller number of secu-
rities increases investment risks)
International Equity Securities 10%-20%
Underlying Fund:
International Equity Fund
(This Fund invests at least 65% in non-U.S. companies.)
Domestic Equity Securities 35%-65%
Underlying Funds:
Small Cap Growth Fund
(This Fund invests in the equity securities of small capitalization
companies.)
Mid Cap Value Fund
Mid Cap Growth Fund
(These Funds invest in the equity securities of medium capitalization
companies.)
Large Cap Growth Fund
Growth & Income Fund
(These Funds invest in the equity securities of large capitalization
companies.)
Bonds 25%-45%
Underlying Funds:
Core Bond Fund
High Yield Bond Fund
(These Funds invest in fixed-income securities.)
------
20
<PAGE>
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also managed by the same portfolio managers.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 18.66%
Best quarter: quarter ended 12/31/99 14.20%
Worst quarter: quarter ended 9/30/99 -3.28%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/4/98)
----------------------------------------------------------------------------
<S> <C> <C>
Class A 11.84% 17.34%
----------------------------------------------------------------------------
Class B 14.03% 20.26%
----------------------------------------------------------------------------
Moderate Growth LifeStyle Blended Benchmark 13.77% 19.45%
Index:
----------------------------------------------------------------------------
S&P 500 Index(TM) 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
------
21
<PAGE>
Core Bond Fund (formerly Investment Quality Bond Fund)
Investment Goal and Strategies
The investment objective of the Core Bond Fund is to provide a high level of
current income consistent with the maintenance of principal and liquidity.
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
invests at least 65% of the Fund's total assets in medium to high quality
fixed-income securities, or in securities issued or guaranteed by the U.S. Gov-
ernment, mortgage-backed, or asset-backed securities (U.S. Government securi-
ties are securities issued or guaranteed by the U.S. Government which are sup-
ported by the full faith and credit of the U.S. Government, or by the right of
the issuer to borrow from the U.S. Treasury, or by the credit of the issuing
government agency, or by the authority of the U.S. Government to purchase obli-
gations of the agency). A portion of the 65% may be invested in U.S. dollar-
denominated fixed-income securities issued by foreign issuers, although the
Fund currently intends to limit these investments to no more than 40% of its
total assets. These fixed-income securities will be rated investment grade or
higher at the time of purchase. AGIM will not be required to dispose of a secu-
rity if its rating is downgraded, however.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations, including, in particular, the risks associated with junk bonds)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table
provide an indication
of risk by showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 8.27%
'93 9.29%
'94 -5.43%
'95 18.79%
'96 2.17%
'97 9.28%
'98 7.61%
'99 -2.55%
Best quarter: quarter ended 6/30/95 6.23%
Worst quarter: quarter ended 12/31/94 -4.53%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund
(since 5/1/91)
---------------------------------------------------------------
<S> <C> <C> <C>
Class A -7.18% 5.79% 6.02%
---------------------------------------------------------------
100% Lehman -1.94% 8.16% 7.38%
Brothers
Corporate(TM)
---------------------------------------------------------------
50% Lehman -2.10% 7.80% 7.61%
Brothers
Corporate(TM)
50% Lehman
Brothers
Government(TM)
</TABLE>
------------------------------------------
-------
22
<PAGE>
High Yield Bond Fund
Investment Goal and Strategies
The High Yield Bond Fund seeks the highest possible total return consistent
with conservation of capital through investment in a diversified portfolio of
high yielding, high risk fixed-income securities.
To achieve this objective, American General Investment Management, L.P.
("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total
assets in below-investment grade U.S. and foreign junk bonds. These high yield-
ing, high risk fixed-income securities are rated below Baa3 by Moody's and BBB-
by S&P or comparable investment quality at the time of purchase. Up to 15% can
be rated below Caa3 by Moody's or CCC- by S&P or comparable investment quality
at the time of purchase. The Fund may also invest up to 35% of total assets in
below-investment grade foreign fixed-income securities.
The Fund may invest up to 35% in investment grade securities, those rated Baa3
or higher by Moody's and BBB- or higher by S&P or comparable investment quality
at the time of purchase. In addition, the Fund may invest up to 15% in zero
coupon securities (securities not paying current cash interest), and up to 20%
of total assets in equity securities. Equity securities include common or pre-
ferred stocks, warrants, and convertible securities. AGIM is not required to
dispose of a bond that is downgraded to below-investment grade. The Fund may
invest in derivatives.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations, including, in particular, the risks associated with junk bonds)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000l. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also subadvised by AGIM.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 4.05%
Best quarter: quarter ended 3/31/99 3.89%
Worst quarter: quarter ended 9/30/99 -1.51%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/4/98)
-----------------------------------------------------------------------
<S> <C> <C>
Class A -0.89% 0.13%
-----------------------------------------------------------------------
Class B -1.48% 0.38%
-----------------------------------------------------------------------
Salomon Smith Barney High Yield Market 1.74% 29.87%
Index(TM)
</TABLE>
--------------------------------------------------------------------------------
------
23
<PAGE>
Municipal Bond Fund
Investment Goal and Strategies
The investment objective of the Municipal Bond Fund is to achieve a high level
of current income that is exempt from regular federal income taxes. The Fund is
also particularly concerned with preserving capital. American General
Investment Management, L.P. ("AGIM") is the Fund's subadvisor. The Fund will
invest at least 80% of total assets in investment grade municipal fixed-income
securities, such as municipal bonds, municipal notes, and other municipal
obligations. Investment grade bonds are those rated at least Baa3 by Moody's or
BBB- by S&P or Fitch, or of comparable quality at the time of purchase. The
municipal notes are short-term obligations rated high quality or better by
Moody's, S&P, or Fitch. The Fund may invest up to 20% of total assets in
taxable fixed-income securities, including money market instruments, U.S.
Government obligations, and other investment grade securities rated as above.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor obli-
gations)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and
table provide an
indication of risk
by showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 -9.21%
'95 18.43%
'96 4.14%
'97 9.65%
'98 3.97%
'99 -3.32%
Best quarter: quarter ended 3/31/95 7.39%
Worst quarter: quarter ended 3/31/94 -7.58%
---------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund* Life of Fund*
(Class A) (Class B & C)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A -7.91% 5.36% 3.27% N/A
------------------------------------------------------------------------------------
Class B -8.93% 5.18% N/A 4.20%
------------------------------------------------------------------------------------
Class C -5.09% 5.50% N/A 4.34%
------------------------------------------------------------------------------------
Lehman Brothers -0.83% 7.73% 5.84% 6.68%
Municipal Bond Index(TM)
</TABLE>
---------------------------------------------------
*Inception dates: Class A - 7/6/93; Class B and Class C - 4/1/94
-------
24
<PAGE>
Strategic Income Fund
Investment Goal and Strategies
The investment objective of the Strategic Income Fund is to seek a high level
of total return consistent with preservation of capital. To achieve this goal,
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
invests at least 65% of the Fund's total assets in a broad range of fixed-
income securities, including investment grade bonds (rated Baa or higher by
Moody's and BBB or higher by S&P at the time of purchase), U.S. Government and
agency obligations, mortgage-backed securities, and U.S., Canadian, and foreign
high-risk, high-yield bonds (rated C or higher by Moody's and CC or higher by
S&P, or of comparable investment quality at time of purchase, commonly known as
"junk bonds" at the time of purchase). Up to 25% of the Fund's total assets may
be invested in foreign emerging market debt, and up to an additional 25% in non-
U.S. dollar bonds. The Fund may invest up to 20% of total assets in equity
securities, such as common and preferred stocks, convertible securities, and
warrants. The Fund may invest in asset-backed securities, foreign currency,
futures and options, illiquid securities (limited to 15% of the Fund's assets),
investment companies, loan participations, money market securities, mortgage-
related securities, real estate securities, repurchase agreements, reverse
repurchase agreements, dollar rolls, structured securities, swaps, variable
amount master demand notes, variable rate demand notes, and when-issued
securities.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations including, in particular, the risks associated with junk bonds)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and
table provide an
indication of risk by
showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 -6.79%
'95 18.57%
'96 14.82%
'97 10.76%
'98 0.72%
'99 1.36%
Best quarter: quarter ended 6/30/95 8.22%
Worst quarter: quarter ended 3/31/94 -5.76%
---------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund* Life of Fund*
(Class A) (Class B & C)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A -3.45% 7.96% 5.40% N/A
----------------------------------------------------------------------------
Class B -4.17% 8.04% N/A 6.78%
----------------------------------------------------------------------------
Class C -0.17% 8.34% N/A 6.90%
----------------------------------------------------------------------------
Lehman Brothers -0.83% 7.73% 5.66% 6.68%
Aggregate Bond
Index(TM)
</TABLE>
---------------------------------------------------
*Inception dates: Class A - 11/1/93; Class B and Class C - 4/1/94
-------
25
<PAGE>
U.S. Government Securities Fund
Investment Goal and Strategies
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 main-
tenance of liquidity. American General Investment Management, L.P. ("AGIM"),
the Fund's subadvisor, pursues this objective by emphasizing investments in
debt obligations and mortgage-backed securities
by such securities and related repurchase agreements,
issued or guaranteed by the U.S. Government or its agencies (including the Gov-
ernment National Mortgage Association ("Ginnie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Associa-
tion ("Fannie Mae")), and in derivative investments (such as
privately-issued mortgage obligations collateralized by such securities and
related repurchase agreements).
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and
table provide an
indication of risk by
showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 13.36%
'92 6.63%
'93 7.64%
'94 -1.59%
'95 15.28%
'96 3.04%
'97 7.99%
'98 6.86%
'99 -0.96%
Best quarter: quarter ended 6/30/95 5.42%
Worst quarter: quarter ended 3/31/94 -1.65%
---------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund* Life of Fund*
(Class A) (Class B & C)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A -5.67% 5.25% 6.09% N/A
-----------------------------------------------------------------------------
Class B -6.26% 5.34% N/A 4.69%
-----------------------------------------------------------------------------
Class C -2.31% 5.66% N/A 4.83%
-----------------------------------------------------------------------------
Merrill Lynch 1- 0.55% 6.9% 7.28% 6.28%
10 year
Government
Index(TM)
</TABLE>
---------------------------------------------------
*Inception dates: Class A - 8/28/89; Class B and Class C - 4/1/94
-------
26
<PAGE>
Money Market Fund
Investment Goal and Strategies
The investment objective of the Money Market Fund is to obtain maximum current
income consistent with preservation of principal and liquidity. American Gen-
eral Investment Management, L.P. ("AGIM") is, the Fund's subadvisor. The Fund
invests in short-term money market securities to provide you with liquidity,
protection of your investment and current income. In accordance with Rule 2a-7
of the Investment Company Act, such securities
must mature in 13 months or less and the Fund must have a dollar-weighted aver-
age portfolio maturity of 90 days or less. The investments of the Fund may
include securities issued or guaranteed by the U.S. Government (and its agen-
cies or instrumentalities), certificates of deposit and other obligations of
domestic banks that have total assets in excess of $1 billion, commercial paper
sold by corporations and finance companies, corporate debt obligations with
remaining maturities of 13 months or less, repurchase agreements, money market
instruments of foreign issuers payable in U.S. dollars (limited to no more than
20% of the fund's net assets), asset-backed securities, loan participations,
adjustable rate securities, Variable Rate Demand Notes, illiquid and restricted
securities (limited to 10% of the Fund's net assets at all times), and Rule
144A securities. The Fund may invest in investment companies, real estate secu-
rities, and reverse repurchase agreements.
Main Risks
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.An investment in the Money Market Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or by any other government agency.
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
The bar chart and
table provide an
indication of risk by
showing the
variability of the
Fund's historical
returns.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 5.97%
'92 3.42%
'93 2.76%
'94 3.88%
'95 5.66%
'96 5.08%
'97 5.19%
'98 5.05%
'99 4.62%
Best quarter: quarter ended 12/31/89 1.68%
Worst quarter: quarter ended 6/30/93 0.66%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund* Life of Fund*
(Class A) (Class B & C)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 4.62% 4.80% N/A
--------------------------------------------------------------------------------------------
Class B 4.62% N/A 5.04%
--------------------------------------------------------------------------------------------
Class C 4.62% N/A 5.04%
</TABLE>
--------------------------------------------------------------------------------
*Inception dates: Class A - 8/28/89; Class B and Class C - 4/1/94
To obtain the Fund's current 7-day yield, please call 1-800-872-8037.
-------
27
<PAGE>
Municipal Money Market Fund
Investment Goal and Strategies
The Fund seeks liquidity, protection of capital and current income through
investments in short-term money market securities that are exempt from regular
federal income taxation.
To achieve this objective, American General Investment Management, L.P.
("AGIM"), the Fund's subadvisor, invests in short-term money market securities
to provide you with liquidity, protection of your investment and current income
that is exempt from federal income tax. AGIM uses 95% of the Fund's total
assets to buy short-term securities that are rated within the highest rating
category for short-term fixed-income securities by at least two nationally rec-
ognized rating services or unrated securities of comparable investment quality.
If the Fund invests in municipal securities issued for certain private purpos-
es, a portion of the Fund's dividends may be subject to the alternative minimum
tax.
The investments this Fund may buy include:
.Municipal fixed-income securities with remaining maturities of 13 months or
less
.Commercial paper sold by municipalities rated at least MIG1 or MIG2 by Moody's
or A1 or A2 by S&P
.Variable rate demand notes
.Auction rate preferred stock and other adjustable rate obligations that are
exempt from federal income taxation
.Illiquid and restricted securities, limited to 10% of the Fund's net assets at
all times
.Rule 144A securities (liquid)
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.An investment in the Municipal Money Market Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or by any other government agen-
cy. Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns.
Performance information shown for periods prior to July 7, 2000 is that of the
corresponding series of American General Series Portfolio Company 2 (the
"AGSPC2 Fund") that was reorganized into the Fund on July 7, 2000. The AGSPC2
Fund had the same investment objective, and investment strategies and policies
as does the Fund, and was also subadvised by AGIM.
[GRAPH]
Calendar Year Total Returns for A Shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 2.28%
Best quarter: quarter ended 12/31/99 0.66%
Worst quarter: quarter ended 3/31/99 0.44%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past Life of Fund
One Year (since 11/4/98)
------------------------------------
<S> <C> <C>
Class A 2.28% 2.28%
------------------------------------
Class B -3.48% -1.94%
------------------------------------
Class C N/A N/A
</TABLE>
--------------------------------------------------------------------------------
To obtain this Fund's current 7-day yield, please call 1-800-872-8037.
-------
28
<PAGE>
Descriptions of Main Risks
The value of your investment in a Fund can change for many reasons, and may
decrease. The primary reasons for possible decreases in a Fund's value are
called "Main Risks," and are explained in this section. Because the types of
investments a Fund may change over time, the types of risks affecting the Fund
may change as well. Section II of the Prospectus includes more information
about other risks that could affect the Funds' values.
Credit Risk
Credit risk is the risk that the issuer or the guarantor (the entity that
agrees to pay the debt if the issuer cannot) of a debt or fixed income securi-
ty, or the counterparty to a derivatives contract or a securities loan, will
not repay the principal and interest owed to the investors or otherwise honor
its obligations. There are different levels of credit risk. Debt securities
rated in one of the four highest rating categories by a rating agency (and com-
parable unrated securities) are known as "investment grade." Debt securities
rated below the four highest rating categories by a rating agency (and compara-
ble unrated securities) are known as "lower-rated" or junk bonds." Funds that
invest in lower-rated securities have higher levels of credit risk. Lower-rated
or unrated securities of equivalent quality (generally known as junk bonds)
have very high levels of credit risk. Securities that are highly rated have
lower levels of credit risk.
Funds may be subject to greater credit risk because they may invest in debt
securities issued in connection with corporate restructurings by highly
leveraged (indebted) issuers and in debt securities not current in the payment
of interest or principal, or in default.
Funds that invest in foreign securities are also subject to increased credit
risk because of the difficulties of requiring foreign entities, including
issuers of sovereign (national) debt, to honor their contractual commitments,
and because a number of foreign governments and other issuers are already in
default.
Currency Risk
Funds that invest in securities that are denominated in and/or are receiving
revenues in foreign currencies are subject to currency risk. Currency risk is
the risk that foreign currencies will decline in value relative to the U.S.
dollar. In the case of hedging positions, it is the risk that the U.S. dollar
will decline in value relative to the currency hedged.
Derivatives Risk
Derivatives are financial contracts whose value depends on, or is derived from,
the change in value of an underlying asset, reference rate or index. When the
value of the underlying security or index changes, the value of the derivative
changes as well. As a result, derivatives can lose all of their value very
quickly. Derivatives involve credit risk if the other party to the derivative
should fail to meet its obligations to the Fund. Additional risks associated
with derivatives include imperfect correlation (between the values of the
derivative and the underlying investment) and improper valuation. Derivatives
risk for some Funds will be increased by their investments in structured secu-
rities.
Equity Risk
Equity securities, such as a company's common stock, may fall in value in
response to factors relating to the issuer, such as management decisions or
falling demand for a company's goods or services. Additionally, factors affect-
ing a company's particular industry, such as increased production costs, may
affect the value of its equity securities. Equity securities also rise and fall
in value as a result of factors affecting entire financial markets, such as
political or economic developments, or changes in investor psychology.
Growth stocks are the stocks of companies that have earnings that are expected
to grow relatively rapidly. As a result, the values of growth stocks may be
more sensi-
-------
29
<PAGE>
tive to changes in current or expected earnings than the values of other
stocks.
Value stocks are the stocks of companies that are not expected to experience
significant earnings growth, but that are undervalued, or are inexpensive rela-
tive to the value of the company and its business as a whole. These companies
may have experienced recent troubles that have caused their stocks to be out of
favor with investors. If the market does not recognize the value of the company
over time, the price of its stock may fall, or simply may not increase as
expected.
Market capitalization refers to the total value of a company's outstanding
stock. Smaller companies with market capitalizations of less than $1 billion or
so are more likely than larger companies to have limited product lines, smaller
markets for their products and services, and they may depend on a small or
inexperienced management group. Small company stocks may not trade very active-
ly, and their prices may fluctuate more than stocks of larger companies. Stocks
of smaller companies may be more vulnerable to negative changes than stocks of
larger companies.
The risks associated with equity securities are typically higher for equity
securities purchased in IPOs. Issuers in IPOs typically have a limited operat-
ing history, and the prices of equity securities are often very volatile for
some time following an IPO.
Foreign Investment Risk
Funds investing in foreign securities may experience rapid changes in value.
One reason for this volatility is that the securities markets of many foreign
countries are relatively small, with a limited number of companies representing
a small number of industries. Also, foreign securities issuers are usually not
subject to the same degree of regulation as U.S. issuers. Reporting, accounting
and auditing standards of foreign countries differ, in some cases significant-
ly, from U.S. standards.
The possibility of political instability or diplomatic developments in foreign
countries could trigger nationalization of companies and industries, expropria-
tion (confiscation of property), extremely high levels of taxation, and other
negative developments. In the event of nationalization, expropriation or other
confiscation, a Fund could lose its entire investment. Funds that invest in
sovereign debt obligations are exposed to the risks of political, social and
economic change in the countries that issued the bonds.
Interest Rate Risk (Market Risk)
Interest rate risk, or market risk, is the risk that a change in interest rates
will negatively affect the value of a security. This risk applies primarily to
debt securities such as bonds, notes and asset backed securities. Debt securi-
ties are obligations of the issuer to make payments of principal and/ or inter-
est on future dates. As interest rates rise, an investment in a Fund can lose
value, because the value of the securities the Fund holds may fall.
Market risk is generally greater for Funds that invest in debt securities with
longer maturities. This risk may be increased for Funds that invest in mort-
gage-backed or other types of asset-backed securities that are often prepaid.
Even Funds that invest in the highest quality debt securities are subject to
interest rate risk.
Liquidity Risk
Liquidity risk is the risk that a Fund will not be able to sell a security
because there are too few people who actively buy and sell, or trade, that
security on a regular basis. A Fund holding an illiquid security may not be
able to sell the security at a fair price. Liquidity risk increases for Funds
investing in derivatives, foreign investments or restricted securities.
Management Risk
Management risk is the risk that the subadvisor of a Fund, despite using vari-
ous investment and risk analysis techniques, may not produce the desired
investment results.
Non-Diversification Risk
Investment professionals believe that investment risk can be reduced through
diversification, which is simply the practice of choosing more than one type of
investment. On the other hand, concentrating investments in a smaller number of
securities increases risk.
-------
30
<PAGE>
Social Criteria Risk
This risk applies only to the Socially Responsible Fund. If a company stops
meeting the Fund's social criteria after the Fund invested in it, the Fund will
sell these investments even if this means the Fund loses money. Also, if the
Fund changes its social criteria and the companies the Fund has already
invested in no longer qualify, the Fund will sell these investments, even if
this means the Fund loses money. Social criteria screening will limit the
availability of investment opportunities for the Fund more than for funds hav-
ing no such criteria.
Science & Technology Company Risk
Companies in the rapidly changing fields of science and technology often face
unusually high price volatility, both in terms of gains and losses. The poten-
tial for wide variation in performance is based on the special risks common to
these stocks. For example, products or services that at first appear promising
may not prove commercially successful or may become obsolete quickly. Earnings
disappointments can result in sharp price declines. A portfolio focused primar-
ily on these stocks is, therefore, likely to be much more volatile.
-------
31
<PAGE>
Section II:
Fees and Expenses
This table describes the fees and expenses that you may pay if you invest in
the Funds.
Shareholder Fees (fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
----------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)
Equity Funds/1/ 5.75% None None
Income Funds/1/ 4.75% None None
Municipal Money Market Fund and Money Market Fund None None None
Maximum Deferred Sales Charge
(as a percentage of original purchase price
or redemption price, whichever is lower)
Equity Funds and Income Funds 1%/2/ 5%/3/ 1%/4/
Municipal Money Market Fund and Money Market Fund None None None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
<CAPTION>
Class A Class B Class C
----------------------------------------------------------------------------
<S> <C> <C> <C>
Growth & Income Fund
Management Fees 0.67% 0.67% 0.67%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.31% 0.31% 0.31%
Total Annual Fund Operating Expenses 1.33% 1.98% 1.98%
----------------------------------------------------------------------------
Large Cap Growth Fund
Management Fees 0.90% 0.90% 0.90%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.57% 0.57% 0.57%
Total Annual Fund Operating Expenses 1.82% 2.47% 2.47%
Fee Waiver and/or Expense Reimbursement 0.65% 0.65% 0.65%
<CAPTION>
Net Expenses/5/ 1.17% 1.82% 1.82%
----------------------------------------------------------------------------
<S> <C> <C> <C>
Mid Cap Growth
Management Fees 0.93% 0.93% 0.93%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.54% 0.54% 0.54%
Total Annual Fund Operating Expenses 1.82% 2.47% 2.47%
Fee Waiver and/or Expense Reimbursement 0.34% 0.34% 0.34%
<CAPTION>
Net Expenses/5/ 1.48% 2.13% 2.13%
----------------------------------------------------------------------------
<S> <C> <C> <C>
Mid Cap Value Fund
Management Fees 0.90% 0.90% 0.90%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.60% 0.60% 0.60%
Total Annual Fund Operating Expenses/5/ 1.85% 2.50% 2.50%
Fee Waiver and/or Expense Reimbursement 0.07% 0.07% 0.07%
<CAPTION>
Net Expenses/5/ 1.78% 2.43% 2.43%
----------------------------------------------------------------------------
</TABLE>
-------
32
<PAGE>
<TABLE>
<CAPTION>
Class Class Class
Fund A B C
-----------------------------------------------------------
<S> <C> <C> <C>
Science & Technology Fund
Management Fees 0.90% 0.90% 0.90%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 1.00% 1.00% 1.00%
Total Annual Fund Operating Expenses 2.25% 2.90% 2.90%
Fee Waiver and/or Expense Reimbursement 1.15% 1.15% 1.15%
Net Expenses/5/ 1.10% 1.75% 1.75%
-----------------------------------------------------------
Small Cap Growth Fund
Management Fees 0.95% 0.95% 0.95%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.59% 0.59% 0.59%
Total Annual Fund Operating Expenses 1.89% 2.54% 2.54%
Fee Waiver and/or Expense Reimbursement 0.67% 0.67% 0.67%
Net Expenses/5/ 1.22% 1.87% 1.87%
-----------------------------------------------------------
Small Cap Index Fund
Management Fees 0.28% 0.28% 0.28%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 1.09% 1.09% 1.09%
Total Annual Fund Operating Expenses/4/ 1.72% 2.37% 2.37%
Fee Waiver and/or Expense Reimbursement 0.72% 0.72% 0.72%
Net Expenses/5/ 1.00% 1.65% 1.65%
-----------------------------------------------------------
Socially Responsible Fund
Management Fees 0.65% 0.65% 0.65%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.78% 0.78% 0.78%
Total Annual Fund Operating Expenses 1.78% 2.43% 2.43%
Fee Waiver and/or Expense Reimbursement 0.58% 0.58% 0.58%
Net Expenses/5/ 1.20% 1.85% 1.85%
-----------------------------------------------------------
Stock Index Fund
Management Fees 0.27% 0.27% 0.27%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.66% 0.66% 0.66%
Total Annual Fund Operating Expenses 1.28% 1.93% 1.93%
Fee Waiver and/or Expense Reimbursement 0.58% 0.58% 0.58%
Net Expenses/5/ 0.70% 1.35% 1.35%
-----------------------------------------------------------
Global Equity Fund
Management Fees 0.90% 0.90% 0.90%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.62% 0.62% 0.62%
Total Annual Fund Operating Expenses 1.87% 2.52% 2.52%
-----------------------------------------------------------
International Equity Fund
Management Fees 0.90% 0.90% 0.90%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.66% 0.66% 0.66%
Total Annual Fund Operating Expenses 1.91% 2.56% 2.56%
Fee Waiver and/or Expense Reimbursement 0.41% 0.41% 0.41%
Net Expenses/5/ 1.50% 2.15% 2.15%
-----------------------------------------------------------
International Small Cap Fund
Management Fees 1.05% 1.05% 1.05%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.84% 0.84% 0.84%
Total Annual Fund Operating Expenses 2.24% 2.89% 2.89%
Fee Waiver and/or Expense Reimbursement 0.39% 0.39% 0.39%
Net Expenses/5/ 1.85% 2.50% 2.50%
-----------------------------------------------------------
</TABLE>
-------
33
<PAGE>
<TABLE>
<CAPTION>
Class Class Class
Fund A B C
------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund
Management Fees 0.75% 0.75% 0.75%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.43% 0.43% 0.43%
Total Annual Fund Operating Expenses 1.53% 2.18% 2.18%
Fee Waiver and/or Expense Reimbursement 0.02% 0.02% 0.02%
Net Expenses/5/ 1.51% 2.16% 2.16%
------------------------------------------------------------------------
Aggressive Growth LifeStyle Fund
Management Fees 0.10% 0.10% 0.10%
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
Other Expenses 0.00% 0.00% 0.00%
Total Annual Fund Operating Expenses 0.20% 0.85% 0.85%
Estimated Total Annual Combined Indirect Expenses/6/ 1.47% 2.12% 2.12%
------------------------------------------------------------------------
Conservative Growth LifeStyle Fund
Management Fees 0.10% 0.10% 0.10%
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
Other Expenses 0.00% 0.00% 0.00%
Total Annual Fund Operating Expenses 0.20% 0.85% 0.85%
Estimated Total Annual Combined Indirect Expenses/6/ 1.43% 2.08% 2.08%
------------------------------------------------------------------------
Moderate Growth LifeStyle Fund
Management Fees 0.10% 0.10% 0.10%
Distribution (12b-1) Fees 0.10% 0.75% 0.75%
Other Expenses 0.00% 0.00% 0.00%
Total Annual Fund Indirect Expenses/6/ 0.20% 0.85% 0.85%
Estimated Total Annual Combined Indirect Expenses/6/ 1.45% 2.10% 2.10%
------------------------------------------------------------------------
Core Bond Fund
Management Fees 0.60% 0.60% 0.60%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.44% 0.44% 0.44%
Total Annual Fund Operating Expenses 1.39% 2.04% 2.04%
Fee Waiver and/or Expense Reimbursement 0.09% 0.09% 0.09%
Net Expenses/5/ 1.30% 1.95% 1.95%
------------------------------------------------------------------------
High Yield Bond Fund
Management Fees 0.83% 0.83% 0.83%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.55% 0.55% 0.55%
Total Annual Fund Operating Expenses 1.73% 2.38% 2.38%
Fee Waiver and/or Expense Reimbursement 0.18% 0.18% 0.18%
Net Expenses/5/ 1.55% 2.20% 2.20%
------------------------------------------------------------------------
Municipal Bond Fund
Management Fees 0.60% 0.60% 0.60%
Distribution (12b-1) Fees 0.15% 1.00% 1.00%
Other Expenses 0.59% 0.59% 0.59%
Total Annual Fund Operating Expenses 1.34% 2.19% 2.19%
Fee Waiver and/or Expense Reimbursement 0.34% 0.34% 0.34%
Net Expenses/5/ 1.00% 1.85% 1.85%
------------------------------------------------------------------------
</TABLE>
-------
34
<PAGE>
<TABLE>
<CAPTION>
Class Class Class
Fund A B C
----------------------------------------------------------
<S> <C> <C> <C>
Strategic Income Fund
Management Fees 0.74% 0.74% 0.74%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.51% 0.51% 0.51%
Total Annual Fund Operating Expenses 1.60% 2.25% 2.25%
Fee Waiver and/or Expense Reimbursement 0.05% 0.05% 0.05%
Net Expenses/5/ 1.55% 2.20% 2.20%
----------------------------------------------------------
U.S. Government Securities Fund
Management Fees 0.60% 0.60% 0.60%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.51% 0.51% 0.51%
Total Annual Fund Operating Expenses 1.46% 2.11% 2.11%
Fee Waiver and/or Expense Reimbursement 0.21% 0.21% 0.21%
Net Expenses/5/ 1.25% 1.90% 1.90%
----------------------------------------------------------
Money Market Fund
Management Fees 0.20% 0.20% 0.20%
Distribution (12b-1) Fees 0.00% 0.00% 0.00%
Other Expenses 0.72% 0.72% 0.72%
Total Annual Fund Operating Expenses 0.92% 0.92% 0.92%
Fee Waiver and/or Expense Reimbursement 0.22% 0.22% 0.22%
Net Expenses/5/ 0.70% 0.70% 0.70%
----------------------------------------------------------
Municipal Money Market Fund
Management Fees 0.35% 0.35% 0.35%
Distribution (12b-1) Fees 0% 0% 0%
Other Expenses 0.85% 0.85% 0.85%
Total Annual Fund Operating Expenses 1.20% 1.20% 1.20%
Fee Waiver and/or Expense Reimbursement 0.45% 0.45% 0.45%
Net Expenses/5/ 0.75% 0.75% 0.75%
----------------------------------------------------------
</TABLE>
1 Equity Funds include: Growth & Income, Large Cap Growth, Mid Cap Growth, Mid
Cap Value, Science & Technology, Small Cap Growth, Small Cap Index, Socially
Responsible, Stock Index, Global Equity, International Equity, International
Small Cap Balanced Fund, Aggressive Growth LifeStyle, Conservative Growth
LifeStyle and Moderate Growth LifeStyle. Income Funds include: Core Bond,
High Yield Bond, Municipal Bond, Strategic Income and U.S. Government Secu-
rities.
2 1% first year after purchase for purchases of $1 million or more.
3 5% first and second year; 4% third year; 3% fourth year; 2% fifth year; 1%
sixth year and 0% thereafter.
4 0% after first year.
5 Reflects AGAM's contractual obligation to waive and to the extent necessary
reimburse certain fees and expenses of the Fund through February 28, 2001.
6 These estimates are based upon the Funds' Expenses shown above and the
expenses of the Underlying Funds' Institutional Class I shares shown in the
current prospectus for such shares. The estimates assume the following con-
stant allocation by the Funds of their assets among the Underlying Funds:
<TABLE>
<CAPTION>
Aggressive Growth Moderate Growth Conservative Growth
Lifestyle Fund Lifestyle Fund Lifestyle Fund
<S> <C> <C> <C>
International Equity 25% 15% 8%
Fund
Small Cap Growth Fund 20% 13% 8%
Mid Cap Value Fund 10% 9% 6%
Mid Cap Growth Fund 5% 3% 2%
Large Cap Growth Fund 20% 15% 13%
Growth & Income Fund 10% 15% 13%
Core Bond Fund 10% 30% 50%
High Yield Bond Fund 0% 0% 0%
</TABLE>
The Funds' actual expense may be higher or lower as a result of the allocation
of their assets among the Underlying Funds, the expenses of the Underlying
Funds, and/or the Funds' own expenses. The Net expense and Total Annual
Operating Expenses shown above with respect to the LifeStyle Funds and used to
calculate the 1 year and 3, 5 and 10 years examples, respectively, shown on the
following pages with respect to such Funds.
The higher Distribution Fees borne by Class B and Class C shares may cause
long-term shareholders to pay more in sales charges than the maximum permitted
front-end sales charge on Class A shares.
-------
35
<PAGE>
By translating "Total Annual Fund Operating Expenses" into dollar amounts,
these examples help you compare the costs of investing in a particular Fund, or
a particular class of shares, with the costs of investing in other mutual
funds.
The examples assume that you:
. Invest $10,000 in a Fund for the time period indicated and then redeem all of
your shares at the end of those periods.
. Your investment earns a 5% return each year and that each Fund's operating
expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
<S> <C> <C> <C> <C>
Growth & Income Fund
Class A 715 1,016 1,339 2,145
Class B 714 1,065 1,342 2,196
Class B No redemption 214 665 1,142 2,196
Class C Shares 314 665 1,142 2,361
Class C No redemption 214 665 1,142 2,361
----------------------------------------------------------
Large Cap Growth Fund
Class A 687 1,071 1,478 2,520
Class B 685 1,118 1,478 2,562
Class B No redemption 185 718 1,278 2,562
Class C Shares 285 718 1,278 2,722
Class C No redemption 185 718 1,278 2,722
----------------------------------------------------------
Mid Cap Growth Fund
Class A 717 1,097 1,502 2,544
Class B 716 1,152 1,514 2,613
Class B No redemption 216 752 1,314 2,613
Class C Shares 316 752 1,314 2,772
Class C No redemption 216 752 1,314 2,772
----------------------------------------------------------
Mid Cap Value Fund
Class A 745 1,117 1,512 2,614
Class B 745 1,172 1,524 2,671
Class B No redemption 246 772 1,324 2,671
Class C Shares 346 772 1,324 2,831
Class C No redemption 246 772 1,324 2,831
----------------------------------------------------------
Science & Technology Fund
Class A 681 1,134 1,605 2,906
Class B 678 1,184 1,521 2,953
Class B No redemption 178 789 1,411 2,953
Class C Shares 278 789 1,411 3,108
Class C No redemption 178 789 1,411 3,108
----------------------------------------------------------
Small Cap Growth Fund
Class A 692 1,073 1,479 2,606
Class B 690 1,146 1,508 2,658
Class B No redemption 190 726 1,289 2,658
Class C Shares 290 726 1,289 2,817
Class C No redemption 190 726 1,289 2,817
----------------------------------------------------------
Small Cap Index Fund
Class A 671 1,019 1,391 2,432
Class B 668 1,071 1,400 2,489
Class B No redemption 168 671 1,200 2,489
Class C Shares 268 671 1,200 2,651
Class C No redemption 168 671 1,200 2,651
----------------------------------------------------------
</TABLE>
-------
36
<PAGE>
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Socially Responsible Fund
Class A 690 1,050 1,433 2,504
Class B 688 1,102 1,443 2,561
Class B No redemption 188 702 1,243 2,561
Class C Shares 288 702 1,243 2,722
Class C No redemption 188 702 1,243 2,722
-------------------------------------------------------------------
Stock Index Fund
Class A 642 903 1,184 1,983
Class B 637 950 1,188 2,037
Class B No redemption 137 550 988 2,037
Class C Shares 237 550 988 2,207
Class C No redemption 137 550 988 2,207
-------------------------------------------------------------------
Global Equity Fund
Class A 754 1,129 1,528 2,639
Class B 755 1,185 1,540 2,697
Class B No redemption 255 785 1,340 2,697
Class C Shares 355 785 1,340 2,856
Class C No redemption 255 785 1,340 2,856
-------------------------------------------------------------------
International Equity Fund
Class A 719 1,117 1,539 2,712
Class B 718 1,172 1,552 2,770
Class B No redemption 218 772 1,352 2,770
Class C Shares 318 770 1,348 2,919
Class C No redemption 218 770 1,348 2,919
-------------------------------------------------------------------
International Small Cap Fund
Class A 752 1,200 1,672 2,973
Class B 753 1,258 1,689 3,032
Class B No redemption 253 858 1,489 3,032
Class C Shares 353 858 1,489 3,186
Class C No redemption 253 858 1,489 3,186
-------------------------------------------------------------------
Balanced Fund
Class A 720 1,043 1,388 2,359
Class B 719 1,095 1,397 2,414
Class B No redemption 219 695 1,197 2,414
Class C Shares 319 695 1,197 2,578
Class C No redemption 219 695 1,197 2,578
-------------------------------------------------------------------
Aggressive Growth LifeStyle Fund
Class A 585 624 670 804
Class B 510 631 632 790
Class B No redemption 10 196 397 790
Class C Shares 10 196 397 976
Class C No redemption 10 196 397 976
-------------------------------------------------------------------
Conservative Growth LifeStyle Fund
Class A 585 624 670 804
Class B 510 631 632 790
Class B No redemption 10 196 397 790
Class C Shares 10 196 397 976
Class C No redemption 10 196 397 976
-------------------------------------------------------------------
</TABLE>
------
37
<PAGE>
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Moderate Growth LifeStyle Fund
Class A 585 624 670 804
Class B 510 631 632 790
Class B No redemption 10 196 397 790
Class C Shares 10 196 397 976
Class C No redemption 10 196 397 976
----------------------------------------------------------------
Core Bond Fund
Class A Shares 601 948 1,318 2,356
Class B Shares 698 1,103 1,436 2,521
Class B No Redemption 198 703 1,236 2,521
Class C Shares 298 703 1,236 2,693
Class C No Redemption 198 703 1,236 2,693
----------------------------------------------------------------
High Yield Bond Fund
Class A Shares 625 977 1,353 2,405
Class B Shares 723 1,125 1,454 2,541
Class B No Redemption 223 725 1,254 2,541
Class C Shares 323 725 1,254 2,703
Class C No Redemption 223 725 1,254 2,703
----------------------------------------------------------------
Municipal Bond Fund
Class A Shares 572 862 1,172 2,052
Class B Shares 688 1,067 1,373 2,349
Class B No Redemption 188 667 1,173 2,349
Class C Shares 288 667 1,173 2,563
Class C No Redemption 188 667 1,173 2,563
----------------------------------------------------------------
Strategic Income Fund
Class A Shares 625 965 1,329 2,348
Class B Shares 723 1,113 1,429 2,484
Class B No Redemption 223 713 1,229 2,484
Class C Shares 323 713 1,229 2,647
Class C No Redemption 223 713 1,229 2,647
----------------------------------------------------------------
U.S. Government Securities Fund
Class A Shares 596 895 1,216 2,121
Class B Shares 693 1,041 1,315 2,259
Class B No Redemption 193 641 1,115 2,259
Class C Shares 293 641 1,115 2,425
Class C No Redemption 193 641 1,115 2,425
----------------------------------------------------------------
Money Market Fund
Class A Shares 72 278 501 1,144
Class B Shares 72 278 501 1,144
Class B No Redemption 72 278 501 1,144
Class C Shares 72 278 501 1,144
Class C No Redemption 72 278 501 1,144
----------------------------------------------------------------
Municipal Money Market Fund
Class A Shares 102 361 640 1,437
Class B Shares 102 361 640 1,437
Class B No Redemption 102 361 640 1,437
Class C Shares 102 361 640 1,437
Class C No Redemption 102 361 640 1,437
----------------------------------------------------------------
</TABLE>
-------
38
<PAGE>
More Information About
Investment Strategies and Risks
This Prospectus does not attempt to disclose all of the different investment
techniques that the Funds might use, or all of the types of securities in which
the Funds might invest. As with any mutual fund, investors must rely on the
professional judgment and skill of the Funds' management. A subadvisor may
choose not to use some or all of the investment techniques available to a Fund,
and these choices may cause the Fund to lose money or not achieve its invest-
ment objective.
Each Fund has a unique investment objective (see the Fund Summaries) that it
tries to achieve through its investment strategies. The investment objectives
of the following Funds cannot be changed without the approval of the holders of
a majority of the outstanding shares of each Fund; Growth & Income Fund, Large
Cap Growth Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Global Equity
Fund, International Equity Fund, International Small Cap, Balanced Fund, Core
Bond Fund, Municipal Bond Fund, Strategic Income Fund, U.S. Government Securi-
ties Fund and Money Market Fund. The Investment Objectives of the other Funds
may be changed by the Trustees. Except as noted for certain investment restric-
tions, the strategies a Fund uses to achieve its investment objective also may
be changed by the Trustees without approval of the shareholders. Because each
Fund is different, they have different investment policies and risks, and will
also have different returns over time. This section provides additional infor-
mation about the Funds, and should be read in conjunction with the Fund Summa-
ries.
Growth & Income Fund
Wellington Management seeks to achieve the Fund's objective by investing pri-
marily in a diversified portfolio of common stocks of U.S. issuers which Wel-
lington Management believes are of high quality. Wellington Management believes
that high quality companies are evidenced by a leadership position within an
industry, a strong or improving balance sheet, relatively high return on equi-
ty, steady or increasing dividend payout, and strong management skills. The
Fund's investments will emphasize primarily dividend paying stocks of larger
companies. The Fund may invest in securities that can be converted into, or
that include the right to buy common stocks, including convertible securities
issued in the Euromarket and preferred stocks. The Fund may also invest in mar-
ketable 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
unrated securities considered to be of equivalent quality in Wellington Manage-
ment's judgment. Under normal market conditions, the subadvisor expects that
the Fund's portfolio will consist primarily of equity securities.
The Fund may invest in derivatives.
Large Cap Growth Fund
At least 65% of the Fund's total assets will be invested in common stocks of
well-established, high-quality growth companies. The Fund may also invest in
convertible securities, preferred stocks, debentures and other corporate
obligations when Founders believes that these investments offer opportunities
for capital appreciation. Although these securities may produce current income,
income will not be a substantial factor in selecting these securities.
The Fund may invest in investment grade bonds, debentures and corporate obliga-
tions rated at the time of purchase of Baa or higher by Moody's or BBB or
higher by S&P. The Fund may choose to invest in lower-rated (Ba or lower by
Moody's and BB or lower by S&P) convertible and preferred stocks but not rated
below B. The Fund may also invest in unrated convertible securities and pre-
ferred stocks if Founders believes that they are equivalent in quality to the
rated securities the Fund may buy.
The Fund will never have more than 5% of its total assets invested in unrated
or below-investment-grade fixed income
-------
39
<PAGE>
securities, with the exception of preferred stocks. If the Fund holds securi-
ties that are downgraded after they are purchased, the Fund does not have to
sell them unless the Fund assets in unrated and below investment-grade securi-
ties reaches 5% of total assets.
The Fund is also permitted to use forward foreign currency contracts and
futures contracts. The Fund may also purchase and/or write options on securi-
ties and on indices, and may invest in Rule 144A securities.
Mid Cap Growth Fund
The Fund invests in equity securities, including common and preferred stocks,
and securities that can be converted into or exchanged for equity securities,
including warrants and rights. The Fund will typically invest in companies
whose securities are traded on domestic stock exchanges or in the over-the-
counter market.
To give the Fund the flexibility to take advantage of new opportunities that
can help to meet the Fund's investment objectives, the Fund can invest up to
15% of its net assets 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.
The Fund 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. The Fund may
also purchase American Depositary Receipts ("ADRs") or U.S. dollar-denominated
securities of foreign issuers that are not included in the 20% foreign securi-
ties limitation.
The Fund may invest in derivatives.
Mid Cap Value Fund
Although primarily investing in equity securities of mid cap companies using a
value-oriented approach, the Fund may use certain practices and securities
involving additional risks. Borrowing, securities lending, and derivatives
could create leverage, meaning that certain gains or losses could be amplified,
increasing NAV price movements. In using certain derivatives to gain stock mar-
ket exposure for excess cash holdings, the Fund increases its risk of loss.
Although they may add diversification, foreign securities can be riskier,
because foreign markets tend to be more volatile and exchange rates fluctuate.
When the Fund anticipates adverse market, economic, political or other condi-
tions, it may temporarily depart form its goal and invest substantially in
high-quality short-term fixed-income investments. This could help the Fund
avoid losses but may also mean lost opportunities.
Science & Technology Fund
At least 65 % of the Fund's total assets will be invested in common stocks, in
keeping with the Fund's objectives. The Fund may sell securities for a variety
of reasons, such as to secure gains, limit losses, or redeploy assets into more
promising opportunities.
Since this Fund is focused on the science and technology industries, it is less
diversified than stock funds investing in a broader range of industries and,
therefore, could experience significant volatility. Companies in the rapidly
changing fields of science and technology often face unusually high price vola-
tility, in terms of both gains and losses. The potential for wide variation in
performance is based on the special risks common to these stocks. For example,
products or services that at first appear promising may not prove commercially
successful or may become obsolete quickly. Earnings disappointments can result
in sharp price declines.
The level of risk will rise to the extent that the Fund has significant expo-
sure to smaller or unseasoned companies (those with less than a three-year
operating history), which may not have established products or more experienced
management.
Foreign stock holdings are subject to the to the risk that some holdings may
lose value because of declining foreign currencies or adverse political or eco-
nomic events overseas. Investment in futures and options, if any, are subject
to additional volatility and potential losses.
As with any mutual fund, there can be no guarantee the Fund will achieve its
objectives.
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Small Cap Growth Fund
The Fund will usually invest at least 65% of its total assets in common stocks
or warrants of emerging growth companies that represent attractive opportuni-
ties for maximum capital appreciation. Emerging growth companies are small- or
medium-sized companies beyond their start-up phase showing positive earnings or
the potential for accelerated earnings growth.
Although the Fund will typically invest in smaller companies, the Fund may
invest in emerging growth companies of any size. Emerging growth companies gen-
erally benefit from new products or services, technological developments,
changes in management or other factors. The Fund may also invest in companies
experiencing unusual developments affecting their market value, called "special
situation" companies. These companies may be involved in acquisitions or con-
solidations, reorganization, recapitalization, mergers, liquidation, or distri-
bution of cash, securities or other assets, tender or exchange offers, a
breakup or workout of a holding company, lawsuits which, if resolved favorably,
would improve the value of the company's stock, or a change in corporate con-
trol.
The 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. The Fund may also invest up to 20% of its
total assets in the securities of foreign issuers, which have certain risks
associated with them. The Fund's status is non-diversified , although its port-
folio managers have typically diversified the Fund's investments.
The interest income to be derived may be considered as one factor in selecting
debt securities for investment. Because the market value of debt obligations
can be expected to vary inversely with changes in prevailing interest rates,
investing in debt obligations may provide an opportunity for capital apprecia-
tion when interest rates are expected to decline. The success of such a strat-
egy is dependent upon the manager's ability to accurately forecast changes in
interest rates.
A security will be considered investment grade if it is rated within the four
highest grades by Moody's or S&P or, if unrated, is determined by the manager
to be of comparable quality. Bonds rated in the fourth highest grade may have
speculative characteristics. If a security held by the Fund is no longer rated,
or is rated below the Fund's minimum allowed rating, the manager factors this
information into the decision about whether the Fund should continue to hold
the securities. The Fund can normally invest up to 20% of its total assets in
domestic and foreign short-term money market obligations.
Investing in securities of emerging growth and small-sized companies can
involve greater risks because these securities may have limited marketability.
Because small and medium-sized companies normally have fewer shares outstanding
than larger companies, it may be more difficult for the Fund to buy or sell
large numbers of shares without affecting current prices. Small- and medium-
sized companies are typically subject to a greater degree of changes in earn-
ings 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. And companies with
small market capitalizations may also be dependent upon a single proprietary
product or market niche, may have limited product lines, markets or financial
resources, or may depend on a limited management group.
The Fund may invest in derivatives.
Small Cap Index Fund
The Fund's subadvisor pursues the Fund's objective by investing in companies
that are listed in the Russell 2000 Index (the "Index"), except for a small
portion in cash, to be available for redemptions. Since it may not be possible
to buy every stock included in the Index, or in the same proportions, the Fund
invests in a sampling of common stocks in the Index. The common stocks of the
Index will be selected utilizing a statistical sampling technique known as "op-
timization". This process selects stocks for the Fund so that various industry
weightings, market capitalizations and fundamental characteristics (e.g.,
price-to-book, price-to-earnings, debt-to-asset ratios and
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<PAGE>
dividend yields) closely approximate those of the Index. The common stocks held
by the Fund are weighted to make the Fund's aggregate investment characteris-
tics similar to those of the Index as a whole.
Socially Responsible Fund
The manager of the Fund determines whether a company "significantly" engages in
prohibited activities by screening the Fund's investable universe against a
proprietary database of stocks. Companies in the database generating more that
5% of revenues from any violating activity are not purchased by the Fund. In
addition to this database, the manager uses various other resources to screen
out companies whose operations appear to violate the social criteria.
At least once a year, the Investor Responsibility Research Center ("IRRC") sur-
veys state laws to see if there are any new or revised state laws that govern
or affect the investments of public funds. If the survey shows that at least 20
states have adopted laws that restrict public funds from being invested in a
clearly definable category of investments, this category is automatically added
to the Fund's social criteria list.
The manager of the Fund determines whether a company "significantly pollutes
the environment" by screening the Fund's investable universe against a list of
the top 75 global emitters. Emissions data is collected from various sources
including, but not limited to, government agencies and company filings. In
addition to this list, the manager uses various publications to screen out com-
panies whose operations appear to violate the social criteria.
Stock Index Fund
The Fund's subadvisor pursues the Fund's objective by investing in companies
that are listed in the S&P 500 Index (the "Index"), except for a small portion
in cash, to be available for redemptions. Since it may not be possible to buy
every stock included in the Index, or in the same proportions, the Fund invests
in a sampling of common stocks in the Index. The common stocks of the Index
will be selected utilizing a statistical sampling technique known as "optimiza-
tion". This process selects stocks for the Fund so that various industry
weightings, market capitalizations and fundamental characteristics (e.g.,
price-to-book, price-to-earnings, debt-to-asset ratios and dividend yields)
closely approximate those of the Index. The common stocks held by the Fund are
weighted to make the Fund's aggregate investment characteristics similar to
those of the Index as whole.
Global Equity Fund
The Fund invests primarily in equity securities of issuers throughout the
world, including issuers in the U.S. and emerging market countries.
The Fund may also invest in money market instruments. Although the Fund 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. Pri-
vately traded securities may have additional liquidity risks. The Fund may also
engage in forward foreign currency transactions and purchase when-issued or
delayed delivery securities.
International Equity Fund
MSAM's Active International Allocation team analyzes both the global economic
environment and the economies of the industrialized countries comprising the
MSCI Europe, Australasia, Far East (EAFE) Index. EAFE countries include Japan,
most nations in Western Europe, Australia, New Zealand, Hong Kong and
Singapore. MSAM views each country and sector as unique investment
opportunities and evaluates prospects for value, growth, inflation, interest
rates, corporate earnings, liquidity and risk characteristics, investor
sentiment and currency outlook. After determining to invest in a country or
sector, MSAM establishes overweight, underweight or neutral positions relative
to the broad market index for that country or sector. Within the countries or
sectors selected for investment, MSAM purchases optimized baskets of equity
securities designed to track the local market index. The Fund does not invest
in securities of U.S. issuers. MSAM considers an issuer to be from a particular
country if: (i) its principal securities trading market is in that country;
(ii) alone or on a consolidated basis it derives 50%
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or more of its annual revenue from either goods produced, sales made or
services performed in that country; or (iii) it is organized under the laws of,
and has a principal office in, that country.
The Fund will limit its use of derivatives for non-hedging purposes to 33 1/3%
of its total assets measured by the aggregate notional amount of outstanding
derivatives. While the use of derivatives may be advantageous to the Fund, if
MSAM is not successful in employing them, the Fund's performance may be worse
than if it did not make such investments.
The Fund may invest in emerging market countries and, with regard to such
investments, make global and regional allocations to emerging markets, as well
as allocations to specific emerging market countries. Emerging market countries
are countries that major international financial institutions, such as the
World Bank, generally consider to be less economically mature than developed
nations, such as the United States or most nations in Western Europe. Emerging
market countries can include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most countries located in
Western Europe. Emerging market countries may be more likely to experience
political turmoil or rapid changes in economic conditions than more developed
countries, and the financial condition of issuers in emerging market countries
may be more precarious than in other countries. The characteristics result in
greater risk of price volatility in emerging market countries, which may be
heightened by currency fluctuations relative to the U.S. dollar.
International Small Cap Fund
The Fund may invest without limit in American Depositary Receipts and American
Depositary Shares (collectively, "ADRs"). ADRs are receipts representing shares
of a foreign corporation held by a U.S. bank that entitle the holder to all
dividends and capital gains on the underlying foreign shares. ADRs are
denominated in U.S. dollars and trade in the U.S. securities markets.
The Fund may invest a significant portion of its assets in the securities of
small companies. The securities of small companies may have limited marketabil-
ity and may experience more abrupt or erratic movements in price than securi-
ties of larger companies or the market averages in general. Because of this,
the net asset value of the International Small Cap Fund may fluctuate more
widely than popular market averages.
The Fund 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.
The Fund may invest in investment-grade bonds, debt securities and corporate
obligations. For purposes of this Fund, investment grade securities are those
rated Baa or higher by Moody's, or BBB or higher by S&P. The Fund may choose to
invest in lower-rated convertible securities and preferred stocks (securities
rated Ba or lower by Moody's and BB or lower by S&P) or of comparable invest-
ment quality at the time of purchase. The Fund may also invest in unrated con-
vertible securities and preferred stocks if Founders believes they are equiva-
lent in quality to the rated securities that the Fund may buy.
The Fund will not invest more than 5% of its total assets in unrated or below
investment-grade fixed-income securities, with the exception of preferred
stocks. If the Fund holds securities that are downgraded to below investment
grade after they are purchased, the Fund does not have to sell them unless the
Fund's investments in unrated and below investment grade securities are equal
to or greater than 5% of total fund assets.
Since the Fund's assets will be invested primarily in foreign securities and
since substantially all of the Fund's revenues will be received in foreign cur-
rencies, the Fund's net asset values will be affected by changes in currency
exchange rates. The Fund will pay dividends in dollars and will incur currency
conversion costs.
Balanced Fund
The Fund may invest in convertible securities, preferred stocks, bonds, deben-
tures, and other corporate obligations when INVESCO believes that these invest-
ments offer opportunities for capital appreciation. Current income is also a
factor in the selection of these securities.
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The Fund may invest without limit in ADRs and up to 30% of its total assets in
foreign securities (other than ADRs). The Fund will not invest more than 25% of
its total assets in the securities of any one foreign country. The 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.
The Fund may also take positions in securities traded on regional or foreign
exchanges. The portion of the Fund's portfolio invested in debt securities may
include obligations of the U.S. government, government agencies, and investment
grade corporate bonds. Obligations issued by U.S. Government agencies may
include some supported only by the credit of the issuing agency rather than by
the full faith and credit of the U.S. Government. The Fund may hold securities
of any maturity, with the average maturity of the portfolio varying depending
upon economic and market conditions. The Fund may invest in derivatives.
Aggressive Growth LifeStyle Fund
The Fund is managed so that it can serve as a complete investment program or as
a core part of your larger portfolio. The combination of the North American
Funds ("Underlying Funds") has been selected to represent a reasonable spectrum
of investment options for the Fund. The manager may change the asset allocation
ranges and the particular Underlying Funds in which the Fund may invest from
time to time.
Conservative Growth LifeStyle Fund
The Fund is managed so that it can serve as a complete investment program or as
a core part of your larger portfolio. The combination of the North American
Funds ("Underlying Funds") has been selected to represent a reasonable spectrum
of investment options for the Fund. The manager may change the asset allocation
ranges and the particular Underlying Funds in which the Fund may invest from
time to time.
Moderate Growth LifeStyle Fund
The Fund is managed so that it can serve as a complete investment program or as
a core part of your larger portfolio. The combination of the North American
Funds ("Underlying Funds") has been selected to represent a reasonable spectrum
of investment options for the Fund. The manager may change the asset allocation
ranges and the particular Underlying Funds in which the Fund may invest from
time to time.
Core Bond Fund
Credit research on corporate bonds includes examining both quantitative (mathe-
matical) and qualitative criteria established by AGIM. These criteria include
an issuer's industry, operating and financial profiles, business strategy, man-
agement quality, and projected financial and business conditions.
Up to 10% of the Fund's total assets may be invested in lower quality fixed-
income securities,
those rated below Baa3 by Moody's and BBB by S&P or comparable investment qual-
ity at the time of purchase. Up to 35% of the Fund's total assets may be
invested in interest-bearing short-term investments, such as commercial paper,
bankers' acceptances, bank certificates of deposit, and other cash equivalents
and cash. Equity securities, including common or preferred stocks, convertible
securities, and warrants, may comprise up to 20% of the Fund's total assets.
The Fund may invest in depositary receipts, foreign currency, futures and
options, illiquid securities (limited to 15% of the Fund's assets), investment
companies, loan participations, real estate securities, repurchase agreements,
reverse repurchase agreements, dollar rolls, structured securities, variable
amount master demand notes, variable rate demand notes, and when-issued
securities.The Fund may invest in derivatives.
High Yield Bond Fund
At least 65% of the Fund's total assets are invested in below investment-grade
U.S. and foreign junk bonds. To balance this risk, the Fund may invest up to
35% in investment grade securities, which are those securities rated Baa3 or
higher by Moody's and BBB- or higher by S&P or comparable investment quality at
the time of purchase. In addition, the Fund may invest up to 15% in zero coupon
securities (securities not paying current cash or interest), and up to 20% of
total assets in equity securities. Equity securities includes common or pre-
ferred stocks, warrant, and convertible securities.
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The sub-advisor can also employ a temporary defensive strategy, which means
that under certain market conditions the Fund may take temporary defensive
positions that are inconsistent with its principal investment strategies, in
attempting to respond to adverse market, economic, political or other condi-
tions. If the Fund takes such a temporary defensive position, it may not
achieve its stated investment objective.
Municipal Bond Fund
U.S. Government securities are securities issued or guaranteed by the U.S.
Government which are supported by the full faith and credit of the U.S.
Government; the right of the issuer to borrow from the U.S. Treasury; the
credit of the issuing government agency; or the authority of the U.S.
Government to purchase obligations of the agency. The Fund may invest in asset-
backed securities, equity securities, futures and options, illiquid securities
(limited to 15% of the Fund's assets), investment companies, loan
participations, mortgage-related securities, real estate securities, repurchase
agreements, reverse repurchase agreements, variable amount master demand notes,
variable rate demand notes, and when-issued securities. If the Fund invests in
municipal securities issued for certain private purposes, a portion of the
Fund's dividends may be subject to the alternative minimum tax.
From time to time, the Fund may invest more than 25% of its total 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 Fund may be more susceptible to a single economic, political
or regulatory development than would a Fund of securities with a greater vari-
ety of issuers.
Strategic Income Fund
The Fund may invest in debt obligations issued or guaranteed by a foreign sov-
ereign government or one of its agencies or political subdivisions, and debt
obligations issued or guaranteed by international organizations designated or
supported by governmental entities to promote economic reconstruction or devel-
opment 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. These securities may be denomi-
nated in multi-national currency units.
The purpose of investing a portion of the Fund's assets in below investment
grade, mortgage, and international debt securities, is to provide investors
with a higher yield than a high-quality domestic corporate bond fund, and with
less risk than a fund that invests principally in below investment grade secu-
rities. Some of the debt securities the Fund may select may be considered com-
parable 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) or comparable investment quality at time of purchase.
The Fund may invest in derivatives.
U.S. Government Securities Fund
The Fund may invest in:
.Mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA"), popularly known as "Ginnie Maes," that are backed by the
full faith and credit of the U.S. Government. These are known as a "modified
pass through" type of mortgage- backed security ("GNMA Certificates"). These
securities entitle the holder to receive all interest and principal payments
due whether or not payments are actually made on the underlying mortgages
.U.S. Treasury obligations
.Obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government. These securities are backed by their own credit, and may not be
backed by the full faith and credit of the U.S. Government
.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 Cor-
poration and the Federal National Mortgage Association;
.Collateralized mortgage obligations issued by private issuers for
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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; and
.Repurchase agreements collateralized by any of the foregoing.
Money Market Fund
The Fund invests in high quality, U.S. dollar-denominated money market instru-
ments, as described on page 27.
Municipal Money Market Fund
The Fund invests in short term U.S. dollar-denominated instruments money market
instruments that are exempt from regular federal income taxation, as described
on page 28.
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<PAGE>
Other Risks of Investing in the North American Funds
Although a Fund may have the flexibility to use some or all of the investments
or strategies described in this Prospectus and the Statement of Additional
Information, its subadvisor may choose not to use these investments or strate-
gies for a variety of reasons. These choices may cause a Fund to miss opportu-
nities, lose money or not achieve its goal.
High Yield/High Risk Securities
High yield securities (often known as "junk bonds") include debt instruments
that have an equity security attached to them. Securities rated below invest-
ment grade and comparable unrated securities offer yields that fluctuate over
time, but generally offer higher yields than do higher rated securities. Howev-
er, 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 qual-
ity and protective characteristics that are outweighed by large uncertainties
or major risk exposures to adverse conditions.
Some of the debt securities in which the Funds may choose to invest may be, or
may be similar to, the lowest rated non-subordinated debt (securities rated C
by Moody's or CCC or lower by S&P or comparable investment quality at the time
of purchase). This type of security is very risky, as issuers may not have the
ability to repay principal and interest, and may even default. If this should
occur, the value of shares of the Fund holding them would likely fall.
Foreign Securities
There are risks associated with investing in foreign securities. These risks
include unforeseen changes in tax laws, political changes, and changes in for-
eign currency values and exchange rates.
There may be less publicly available information about foreign issuers. 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 for domestic issuers. Foreign stock markets generally have
substantially less volume than the U.S. exchanges and securities of foreign
issuers are generally less liquid and more volatile, relative to U.S. issuers.
For emerging markets, these risks can be more extreme.
There is frequently less governmental regulation of foreign exchanges, broker-
dealers and issuers than in the United States, and brokerage costs may be high-
er. In addition, investments in foreign companies may be subject to the possi-
bility of nationalization or other changes in policy. Policy changes may allow
foreign governments to withhold dividends, expropriate (confiscate, or keep)
investment returns, or raise taxes to extremely high levels, among other
things. Also, should a foreign issuer default, it may be difficult to recover
anything in a bankruptcy proceeding.
Lending Fund Securities
Each Fund may lend up to 33% of its total portfolio assets, or securities, to
brokers, dealers and other financial institutions. These loans must be callable
(the Fund may ask that the loan be repaid in full) at any time by the Fund. The
loans must be at all times fully secured by cash, cash equivalents or securi-
ties issued or guaranteed by the U.S. Government or its agencies or instrumen-
talities, and marked-to-market (priced at market value) 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 collat-
eral should the borrower of the securities fail financially. However, these
loans of Fund securities will only be made to firms deemed by the subadvisors
to be creditworthy.
Leverage Risk
Funds that borrow money to buy securities are using leverage. Leverage risk is
the risk that leverage, or debt, will enable a Fund to buy more of a security
that falls in value. In this case, the Fund would still need to repay the money
it borrowed. Funds can create leverage, or borrow money, by using different
types of techniques including reverse repurchase agreements, dollar rolls, and
derivatives including inverse floating rate instruments.
Hedging and Other
Strategic Transactions
Individual Funds 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 man-
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aging the effective maturity or duration of debt instruments held by the Fund.
Hedging is simply believing that certain securities will fall, or rise, in val-
ue, and structuring transactions that take advantage of those changes. These
transactions are generally used to protect against possible changes in the mar-
ket value of securities a Fund already owns or plans to buy, to protect
unrealized gains or to improve the Fund's return in some way.
Where allowed, individual Funds may 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. This category
includes derivative transactions. A "derivative" is generally defined as an
instrument whose value is based upon, or derived from, some underlying index or
rate. Interest rate transactions may include swaps, caps, floors and collars,
and currency transactions may include currency forward contracts, currency
futures contracts, currency swaps and options on currencies or currency futures
contracts.
Frequent Trading
A Fund may buy or sell investments frequently, increasing brokerage commissions
and other expenses of the Fund. Frequent trading may also increase the amount
of capital gains realized by a Fund, including short-term capital gains, which
are generally taxable to shareholders at ordinary income tax rates.
Temporary Defensive Strategies
A Fund's subadvisor may at certain times decide that pursuing the Fund's
investment strategies is inconsistent with market conditions. A subadvisor may
then employ defensive strategies designed mostly to limit losses. However, the
subadvisor may choose not to use defensive strategies, even in volatile or
unsettled market conditions. Such defensive strategies may cause the Fund to
miss opportunities or to not achieve its goal.
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Management of the Funds
Under the federal securities laws, Massachusetts law and the Trust's Agreement
and Declaration of Trust and By-Laws, the business and affairs of the Trust are
managed under the direction of the Trustees.
American General Asset Management Corp. ("AGAM"), formerly CypressTree Asset
Management Corporation, Inc., is the investment adviser for the Trust. AGAM was
formed in 1996 to advise, acquire and distribute mutual funds through broker-
dealers, banks and other intermediaries. AGAM's address is 286 Congress Street,
Boston, Massachusetts 02210.
According to its Advisory Agreement with the Trust (the "Advisory Agreement"),
AGAM:
.Oversees the administration of all aspects of the business and affairs of the
Funds
.Selects, contracts with and compensates subadvisors to manage the assets of
the Funds
The following table shows the management fees each Fund paid (or, in the case
of new Funds will pay) to AGAM for the last fiscal year under the Advisory
Agreement as a percentage of the Fund's average daily net asset value.
<TABLE>
<CAPTION>
Funds Management
Fees
------------------------------------------------------------------------
<S> <C>
Growth & Income Fund .67%
Large Cap Growth Fund .90%
Mid Cap Growth Fund .93%
Mid Cap Value Fund .90% on the first $100 million
.875% on the next $150 million
.675% on assets over $500 million
Science and Technology Fund .90%
Small Cap Growth Fund .95%
Small Cap Index Fund .28% on the first $500 million
.27% on assets over $500 million
Socially Responsible Fund .65%
Stock Index Fund .27% on the first $500 million
.26% on assets over $500 million
Global Equity Fund .90%
International Equity Fund .90%
International Small Cap Fund 1.05%
Balanced Fund .75%
Aggressive Growth Lifestyle Fund .10%
Conservative Growth Lifestyle Fund .10%
Moderate Growth Lifestyle Fund .10%
Core Bond Fund .60%
High Yield Bond Fund .825% on the first $200 million
.725% on the next $300 million
.675% on assets over $500 million
Municipal Bond Fund .60%
Strategic Income Fund .74%
U.S. Government Securities Fund .60%
Money Market Fund .20%
Municipal Money Market Fund .35%
</TABLE>
--------------------------------------------------------------------------------
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.Makes recommendations to the Trustees regarding the hiring, termination and
replacement of subadvisors
.Reimburses the Fund if the total of certain expenses allocated to any Fund
exceeds certain limitations
.Monitors the subadvisors for compliance with the investment objectives and
related policies of each Fund
.Reviews the performance of the subadvisors
.Periodically reports to the Trustees
Under an order granted to the Funds by the Securities and Exchange Commission
("SEC"), AGAM is permitted to appoint a subadvisor, to create a subadvisory
agreement, and to terminate or amend a subadvisory agreement, in each case
without shareholder approval. This "Manager of Managers" structure permits the
Funds to change subadvisors or the fees paid to subadvisors without the expense
and delays associated with obtaining shareholder approval. AGAM has ultimate
responsibility under the Manager of Managers structure to oversee the
subadvisors, including making recommendations to the Trust regarding the hir-
ing, termination and replacement of subadvisors.
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<PAGE>
Subadvisory Agreements
Wellington Management Company, LLP
Wellington Management Company, LLP, the subadvisor to the Growth & Income Fund
("Wellington Management"), whose principal business address is 75 State Street,
Boston, Massachusetts 02109.
Wellington Management and its predecessor organizations have provided invest-
ment management services to investment companies, employee benefit plans,
endowments, foundations and other institutions and individuals since 1928. As
of September 30, 1999, Wellington Management had investment management author-
ity with respect to approximately $217 billion of assets.
Matthew E. Megargel, Senior Vice President of Wellington Management, has served
as fund manager to the Growth & Income Fund since February 1992. Mr. Megargel
joined Wellington Management in 1983 as a research analyst and took on addi-
tional responsibilities as a fund manager in 1988. In 1991, he became solely a
fund manager with Wellington Management.
Credit Suisse Asset Management, LLC.
Credit Suisse Asset Management, LLC., the subadvisor to the Small Cap Growth
Fund ("CSAM"), is located at 153 E. 53rd Street, New York, New York, 10022.
CSAM 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 November 30, 1999,
CSAM managed approximately $60 billion of assets, and together with its global
affiliates, managed $168 billion worldwide.
The co-fund managers of the Small Cap Growth Fund are Elizabeth B. Dater and
Stephen J. Lurito. Ms. Dater, a managing director, has been a fund manager of
the Small Cap Growth Fund since its inception and has been a fund manager since
1978. Mr. Lurito, a managing director, has been a fund manager of the Small Cap
Growth Fund since its inception and has been with the firm since 1987.
Founders Asset Management, LLC.
Investment decisions for the Large Cap Growth Fund, International Small Cap
Fund and Global Equity Funds are made by their subadvisor, Founders Asset Man-
agement, LLC, located at 2930 East Third Avenue, Denver, Colorado 80206. Found-
ers is a registered investment adviser first established as an asset manager in
1938, and is a subsidiary of Mellon Bank, N.A. As of September 30, 1999, Found-
ers had over $7.5 billion of assets under management, including approximately
$5.2 billion in mutual fund accounts and $2.3 billion in other advisory
accounts.
To facilitate the day-to-day investment management of the Large Cap Growth
Fund, International Small Cap Fund, and Global Equity Fund, Founders employs a
unique team-and-lead-manager system. The management team is composed of several
members of the Investment Department, including lead portfolio managers, port-
folio traders and research analysts. Team members share responsibility for pro-
viding ideas, information, knowledge and expertise in the management of the
Funds. Each team member has one or more areas of expertise that is applied to
the management of the Fund. Daily decisions on Fund selection for the Fund
rests with a lead fund manager assigned to the Fund.
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51
<PAGE>
Tracy P. Stouffer, Vice President of Investments, has been the lead fund man-
ager for the International Small Cap Fund since July 1999. Previously, Mr.
Stouffer was a vice president and portfolio manager with Federated Global
Incorporated from 1995 to July 1999 and a vice president and portfolio manager
with Clariden Asset Management from 1988 to 1995.
Thomas M. Arrington, Vice President of Investments, is a Chartered Financial
Analyst who has been the co-portfolio manager, along with Scott Chapman, of the
Large Cap Growth Fund since December 1998. Mr. Arrington has served as co-port-
folio manager to the Global Equity Fund since March 2000. Prior to joining
Founders, he was vice president and director of income equity strategy at
HighMark Capital Management, a subsidiary of Union BanCal Corp., where he man-
aged the HighMark Income Equity Fund, a large-cap fund. He received a bache-
lor's degree in economics from the University of California, Los Angeles and an
MBA from San Francisco State University.
Scott Chapman, Vice President of Investments, is a Chartered Financial Analyst
who has been the co-portfolio manager, along with Thomas Arrington, of the
Large Cap Growth Fund since December 1998. Mr. Chapman has served as co-portfo-
lio manager to the Global Equity Fund since March 2000. Before joining Found-
ers, Chapman was vice president and director of growth strategy for HighMark
Capital. He has more than 10 years experience in equity investment management,
including security analysis positions with McCullough, Andrews and Cappiello
and Cooper Development Co. Chapman received a bachelor of science degree in
accounting from Santa Clara University and an MBA in finance from Golden Gate
University.
Douglas A. Loeffler, Vice President of Investments, is a Chartered Financial
Analyst who has served as the co-portfolio manager of the Global Equity Fund
since March, 2000. Mr. Loeffler has been the lead portfolio manager for Dreyfus
Founders Worldwide Growth Fund since July, 1999. Prior to joining Founders in
1995, Mr. Loeffler was an investment professional at Scudder, Stevens & Clark
for seven years.
INVESCO Funds Group, Inc. ("INVESCO")
INVESCO, with principal offices at 7800 E. Union Blvd., Denver, Colorado 80237,
has been the subadvisor to the Balanced Fund and the Mid Cap Growth Fund since
March 2000. Established in 1932, INVESCO Funds Group is one of the oldest
existing mutual fund management companies in the United States. Some of the
world's largest institutions and more than one million individual investors
rely on the knowledge of INVESCO's investment specialists. As of December 31,
1999, INVESCO and its affiliates managed approximately $357 billion in assets,
including $40 billion in shareholder accounts.
Charles P. Mayer, Director of Investments & Senior Vice President, manages the
equity portion of the Balanced Fund. Mr. Mayer, who joined INVESCO in 1993, has
been an investment professional since 1969. Mr. Mayer holds a BA from St.
Peter's College, and an MBA from St. John's University.
Donovan J. Paul, Senior Vice President, manages the fixed-income portion of the
Balanced Fund. Mr. Paul, who joined INVESCO in 1994, has been an investment
professional since 1976. Mr. Paul holds a BBA from the University of Iowa, and
an MBA from the University of Northern Iowa.
Peter Lovell, Vice President, is a co-manager of the Balanced Fund. Mr. Lovell,
who joined INVESCO in 1994, has been an investment professional since 1976. Mr.
Lovell holds a BBA from the University of Iowa, and an MBA from the University
of Northern Iowa.
Timothy J. Miller, Senior Vice President, manages the Mid Cap Growth Fund. Mr.
Miller, who joined INVESCO in 1992, has been an investment professional since
1979. Mr. Miller holds a BSBA from St. Louis University, and an MBA from the
University of Missouri.
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52
<PAGE>
Morgan Stanley Dean Witter Investment Management Inc.
Morgan Stanley Dean Witter Investment Management Inc., with principal offices
at 1221 Avenue of the Americas, New York, New York 10020, has been the
subadvisor to the International Equity Fund since April 1, 1999. Morgan Stanley
Dean Witter Investment Management Inc. in certain instances does business using
the name Morgan Stanley Asset Management ("MSAM"). MSAM, a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co., conducts a worldwide fund
management business, providing a broad range of fund management services to
customers in the United States and abroad. As of September 30, 1999, MSAM,
together with its affiliated institutional asset management companies, managed
investments totaling approximately $173.5 billion.
Ann D. Thivierge shares portfolio management responsibility for the Interna-
tional Equity Fund with Barton M. Biggs. Ms. Thivierge is a Managing Director
of MSAM. She joined MSAM in 1986 and holds a B.A. in International Relations
from James Madison College, Michigan State University, and an M.B.A. in Finance
from New York University.
Barton M. Biggs has been Chairman and a director of MSAM since 1980. He is also
a director and chairman of various registered investment companies to which
MSAM and certain of its affiliates provide investment advisory services. Mr.
Biggs holds a B.A. from Yale University and an M.B.A. from New York University.
American General Investment Management, L.P. ("AGIM")
AGIM has been the subadvisor to the Strategic Income Fund, the Core Bond Fund,
the U.S. Government Securities Fund, and the Money Market Fund since March,
2000, and of the Stock Index Fund, the Socially Responsible Fund, the High
Yield Bond Fund, the Aggressive Growth Lifestyle Fund, the Moderate Growth
Lifestyle Fund, and the Conservative Growth Lifestyle Fund since inception.
AGIM was formed in 1998 as a successor to the investment management division of
American General Corporation, and is an indirect wholly-owned subsidiary of
American General Corporation. AGIM also provides investment management and
advisory services to pension and profit sharing plans, financial institutions
and other investors. Accounts managed by AGIM had combined assets, as of
December 31, 1999, of approximately $68.9 billion. AGIM is located at 2929
Allen Parkway, Houston, Texas 77019.
Magali E. Azema-Barac is responsible for AGIM's equity group. She heads the
team making investment decisions for each of the Index Funds, as well as for
the Socially Responsible Fund. Ms. Azema-Barac joined American General in Sep-
tember, 1999. Prior to that, she worked on the equity desk of US West Invest-
ment Management Company in Englewood, Colorado, where she managed an enhanced
equity portfolio.
Steven Guterman, Executive Vice President portfolio and manager of the Strate-
gic Income Fund, joined AGIM in 1998. Mr. Guterman served as Managing Director
at Salomon Brothers, Inc. from 1996 to 1998 and as Senior Portfolio Manager and
head of the U.S. Fixed Income Portfolio Group from 1990 to 1998.
Robert N. Kase, Portfolio Manager, who serves as the portfolio manager of the
Core Bond Fund and the U.S. Government Securities Fund, joined AGIM in 1998.
Mr. Kase has served as Investment Officer of Variable Annuity Life Insurance
Company and Senior Portfolio Manager of AGIM since 1998, and was Senior Portfo-
lio Manager with CL Capital Management, Inc. from 1992 to 1998.
Investment decisions for the High Yield Bond Fund are made by a team, headed by
Gordon Massie. Mr. Massie, Senior Vice President, joined AGIM in April 1998.
Previously, Mr. Massie was Director of High Yield Research at American General
Corporation from August 1985 to April 1998.
Investment decisions for the Municipal Money Market Fund are made by a team of
investment professionals at AGIM.
Teresa Moro, Portfolio Manager, who serves as the portfolio manager of the
Money Market Fund, has served as Vice President and Investment Officer of Amer-
ican General Series Portfolio Company and as portfolio manager of the American
General Series Portfolio Company Money Market Fund since 1991.
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53
<PAGE>
Neuberger Berman
Management, Inc. ("NBM") 605 Third Avenue, Second Floor, New York, New York
10158-0180
NBM is the subadvisor for the Mid Cap Value Fund. NBM and its predecessor firms
have specialized in the management of no-load mutual funds since 1950. As of
December 31, 1999, NBM and its affiliates managed approximately $54 billion in
aggregate net assets.
Robert I. Gendelman and S. Basu Mullick serve as co-managers of the Mid Cap
Value Fund. Messrs. Gendelman and Mullick are Vice Presidents of NBM and Mr.
Gendelman is a managing director of Neuberger Berman, LLC. Messrs. Gendelman
and Mullick have been associated with NBM since 1994 and 1998, respectively.
Prior to joining NBM, Mr. Mullick was Managing Director of Ark Asset Management
from 1993-1998.
T. Rowe Price Associates, Inc., ("T. Rowe Price") 100 East Pratt St.,
Baltimore, MD 21202
T. Rowe Price is the subadvisor for the Science & Technology Fund. Founded in
1937 by Thomas Rowe Price, Jr., the Baltimore-based investment management firm
is one of the nation's leading providers of no-load mutual funds for individual
investors and corporate retirement programs. As of September 30, 1999, T. Rowe
Price and its affiliates served as investment advisor to more than 75 stock,
bond, and money market funds and managed about $157.4 billion.
The Fund is managed by an investment advisory committee, chaired by Charles A.
Morris. Mr. Morris has day-to-day responsibility for managing the portfolio and
works with the committee to develop and execute the Fund's investment program.
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54
<PAGE>
Section III:
Investing in the North American Funds
Classes of Shares
There are three classes of shares of North American Funds offered by this pro-
spectus: Class A shares, Class B shares and Class C shares.
The initial investment minimum for all classes of shares per fund is $1,000.
For retirement plans and other automatic investment programs, the initial pur-
chase minimum is $50. You must maintain a minimum account balance of $500, or
$50 for retirement plans and other automatic investing programs. Purchases and
redemptions will be made at the share price next calculated by North American
Funds after the request is received in good order. Confirmations of all trans-
actions will be mailed to you promptly, and a copy will be sent to your broker
of record. North American Funds may refuse any request to purchase shares.
<TABLE>
<CAPTION>
Buying Fund Redeeming Fund
Shares Shares
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
By Mail Mail a check and account Send a written request to:
application to: North American Funds
North American Funds P.O. Box 8505
P.O. Box 8505 Boston, MA 02266-8505
Boston, MA 02266-8505
To add to an existing account, mail
a check with your account number:
North American Funds
P.O. Box 8505
Boston, MA 02266-8505
Overnight Mailing Address:
North American Funds
c/o Boston Financial
attn: Leadership Services
66 Brooks Dr.
Braintree, MA 02184
----------------------------------------------------------------------------------------------------------
By Wire Transfer For wire instructions, contact Yes, with a minimum of $1,000. For wire
Customer Service at 1-800-872-8037 instructions, contact Customer Service at
1-800-872-8037
----------------------------------------------------------------------------------------------------------
By Phone No Yes, simply call 1-800-872-8037 by 4:00
p.m. to receive that day's closing price
----------------------------------------------------------------------------------------------------------
Through Broker Dealers Yes, if a dealer agreement is in place Yes, if a dealer agreement is in place
----------------------------------------------------------------------------------------------------------
</TABLE>
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55
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Charges .Purchases of less .Shares are sold .Shares are sold
than without a front end without a front end
$1 million are sold sales charge. For sales charge. For
with a front end shares redeemed shares redeemed
sales charge within six years within one year
(see table on next there is a sales there is a 1% sales
page). charge at redemption charge at
.Purchases over $1 (see table on next redemption.
million are sold page). .Available for
without a front end .Available for purchases under $1
sales charge. For purchases of million.
such shares redeemed $250,000 or less.
within one year
there is a 1% back
end sales charge at
redemption.
.For B and C Shares,
the back end sales
charge is assessed
on the lesser of the
net asset value at
redemption, or the
original purchase
price.
-----------------------------------------------------------------------------------
Programs That .Rights of
Reduce Accumulation - you
Sales Charges will pay the sales
charge applicable to
your total account
balance in all
classes of shares.
.Statement of
intention -agree to
invest a certain
amount over 13
months and you will
pay the sales charge
based on your goal.
---------------------------------------------------------------------
.For an account
opened after 5-1-95,
in any class of
shares, there will
be no deferred sales
charge applied on
redemptions of up to
12% of the account
value annually
pursuant to a
systematic
withdrawal plan.
.For qualified group
retirement plans,
please see the
Statement of
Additional
Information (SAI)
for a more detailed
discussion.
-----------------------------------------------------------------------------------
</TABLE>
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56
<PAGE>
Sales Charge Tables
Class A Shares Sales
Charge Table
There is no front end sales charge for Class A shares of the Municipal Money
Market Fund or the Money Market Fund and no payments are made to broker-dealers
on sales of such shares. If Class A shares of these Funds are exchanged for
Class A shares of another Fund, the regular sales charge for Class A shares
will be charged.
<TABLE>
<CAPTION>
Amount of Sales Charge Sales Charge Concession to
Purchase Payment as a as a Broker Dealer as
Percentage of Percentage of a Percentage of
the Offering Price the Net Amount Offering Price
Invested
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000
Equity Funds 5.75% 6.10% 5.00%
Income Funds 4.75% 4.99% 4.00%
-----------------------------------------------------------------------------------
$50,000 but less than 4.75% 4.99% 4.00%
$100,000
-----------------------------------------------------------------------------------
$100,000 but less than 4.00% 4.17% 3.25%
$250,000
-----------------------------------------------------------------------------------
$250,000 but less than 3.00% 3.09% 2.50%
$500,000
-----------------------------------------------------------------------------------
$500,000 but less than $1 2.25% 2.30% 1.75%
million
-----------------------------------------------------------------------------------
$1 million or more None* None* See Below**
-----------------------------------------------------------------------------------
</TABLE>
*A CDSC (back end sales charge) may apply.
** 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 ,
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.
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57
<PAGE>
Class B Shares Sales Charge Table*
<TABLE>
<CAPTION>
Year(s) Since Purchase Deferred Sales Charge
as Percentage of
Amount Redeemed
--------------------------------------------------------------
<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>
Class B shares purchased on or after October 1, 1997 will automatically convert
into Class A shares eight years after the calendar month in which a sharehold-
er's order to purchase the shares was accepted.
Class C Shares*
Class C shares are offered for sale at net asset value and are offered for pur-
chases of less than $1 million. Class C shares are sold without a front end
sales charge. Class C shares are subject to a deferred sales charge of 1% of
the dollar amount subject thereto during the first year after purchase.
Class C shares will be redeemed or exchanged in order of the date purchased,
with the shares purchased earlier being redeemed or exchanged first, unless a
shareholder specifically requests that specific shares be redeemed or
exchanged.
Redemption in Kind
The Funds reserve the right to pay redemption proceeds in whole or in part by a
distribution "in kind" of securities held by the Fund.
Payment Following Redemption
Each Fund will normally send the proceeds from a redemption (less any applica-
ble deferred sales charge) on the next business day, but may delay payment for
up to seven days.
Payment may be delayed if the shares to be redeemed were purchased by a check
that has not cleared. Each Fund may suspend the right of redemption and may
postpone payment for more than seven days when the New York Stock Exchange is
closed for other than weekends or holidays, or if permitted by the rules of, or
action by, the SEC.
* Any shares in the redeeming shareholder's account that can be redeemed with-
out charge will be redeemed prior to those subject to a charge. Only time of
ownership spent in Funds other than the Municipal Money Market Fund and the
Money Market Fund counts towards determining the applicable deferred sales
charge.
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58
<PAGE>
Pricing of Fund Shares
The public offering price of the Class A shares of each Fund is the net asset
value per share (next determined following receipt of a properly completed
order) plus, in the case of all Funds except either the Municipal Money Market
Fund or 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 a properly completed order).
The net asset value of the shares of each class of each Fund is calculated sep-
arately and, except as described below, is determined once daily as of the
close of regularly scheduled trading on the New York Stock Exchange (generally
4:00 p.m., Eastern Time). Net asset value per share of each class of each Fund
is calculated by dividing the value of the portion of the Fund'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 Fund's securities
holdings will not materially affect the current net asset value of the shares
of the Fund and (ii) days when the New York Stock Exchange is closed (for exam-
ple, weekends and national holidays). Generally, trading in non-U.S. securi-
ties, as well as U.S. Government securities and money market instruments, is
substantially completed each day at various times prior to the close of regu-
larly scheduled trading on the New York Stock Exchange. The values of such
securities used in computing the net asset value of the shares of a class of a
Fund 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 subadvisors under procedures estab-
lished by the Trustees.
Shares of the Funds are available at the net asset value to investors purchas-
ing shares of the Funds with redemption proceeds from other mutual fund com-
plexes on which the investor has paid for front end sales charge or was subject
to a deferred sales charge, whether or not paid, if such redemption occurred
more than 60 days prior to such purchase. The Distributor will require satis-
factory evidence of your qualification of this waiver. Please call for more
information. The redemption of the shares from the other mutual fund is, for
federal income tax purposes, a sale upon which a gain or loss may be realized.
All instruments held by the Municipal Money Market Fund, Money Market Fund and
short-term debt instruments with a remaining maturity of 60 days or less held
by the other Funds are valued on an amortized cost basis.
Unless you request cash payment, all dividends and distributions will be rein-
vested. All Funds declare and pay capital gains annually.
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59
<PAGE>
Dividends and Distributions from North American Funds
These Funds declare and pay income dividends annually:
.International Small Cap Fund
.Global Equity Fund
.Small Cap Growth Fund
.Mid Cap Growth Fund
.Large Cap Growth Fund
.Balanced Fund
.Science & Technology Fund
These Funds declare and pay income dividends semi-annually:
.International Equity Fund
.Growth & Income Fund
These Funds declare income dividends daily and pay quarterly:
.Conservative Growth Lifestyle Fund
.Aggressive Growth Lifestyle Fund
.Mid Cap Value Fund
.Moderate Growth Lifestyle Fund
.Socially Responsible Fund
.Small Cap Index Fund
.Stock Index Fund
These Funds declare income dividends daily and pay monthly:
.Strategic Income Fund
.Core Bond Fund
.U.S. Government Securities Fund
.Money Market Fund
.Municipal Money Market Fund
.Municipal Bond Fund
.High Yield Bond Fund
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60
<PAGE>
Taxes
It is expected that each Fund of the Trust will qualify as a "regulated invest-
ment company" under the Code and that it 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.
A Fund's distributions derived from interest, dividends and certain other
income, including gains from investments that the Fund held for one year or
less, will generally result in taxable ordinary income to the shareholders of
the Fund. Distributions of net gains from investments held by a Fund for more
than one year are taxable as long-term capital gains (generally at a 20% rate
for noncorporate shareholders). In the case of the Municipal Bond Fund and the
Municipal Money Market Fund dividends designated as "exempt-interest dividends"
will constitute tax exempt income. Distributions will be treated as described
above for federal income tax purposes whether they are paid in cash or rein-
vested in additional shares regardless of how long a shareholder has held
shares in the Fund. Distributions are taxed as described in this paragraph even
if such distributions economically represent a return of a particular share-
holder's investment. Distributions that represent a return of a particular
shareholder's investment are likely to occur in respect of shares purchased at
a time when a Fund's net asset value reflects gains that are either unrealized,
or realized but not distributed.
The redemption, sale or exchange of Fund shares (including the exchange of
shares of one Fund 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 disposi-
tion of shares of the Fund will be taxed as a long-term capital gain or loss if
the shares are capital assets in the shareholder's hands and if the shareholder
held the shares for more than one year (such gains are generally taxed at a 20%
rate for noncorporate shareholders). Investors in the Municipal Bond or the
Municipal Money Market Fund who receive social security or railroad retirement
benefits should consult with their tax adviser to determine what effect, if
any, an investment in such fund may have on the federal taxation of their bene-
fits. In addition, an investment in the Municipal Bond Fund or the Municipal
Money Market Fund may result in liability for federal alternative minimum tax,
both for individual and corporate shareholders.
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
Moreover, in the case of the Municipal Bond Fund and the Municipal Money Market
Fund, each of those Funds may invest a portion of its assets in securities that
generate income that is not exempt from federal income tax. In addition, the
exemption of exempt-interest dividend income from regular federal income taxa-
tion 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 hold-
ings or obligations issued by that state or its political subdivisions and
instrumentalities.
Descriptions of tax consequences set forth in this Prospectus and in the State-
ment of Additional Information are intended to be a general guide. Investors
should consult their tax advisers with respect to the specific tax consequences
of an investment in a Fund, including the effect and applicability of state,
local, foreign, and other tax laws and the possible effects of changes in fed-
eral or other tax laws. This discussion is not intended as a substitute for
careful tax planning.
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61
<PAGE>
Rule 12b-1 Fees
The Trust has adopted a distribution plan under Rule 12b-1 of the Investment
Company Act of 1940, as amended, that allows the Funds to pay distribution fees
for the sale and distribution of fund shares. Portions of the fees are used to
provide payments for services provided to shareholders ("service fees"), as
indicated below.
Class A shares of each Fund, except the Municipal Money Market Fund, are sub-
ject to a Rule 12b-1 fee of up to .35% of average daily net assets, five- sev-
enths of which (.25%) is a "service fee." There are no Rule 12b-1 fees on the
Municipal Money Market Fund or the Money Market Fund.
Class B shares of each Fund except the Municipal Money Market Fund are subject
to a Rule 12b-1 fee of up to 1.00% of average annual net assets, one-fourth
(.25%) of this is a "service fee."
Class C shares of each Fund except the Municipal Money Market Fund and the
Money Market Fund are subject to a Rule 12b-1 fee of up to 1.00% of average
annual net assets, one-fourth (.25%) of this is a "service fee."
For the Aggressive Growth Lifestyle Fund, the Moderate Growth Lifestyle Fund
and the Conservative Growth Lifestyle Fund, the Trustees presently limit pay-
ments under the Rule 12b-1 Plan to .10%, .75% and .75% of average daily net
assets of Class A, Class B and Class C shares, respectively.
Because these fees are paid out of the Fund's assets on an ongoing basis, over
time they will increase the cost of your investment and may cost you more than
paying other types of sales charges. The higher fees for Class B and Class C
shares may therefore cost you more than paying the maximum permitted front end
sales charge on Class A Shares.
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62
<PAGE>
Account Services
To use any of these programs, simply fill out the appropriate section of your
account application, or request the appropriate form.
Automatic Dividend Diversification
With this program, you can have all dividends and other distributions from one
Fund automatically invested in the same class of shares of another Fund.
Automatic Investment Plan
Shareholders can set up an Automatic Investment Plan. Once each month the
shareholder's account will be debited the amount (at least $50) specified by
the shareholder.
Checkwriting
Checkwriting is available to Class A and Class C shareholders of both the
Municipal Money Market Fund and the Money Market Fund. Simply request this on
your account application, and complete a signature card, and you will receive a
book of blank checks. The minimum amount of a check is $100. When a check is
presented for payment, enough shares will be redeemed to cover the amount of
the check and any applicable deferred sales charge. If the amount of the check
plus the sales charge is more than the account value, the check will be
returned unpaid.
Exchange Privilege
Shareholders may make free unlimited exchanges by mail or telephone within
classes of shares without any sales charge (except that Class A shares of the
Municipal Money Market Fund are subject to a sales charge upon exchange).
Shares of one class may not be exchanged for shares of any other class of any
Fund. Be aware that exchanges are regarded as sales for federal and state
income tax purposes and could result in a gain or loss, depending on the origi-
nal cost of shares exchanged. Exchanges usually occur on the same day they are
requested. The terms of the exchange privilege may change and the privilege may
be revoked at any time without notice.
The Fund will not be responsible for any losses resulting from unauthorized
telephone transactions if it follows reasonable procedures designed to verify
the identify of the caller. The Fund will request personal or other information
from the caller, and will record calls. By establishing an account with the
Fund, you consent to all recording of telephone calls.
You may make exchanges over the telephone by calling 1-800-872-8037.
Reinstatement Privilege
If you redeem Class A shares (under $1 million) and reinvest within 90 days,
you will not have to pay a sales charge. If you redeem Class A shares over $1
million, or Class B or C shares and pay a deferred sales charge and then rein-
vest within 90 days, your account will be credited the amount of the deferred
sales charge.
Systematic Investing
Your shares of any class of either the Municipal Money Market Fund or the Money
Market Fund can be exchanged monthly for shares of the same class of other
Funds. An exchange of at least $50 per exchange will be made around the 15th of
each month in accordance with your instructions. This program takes advantage
of dollar cost averaging.
Systematic Withdrawal Plan
If you have an account balance of at least $10,000, you can set up a plan to
have redemptions paid to you, or someone you designate, on a monthly, quarter-
ly, semi-annual or annual basis. You can withdraw up to 12% of the account
value annually, if a monthly plan, up to 1% per month, without a deferred sales
charge. If you request this service after completing our application and pay-
ments are to be made to someone other than yourself, you will have to provide a
signature guarantee. Redemption checks are generally mailed within two days
after redemption. The availability of this service may end, and a fee of up to
$5 per withdrawal may be charged with 30 days written notice to you.
Transfer of Shares
You may transfer Fund shares to family members and others at any time without a
sales charge. Consult your tax adviser concerning such transfers.
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63
<PAGE>
Financial Highlights
[LOGO OF FINANCIAL HIGHLIGHTS]
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five years or, if shorter, the period of a
Fund's operations. Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the return that an
investor would have earned or lost on an investment in a Fund (assuming
reinvestment of all dividends and distributions). This information has been
derived from each Fund's financial statements, which have been audited by
either PricewaterhouseCoopers LLP (Growth & Income Fund, Large Cap Growth Fund,
Mid Cap Growth Fund, Small Cap Growth Fund, Global Equity Fund, International
Equity Fund, International Small Cap Fund, Balanced Fund, Core Bond Fund,
Municipal Bond Fund, Strategic Income Fund, U.S. Government Securities Fund and
the Money Market Fund) or by Ernst & Young LLP (Mid Cap Value Fund, Small Cap
Index Fund, Socially Responsible Fund, Stock Index Fund, Aggressive Growth
LifeStyle Fund, Conservative Growth LifeStyle Fund, Moderate Growth LifeStyle
Fund, High Yield Bond Fund and the Municipal Money Market Fund). The annual
report of PricewaterhouseCoopers LLP, along with the above listed funds
financial statements, is included in the Trust's annual report, which is
available upon request. The annual report of Ernst & Young LLP, along with the
above listed funds financial statements, is included in the annual report of
American General Series Portfolio 2, and is also available upon request.
-------
64
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Growth & Income Fund
--------------------------------------------------
Class A
--------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96 10/31/95*
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $24.26 $21.77 $17.56 $14.72 $13.09
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.03 0.08 0.14 0.18 0.26
Net realized and unrealized
gain/(loss) on investments
and foreign currency 5.45 4.14 5.26 2.99 1.90
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 5.48 4.22 5.40 3.17 2.16
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - - (0.15) (0.21) (0.23)
Distributions from realized
capital gains (0.96) (1.70) (1.04) (0.12) (0.30)
Distributions in excess of
net investment income - (0.03) - - -
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.96) (1.73) (1.19) (0.33) (0.53)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $28.78 $24.26 $21.77 $17.56 $14.72
--------------------------------------------------------------------------------
Total Return 23.11% 20.82% 31.95% 21.84% 17.28%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
(000's) $37,210 $42,916 $34,186 $18,272 $12,180
--------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.34% 1.34% 1.34% 1.34% 1.34%
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 0.11% 0.34% 0.66% 1.10% 1.91%
--------------------------------------------------------------------------------
Portfolio turnover rate 28% 18% 39% 49% 40%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 1.49% 1.45% 1.50% 1.56% 1.69%
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Growth & Income Fund
---------------------------------------------------
Class B
---------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96* 10/31/95*
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $24.01 $21.67 $17.50 $14.69 $13.08
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.15) (0.07) 0.01 0.07 0.16
Net realized and
unrealized gain/(loss) on
investments and foreign
currency 5.38 4.11 5.23 2.99 1.94
<CAPTION>
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 5.23 4.04 5.24 3.06 2.10
<CAPTION>
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - - (0.03) (0.13) (0.19)
Distributions from
realized capital gains (0.96) (1.70) (1.04) (0.12) (0.30)
<CAPTION>
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.96) (1.70) (1.07) (0.25) (0.49)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $28.28 $24.01 $21.67 $17.50 $14.69
--------------------------------------------------------------------------------
Total Return 22.28% 20.04% 31.40% 21.08% 16.73%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
(000's) $104,695 $75,574 $54,871 $34,740 $19,052
--------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.99% 1.99% 1.99% 1.99% 1.99%
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets (0.54%) (0.32%) 0.01% 0.45% 1.14%
--------------------------------------------------------------------------------
Portfolio turnover rate 28% 18% 39% 49% 40%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 2.13% 2.10% 2.15% 2.20% 2.33%
--------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
65
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Growth & Income Fund
-------------------------------------------------
Class C
-------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $24.10 $21.75 $17.56 $14.71 $13.08
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) (0.15) (0.07) 0.01 0.07 0.18
Net realized and unrealized
gain/(loss) on investments
and foreign currency 5.40 4.12 5.25 3.00 1.90
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 5.25 4.05 5.26 3.07 2.08
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - - (0.03) (0.10) (0.15)
Distributions from realized
capital gains (0.96) (1.70) (1.04) (0.12) (0.30)
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.96) (1.70) (1.07) (0.22) (0.45)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $28.39 $24.10 $21.75 $17.56 $14.71
---------------------------------------------------------------------------------
Total Return 22.28% 20.00% 31.37% 21.12% 16.56%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $156,056 $122,395 $98,250 $74,825 $63,154
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.99% 1.99% 1.99% 1.99% 1.99%
---------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets (0.54%) (0.31%) 0.01% 0.45% 1.26%
---------------------------------------------------------------------------------
Portfolio turnover rate 28% 18% 39% 49% 40%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.13% 2.10% 2.13% 2.20% 2.26%
---------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Large Cap Growth Fund
(formerly Growth Equity Fund)
------------------------------------------------------------------------------------
Class A Class B
----------------------------------------- -----------------------------------------
Year Year Year 3/04/96* Year Year Year 3/04/96*
Ended Ended Ended to Ended Ended Ended to
10/31/99 ** 10/31/98 10/31/97 10/31/96 10/31/99 ** 10/31/98 10/31/97 10/31/96
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $17.73 $17.01 $13.78 $12.50 $17.46 $16.90 $13.73 $12.50
---------------------------------------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.19) (0.07) (0.03) 0.28 (0.31) (0.18) (0.13) 0.24
Net realized and
unrealized gain/(loss)
on investments and
foreign currency 5.05 2.22 3.45 1.00 4.96 2.17 3.46 0.99
<CAPTION>
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total from investment
operations 4.86 2.15 3.42 1.28 4.65 1.99 3.33 1.23
<CAPTION>
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - - (0.19) - - - (0.16) -
Distributions from
capital gains (1.15) (1.43) - - (1.15) (1.43) - -
<CAPTION>
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total distributions (1.15) (1.43) (0.19) (1.15) (1.43) (0.16)
---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $21.44 $17.73 $17.01 $13.78 $20.96 $17.46 $16.90 $13.73
---------------------------------------------------------------------------------------------------------------
Total Return 28.57% 13.85% 25.13% 10.24% 27.77%+ 12.93% 24.50% 9.84%+
---------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------------------------------------
Net assets, end of
period (000's) $5,656 $3,919 $3,053 $2,244 $17,171 $11,659 $9,040 $4,748
---------------------------------------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 1.65% 1.65% 1.65% 1.65%# 2.30% 2.30% 2.30% 2.30%#
---------------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets (0.94%) (0.43%) (0.17%) 4.11%# (1.58%) (1.07%) (0.82%) 4.18%#
---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 145% 115% 181% 450% 145%# 115% 181% 450%#
---------------------------------------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 1.90% 1.91% 2.28% 2.71%# 2.52% 2.56% 2.78% 3.06%#
---------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations
** Net investment income per share has been calculated using the average share
method
# Annualized
+ Non-annualized
-------
66
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Large Cap Growth Fund
(formerly Growth Equity Fund)
-----------------------------------------
Class C
-----------------------------------------
Year Year Year 3/04/96*
Ended Ended Ended to
10/31/99 ** 10/31/98 10/31/97 10/31/96
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.44 $16.89 $13.73 $12.50
--------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) (0.31) (0.20) (0.13) 0.24
Net realized and unrealized
gain/(loss) on investments and
foreign currency 4.95 2.18 3.46 0.99
<CAPTION>
-----------------------------------------
<S> <C> <C> <C> <C>
Total from investment operations 4.64 1.98 3.33 1.23
<CAPTION>
-----------------------------------------
<S> <C> <C> <C> <C>
Distributions
Dividends from net investment income - - (0.17) -
Distributions from capital gains (1.15) (1.43) - -
<CAPTION>
-----------------------------------------
<S> <C> <C> <C> <C>
Total distributions (1.15) (1.43) (0.17) -
--------------------------------------------------------------------------------
Net Asset Value, End of Period $20.93 $17.44 $16.89 $13.73
--------------------------------------------------------------------------------
Total Return 27.75% 12.87% 24.50% 9.84%+
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period (000's) $19,463 $12,965 $12,766 $6,494
--------------------------------------------------------------------------------
Ratio of total expenses to average
net assets 2.30% 2.30% 2.30% 2.30%#
--------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (1.58%) (1.06%) (0.82%) 4.13%#
--------------------------------------------------------------------------------
Portfolio turnover rate 145% 115% 181% 450%#
--------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.52% 2.56% 2.75% 2.96%#
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mid Cap Growth Fund
(formerly Small/Mid Cap Fund)
---------------------------------------------------------------------------------------
Class A Class B
----------------------------------------- -------------------------------------------
Year Year Year 3/04/96* Year Year Year 3/04/96*
Ended Ended Ended to Ended Ended Ended to
10/31/99 ** 10/31/98 10/31/97 10/31/96 10/31/99 ** 10/31/98 10/31/97** 10/31/96
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $16.09 $15.51 $12.62 $12.50 $15.77 $15.33 $12.58 $12.50
--------------------------------------------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.21) (0.15) (0.14) (0.02) (0.32) (0.25) (0.23) (0.05)
Net realized and
unrealized gain/(loss)
on investments and
foreign currency 4.12 0.97 3.03 0.14 4.02 0.93 2.98 0.13
<CAPTION>
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total from investment
operations 3.91 0.82 2.89 0.12 3.70 0.68 2.75 0.08
<CAPTION>
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributions
Distributions from
capital gains (1.48) (0.24) - - (1.48) (0.24) - -
--------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $18.52 $16.09 $15.51 $12.62 $17.99 $15.77 $15.33 $12.58
--------------------------------------------------------------------------------------------------------------------
Total Return 25.50% 5.51% 22.90% 0.96%+ 24.62% 4.65% 21.86% 0.64%+
--------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------------
Net assets, end of
period (000's) $5,970 $4,814 $4,170 $2,966 $17,184 $13,972 $11,802 $6,659
--------------------------------------------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 1.68% 1.68% 1.68% 1.68%# 2.33% 2.33% 2.33% 2.33%#
--------------------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets (1.15%) (0.90%) (1.02%) (0.40%)# (1.80%) (1.55%) (1.67%) (1.05%) #
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 181% 162% 145% 92%# 181% 162% 145% 92%#
--------------------------------------------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 1.89% 1.93% 2.24% 2.69%# 2.54% 2.58% 2.79% 3.05%#
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations
# Annualized
+ Non-annualized
** Net investment income per share has been calculated using the average share
method
-------
67
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mid Cap Growth Fund
(formerly Small/Mid Cap Fund)
------------------------------------------------
Class C
------------------------------------------------
Year Ended Year Ended Year Ended 3/04/96* to
10/31/99 ** 10/31/98 10/31/97** 10/31/96
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $15.79 $15.35 $12.59 $12.50
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) (0.32) (0.25) (0.23) (0.05)
Net realized and unrealized
gain/(loss) on investments
and foreign currency 4.03 0.93 2.99 0.14
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C>
Total from investment
operations 3.71 0.68 2.76 0.09
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C>
Distributions
Distributions from capital
gains (1.48) (0.24) - -
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $18.02 $15.79 $15.35 $12.59
---------------------------------------------------------------------------------
Total Return 24.65% 4.64% 21.92% 0.72%+
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $18,939 $16,221 $13,471 $8,241
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 2.33% 2.33% 2.33% 2.33%#
---------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets (1.80%) (1.55%) (1.67%) (1.05%)#
---------------------------------------------------------------------------------
Portfolio turnover rate 181% 162% 145% 92%#
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.54% 2.58% 2.78% 3.04%#
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mid Cap Value Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.06 -
Net realized and unrealized gain/(loss) on
securities 1.97 1.87
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 2.03 1.87
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.05) (0.02)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.05) (0.02)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $11.98 $11.85
--------------------------------------------------------------------------------
Total Return 20.23% 18.71%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.29% 2.04%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 2.43% 2.77%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 0.51% (0.26%)
--------------------------------------------------------------------------------
Portfolio turnover rate 177% 177%
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 144 384
--------------------------------------------------------------------------------
Net assets, end of period (000's) $1,728 $4,555
--------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations
# Annualized
+ Non-annualized
** Net investment income per share has been calculated using the average share
method
-------
68
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap Growth Fund
(formerly Emerging Growth Fund)
-----------------------------------------------------------------------
Class A Class B Class C
--------------------- --------------------- ---------------------
Year 1/06/98* Year 1/06/98* Year 1/06/98*
Ended to Ended to Ended to
10/31/99 ** 10/31/98 10/31/99 ** 10/31/98 10/31/99 ** 10/31/98
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $8.88 $10.00 $8.83 $10.00 $8.84 $10.00
----------------------------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.15) (0.08) (0.21) (0.12)*** (0.21) (0.12)**
Net realized and
unrealized gain/(loss)
on investments and
foreign currency 4.08 (1.04) 3.95 (1.05) 3.94 (1.04)
<CAPTION>
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total from investment
operations 3.93 (1.12) 3.74 (1.17) 3.73 (1.16)
----------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $12.81 $8.88 $12.57 $8.83 $12.57 $8.84
----------------------------------------------------------------------------------------------------
Total Return 44.26% (11.20%)+ 42.36% (11.70%)+ 42.19% (11.60%)+
----------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------------
Net assets, end of
period (000's) $224 $146 $660 $263 $440 $238
----------------------------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 1.70% 1.70%# 2.35% 2.35%# 2.35% 2.35%#
----------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets (1.43%) (1.00%)# (2.04%) (1.76%)# (2.03%) (1.67%)#
----------------------------------------------------------------------------------------------------
Portfolio turnover rate 129% 52%+ 129% 52%+ 129% 52%+
----------------------------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 6.96% 15.48%# 7.58% 16.48%# 7.60% 15.78%#
----------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations
# Annualized
+ Non-annualized
** Net investment income per share has been calculated using the average share
method
-------
69
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap Index Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.10 0.02
Net realized and unrealized gain/(loss) on
securities 1.03 1.03
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 1.13 1.05
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.10) (0.02)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.10) (0.02)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $11.03 $11.03
--------------------------------------------------------------------------------
Total Return 11.32% 10.53%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.83% 1.58%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 1.69% 2.37%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 0.97% 0.23%
--------------------------------------------------------------------------------
Portfolio turnover rate 48% 48%
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 263 305
--------------------------------------------------------------------------------
Net assets, end of period (000's) $2,900 $3,361
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Socially Responsible Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.10 0.02
Net realized and unrealized gain/(loss) on
securities 2.15 2.13
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 2.25 2.15
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.10) (0.02)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.10) (0.02)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $12.15 $12.13
--------------------------------------------------------------------------------
Total Return 22.53% 21.50%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.80% 1.55%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 1.97% 2.49%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 0.87% 0.09%
--------------------------------------------------------------------------------
Portfolio turnover rate 24% 24%
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 137 243
--------------------------------------------------------------------------------
Net assets, end of period (000's) $1,663 $2,943
--------------------------------------------------------------------------------
</TABLE>
-------
70
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Stock Index Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.11 0.02
Net realized and unrealized gain/(loss) on
securities 2.32 2.23
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 2.43 2.25
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.11) (0.02)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.11) (0.02)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $12.32 $12.23
--------------------------------------------------------------------------------
Total Return 24.36% 22.55%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.82% 1.57%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 1.53% 1.98%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 1.08% 0.37%
--------------------------------------------------------------------------------
Portfolio turnover rate 14% 14%
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 457 1,229
--------------------------------------------------------------------------------
Net assets, end of period (000's) $5,634 $15,040
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Equity Fund
--------------------------------------------------
Class A
--------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96* 10/31/95
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $16.43 $16.32 $14.50 $13.84 $14.82
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.08 0.02 0.06 (0.04) -
Net realized and unrealized
gain/(loss) on investments
and foreign currency 0.82 1.34 3.45 0.91 (0.54)
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.90 1.36 3.51 0.87 (0.54)
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - (0.22) (0.05) (0.21) -
Distributions from realized
capital gains (1.21) (1.03) (1.64) - (0.44)
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (1.21) (1.25) (1.69) (0.21) (0.44)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $16.12 $16.43 $16.32 $14.50 $13.84
--------------------------------------------------------------------------------
Total Return 5.60% 8.90% 26.10% 6.33% (3.52%)
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
(000's) $12,757 $31,055 $30,960 $25,924 $23,894
--------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.75% 1.75% 1.75% 1.75% 1.75%
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 0.47% 0.09% 0.33% (0.30%) 0.03%
--------------------------------------------------------------------------------
Portfolio turnover rate 38% 20% 28% 165% 57%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 1.84% 1.75% 1.81% 1.83% 1.92%
--------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
71
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Equity Fund
----------------------------------------------------
Class B
----------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97* 10/31/96* 10/31/95*
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $16.24 $16.14 $14.36 $13.73 $14.79
---------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.04) (0.11) (0.05) (0.14) (0.09)
Net realized and
unrealized gain/(loss)
on investments and
foreign currency 0.84 1.35 3.47 0.91 (0.53)
<CAPTION>
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.80 1.24 3.42 0.77 (0.62)
<CAPTION>
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - (0.11) (0.14) -
Distributions from
realized capital gains (1.21) (1.03) (1.64) - (0.44)
<CAPTION>
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (1.21) (1.14) (1.64) (0.14) (0.44)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $15.83 $16.24 $16.14 $14.36 $13.73
---------------------------------------------------------------------------------
Total Return 5.01% 8.17% 25.63% 5.64% (4.09%)
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $25,381 $30,287 $31,833 $25,661 $23,317
---------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 2.40% 2.40% 2.40% 2.40% 2.40%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets (0.25%) (0.55%) (0.32%) (0.95%) (0.61%)
---------------------------------------------------------------------------------
Portfolio turnover rate 38% 20% 28% 165% 57%
---------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 2.50% 2.40% 2.47% 2.48% 2.58%
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Equity Fund
--------------------------------------------------
Class C
--------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96* 10/31/95
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $16.30 $16.19 $14.41 $13.73 $14.79
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.04) (0.10) (0.05) (0.14) (0.09)
Net realized and unrealized
gain/(loss) on
investments and foreign
currency 0.84 1.35 3.47 0.92 (0.53)
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.80 1.25 3.42 0.78 (0.62)
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - (0.11) - (0.10) -
Distributions from realized
capital gains (1.21) (1.03) (1.64) - (0.44)
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (1.21) (1.14) (1.64) (0.10) (0.44)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $15.89 $16.30 $16.19 $14.41 $13.73
--------------------------------------------------------------------------------
Total Return 4.99% 8.21% 25.54% 5.70% (4.09%)
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
(000's) $45,201 $57,774 $61,245 $64,830 $83,340
--------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 2.40% 2.40% 2.40% 2.40% 2.40%
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets (0.24%) (0.56%) (0.32%) (0.95%) (0.64%)
--------------------------------------------------------------------------------
Portfolio turnover rate 38% 20% 28% 165% 57%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 2.50% 2.40% 2.46% 2.48% 2.53%
--------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
72
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Equity Fund
-----------------------------------------------------
Class A
-----------------------------------------------------
Year Year Year Year 1/09/95*
Ended Ended Ended Ended to
10/31/99 ** 10/31/98 10/31/97 10/31/96** 10/31/95
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.83 $10.81 $11.35 $10.11 $10.00
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.02 0.03 0.06 0.09 0.06
Net realized and
unrealized gain/(loss)
on investments and
foreign currency 2.07 0.02 0.35 1.33 0.08
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 2.09 0.05 0.41 1.42 0.14
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - (0.13) (0.19) (0.08) (0.03)
Distributions from
realized capital gains (0.03) (0.90) (0.76) (0.10) -
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.03) (1.03) (0.95) (0.18) (0.03)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $11.89 $9.83 $10.81 $11.35 $10.11
--------------------------------------------------------------------------------
Total Return 21.33% 0.67% 3.55% 14.25% 1.37%+
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of
period (000's) $3,997 $3,769 $4,461 $4,732 $6,897
--------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 1.75% 1.75% 1.75% 1.75% 1.75%#
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to
average net assets 0.18% 0.44% 0.97% 0.84% 0.70%#
--------------------------------------------------------------------------------
Portfolio turnover rate 142% 173% 146% 170% 69%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 1.98% 1.87% 1.96% 1.97% 2.18%#
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Equity Fund
-------------------------------------------------------
Class B
-------------------------------------------------------
Year Year Year Year 1/09/95*
Ended Ended Ended Ended to
10/31/99 ** 10/31/98 10/31/97** 10/31/96** 10/31/95
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.77 $10.75 $11.30 $10.10 $10.00
----------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.05) (0.02) 0.03 0.06 0.01
Net realized and
unrealized gain/(loss)
on investments and
foreign currency 2.05 0.00 0.31 1.30 0.12
<CAPTION>
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 2.00 (0.02) 0.34 1.36 0.13
<CAPTION>
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - (0.06) (0.13) (0.05) (0.03)
Distributions from
realized capital gains (0.03) (0.90) (0.76) (0.11) -
<CAPTION>
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.03) (0.96) (0.89) (0.16) (0.03)
----------------------------------------------------------------------------------
Net Asset Value, End of
Period $11.74 $9.77 $10.75 $11.30 $10.10
----------------------------------------------------------------------------------
Total Return 20.53% (0.03%) 2.92% 13.58% 1.28%+
----------------------------------------------------------------------------------
Ratios/Supplemental Data
----------------------------------------------------------------------------------
Net assets, end of
period (000's) $14,269 $14,030 $16,334 $15,217 $8,421
----------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 2.40% 2.40% 2.40% 2.40% 2.40%#
----------------------------------------------------------------------------------
Ratio of net investment
income (loss) to
average net assets (0.45%) (0.18%) 0.32% 0.57% 0.15%#
----------------------------------------------------------------------------------
Portfolio turnover rate 142% 173% 146% 170% 69%
----------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 2.63% 2.52% 2.54% 2.60% 2.93%#
----------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations
# Annualized
+ Non-annualized
** Net investment income per share has been calculated using the average share
method
-------
73
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Equity Fund
-------------------------------------------------------
Class C
-------------------------------------------------------
Year Year Year Year 1/09/95*
Ended Ended Ended Ended to
10/31/99 ** 10/31/98 10/31/97** 10/31/96** 10/31/95
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.77 $10.76 $11.31 $10.10 $10.00
----------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.05) (0.02) 0.03 0.06 0.01
Net realized and
unrealized gain/(loss)
on Investments and
foreign currency 2.05 (0.01) 0.31 1.30 0.12
<CAPTION>
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 2.00 (0.03) 0.34 1.36 0.13
<CAPTION>
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income - (0.06) (0.13) (0.05) (0.03)
Distributions from
realized capital gains (0.03) (0.90) (0.76) (0.10) -
<CAPTION>
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.03) (0.96) (0.89) (0.15) (0.03)
----------------------------------------------------------------------------------
Net Asset Value, End of
Period $11.74 $9.77 $10.76 $11.31 $10.10
----------------------------------------------------------------------------------
Total Return 20.53% (0.13%) 2.91% 13.63% 1.28%+
----------------------------------------------------------------------------------
Ratios/Supplemental Data
----------------------------------------------------------------------------------
Net assets, end of
period (000's) $6,680 $7,960 $8,460 $9,076 $6,324
----------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 2.40% 2.40% 2.40% 2.40% 2.40%#
----------------------------------------------------------------------------------
Ratio of net investment
income (loss) to
average net assets (0.49%) (0.19%) 0.32% 0.51% 0.13%#
----------------------------------------------------------------------------------
Portfolio turnover rate 142% 173% 146% 170% 69%
----------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 2.62% 2.52% 2.57% 2.60% 2.93%#
----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Small Cap Fund
----------------------------------------------------------------------------------
Class A Class B
----------------------------------------- --------------------------------------
Year Year Year 3/04/96* Year Year Year 3/04/96*
Ended Ended Ended to Ended Ended Ended to
10/31/99 ** 10/31/98 10/31/97 10/31/96 10/31/99 10/31/98 10/31/97 10/31/96
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $13.91 $13.86 $13.43 $12.50 $13.66 $13.71 $13.37 $12.50
--------------------------------------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) (0.14) (0.02) (0.03) 0.05 (0.27) (0.12) (0.11) (0.01)
Net realized and
unrealized gain/(loss)
on investments and
foreign currency 5.06 0.07 0.46 0.88 4.96 0.07 0.45 0.88
-------------------------------------------------------------------------------------
Total from investment
operations 4.92 0.05 0.43 0.93 4.69 (0.05) 0.34 0.87
--------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $18.83 $13.91 $13.86 $13.43 $18.35 $13.66 $13.71 $13.37
--------------------------------------------------------------------------------------------------------------
Total Return 35.37% 0.36% 3.20% 7.44%+ 34.33% (0.36%) 2.54% 6.96%+
--------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------------------------------------
Net assets, end of
period (000's) $2,309 $2,173 $3,225 $2,120 $7,417 $7,073 $7,369 $5,068
--------------------------------------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 1.90% 1.90% 1.90% 1.90%# 2.55% 2.55% 2.55% 2.55%#
--------------------------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets (0.87%) (0.12%) (0.19%) (0.50%)# (1.53%) (0.79%) (0.84%) (0.15%)#
--------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 202% 54% 75% 67%# 202% 54% 75% 67%#
--------------------------------------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 2.24% 2.23% 2.46% 3.07%# 2.89% 2.88% 2.98% 3.27%#
--------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations
# Annualized
+ Non-annualized
** Net investment income per share has been calculated using the average share
method
-------
74
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Small Cap Fund
--------------------------------------
Class C
--------------------------------------
Year Year Year 3/04/96*
Ended Ended Ended to
10/31/99 10/31/98 10/31/97 10/31/96
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.66 $13.71 $13.37 $12.50
--------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) (0.31) (0.12) (0.11) (0.01)
Net realized and unrealized
gain/(loss) on investments and
foreign currency 5.02 0.07 0.45 0.88
----------------------------------
Total from investment operations 4.71 (0.05) 0.34 0.87
--------------------------------------------------------------------------------
Net Asset Value, End of Period $18.37 $13.66 $13.71 $13.37
--------------------------------------------------------------------------------
Total Return 34.48% (0.36%) 2.54% 6.96%+
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period (000's) $5,972 $6,195 $7,025 $5,517
--------------------------------------------------------------------------------
Ratio of total expenses to average net
assets 2.55% 2.55% 2.55% 2.55%#
--------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (1.53%) (0.78%) (0.84%) (0.15%)#
--------------------------------------------------------------------------------
Portfolio turnover rate 202% 54% 75% 67%#
--------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.89% 2.88% 2.96% 3.25%#
--------------------------------------------------------------------------------
</TABLE>
* Commencement of Operations
# Annualized
+ Non-annualized
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balanced Fund
------------------------------------------------------
Class A
------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 * 10/31/98 10/31/97 10/31/96 * 10/31/95 *
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $11.48 $12.58 $12.33 $12.02 $11.13
---------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.24 0.25 0.34 0.39 0.38
Net realized and
unrealized gain/(loss)
on investments and
foreign currency (0.09) 1.04 1.52 1.07 1.35
<CAPTION>
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.15 1.29 1.86 1.46 1.73
<CAPTION>
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.23) (0.32) (0.45) (0.40) (0.32)
Distributions from
realized capital gains (0.84) (2.07) (1.16) (0.75) (0.52)
<CAPTION>
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (1.07) (2.39) (1.61) (1.15) (0.84)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $10.56 $11.48 $12.58 $12.33 $12.02
---------------------------------------------------------------------------------
Total Return 1.20% 12.42% 17.01% 13.10% 16.95%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of
period (000's) $5,936 $14,415 $12,294 $10,873 $10,033
---------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 1.39% 1.39% 1.34% 1.34% 1.34%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to
average net assets 2.18% 2.11% 2.74% 3.32% 3.39%
---------------------------------------------------------------------------------
Portfolio turnover rate 198% 185% 211% 253% 226%
---------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 1.60% 1.53% 1.59% 1.55% 1.69%
---------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
75
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balanced Fund
--------------------------------------------------------
Class B
--------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 * 10/31/98 10/31/97 * 10/31/96 * 10/31/95 *
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $11.40 $12.49 $12.26 $11.98 $11.12
-----------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.18 0.18 0.25 0.31 0.30
Net realized and
unrealized gain/(loss)
on investments and
foreign currency (0.10) 1.04 1.53 1.07 1.36
<CAPTION>
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.08 1.22 1.78 1.38 1.66
<CAPTION>
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.15) (0.24) (0.39) (0.35) (0.28)
Distributions from
realized capital gains (0.84) (2.07) (1.16) (0.75) (0.52)
<CAPTION>
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.99) (2.31) (1.55) (1.10) (0.80)
-----------------------------------------------------------------------------------
Net Asset Value, End of
Period $10.49 $11.40 $12.49 $12.26 $11.98
-----------------------------------------------------------------------------------
Total Return 0.57% 11.71% 16.27% 12.35% 16.31%
-----------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------
Net assets, end of
period (000's) $13,958 $18,929 $17,140 $16,219 $9,875
-----------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 2.04% 2.04% 1.99% 1.99% 1.99%
-----------------------------------------------------------------------------------
Ratio of net investment
income (loss) to
average net assets 1.60% 1.46% 2.09% 2.67% 2.69%
-----------------------------------------------------------------------------------
Portfolio turnover rate 198% 185% 211% 253% 226%
-----------------------------------------------------------------------------------
Expense ratio before
expense reimbursement
by advisor 2.25% 2.18% 2.23% 2.20% 2.37%
-----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balanced Fund
----------------------------------------------------
Class C
----------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 * 10/31/98 10/31/97 10/31/96 10/31/95 *
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $11.54 $12.62 $12.35 $12.02 $11.12
---------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.17 0.18 0.25 0.32 0.31
Net realized and
unrealized gain/(loss)
on investments and
foreign currency (0.09) 1.05 1.54 1.07 1.35
<CAPTION>
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.08 1.23 1.79 1.39 1.66
<CAPTION>
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.15) (0.24) (0.36) (0.31) (0.24)
Distributions from
realized capital gains (0.84) (2.07) (1.16) (0.75) (0.52)
<CAPTION>
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.99) (2.31) (1.52) (1.06) (0.76)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $10.63 $11.54 $12.62 $12.35 $12.02
---------------------------------------------------------------------------------
Total Return 0.58% 11.68% 16.21% 12.41% 16.25%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $53,669 $65,049 $68,261 $72,821 $80,626
---------------------------------------------------------------------------------
Ratio of total expenses
to average net assets 2.04% 2.04% 1.99% 1.99% 1.99%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 1.55% 1.47% 2.09% 2.67% 2.76%
---------------------------------------------------------------------------------
Portfolio turnover rate 198% 185% 211% 253% 226%
---------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 2.25% 2.18% 2.20% 2.20% 2.24%
---------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
76
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Aggressive Growth
Lifestyle Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
--------------------------------------------------------------------------------
Income Operations:
Net investment income/(loss) 0.07 0.06
Net realized and unrealized gain/(loss) on
securities 1.91 1.89
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 1.98 1.95
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.06) (0.05)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.06) (0.05)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $11.92 $11.90
--------------------------------------------------------------------------------
Total Return 19.65% 19.52%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.10% 0.10%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 0.10% 0.10%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 0.63% 0.66%
--------------------------------------------------------------------------------
Portfolio turnover rate 9% 9%
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 162 413
--------------------------------------------------------------------------------
Net assets, end of period (000's) $1,929 $4,915
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Conservative Growth
Lifestyle Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
--------------------------------------------------------------------------------
Income Operations:
Net investment income/(loss) 0.21 0.18
Net realized and unrealized gain/(loss) on
securities 1.02 1.05
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 1.23 1.23
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.20) (0.17)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.20) (0.17)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $11.03 $11.06
--------------------------------------------------------------------------------
Total Return 12.30% 12.21%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.10% 0.10%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 0.10% 0.10%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 2.01% 2.11%
--------------------------------------------------------------------------------
Portfolio turnover rate 10% 10%
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 162 532
--------------------------------------------------------------------------------
Net assets, end of period (000's) $1,790 $5,880
--------------------------------------------------------------------------------
</TABLE>
-------
77
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moderate Growth
Lifestyle Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
--------------------------------------------------------------------------------
Income Operations:
Net investment income/(loss) 0.14 0.12
Net realized and unrealized gain/(loss) on
securities 1.39 1.41
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 1.53 1.53
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.13) (0.11)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.13) (0.11)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $11.40 $11.42
--------------------------------------------------------------------------------
Total Return 15.20% 15.26%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.10% 0.10%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 0.10% 0.10%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 1.33% 1.40%
--------------------------------------------------------------------------------
Portfolio turnover rate 11% 11%
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 168 486
--------------------------------------------------------------------------------
Net assets, end of period (000's) $1,918 $5,553
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Core Bond Fund
(formerly Investment Quality Bond Fund)
--------------------------------------------------
Class A
--------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96 10/31/95*
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $10.63 $10.52 $10.34 $10.56 $9.74
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.66 0.68 0.67 0.66 0.68
Net realized and unrealized
gain/(loss) on investments
and foreign currency (0.77) 0.10 0.18 (0.20) 0.82
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations (0.11) 0.78 0.85 0.46 1.50
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.67) (0.67) (0.67) (0.68) (0.68)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $9.85 $10.63 $10.52 $10.34 $10.56
--------------------------------------------------------------------------------
Total Return (1.08%) 7.63% 8.57% 4.52% 15.91%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
(000's) $3,507 $6,730 $7,110 $9,056 $10,345
--------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.25% 1.25% 1.25% 1.25% 1.25%
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 4.77% 6.45% 6.54% 6.37% 6.72%
--------------------------------------------------------------------------------
Portfolio turnover rate 43% 48% 65% 56% 132%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 1.70% 1.54% 1.62% 1.55% 1.73%
--------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
78
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Core Bond Fund
(formerly Investment Quality Bond Fund)
-------------------------------------------------
Class B
-------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.62 $10.52 $10.33 $10.55 $9.74
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) 0.59 0.61 0.60 0.60 0.61
Net realized and unrealized
gain/(loss) on investments (0.75) 0.10 0.20 (0.20) 0.82
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations (0.16) 0.71 0.80 0.40 1.43
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.61) (0.61) (0.61) (0.62) (0.62)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $9.85 $10.62 $10.52 $10.33 $10.55
---------------------------------------------------------------------------------
Total Return (1.56%) 6.93% 8.05% 3.92% 15.12%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $4,295 $4,845 $4,613 $4,678 $3,472
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.90% 1.90% 1.90% 1.90% 1.90%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 5.71% 5.81% 5.89% 5.72% 5.95%
---------------------------------------------------------------------------------
Portfolio turnover rate 43% 48% 65% 56% 132%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.39% 2.20% 2.33% 2.27% 2.69%
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Core Bond Fund
(formerly Investment Quality Bond Fund)
-------------------------------------------------
Class C
-------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.62 $10.52 $10.33 $10.55 $9.74
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) 0.59 0.61 0.60 0.60 0.61
Net realized and unrealized
gain/(loss) on investments (0.75) 0.10 0.20 (0.20) 0.82
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations (0.16) 0.71 0.80 0.40 1.43
<CAPTION>
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.61) (0.61) (0.61) (0.62) (0.62)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $9.85 $10.62 $10.52 $10.33 $10.55
---------------------------------------------------------------------------------
Total Return (1.56%) 6.93%+ 8.05% 3.92% 15.12%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $4.593 $5,532 $6,109 $7,543 $7,206
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.90% 1.90% 1.90% 1.90% 1.90%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 5.70% 5.81% 5.89% 5.72% 6.00%
---------------------------------------------------------------------------------
Portfolio turnover rate 43% 48% 65% 56% 132%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.38% 2.20% 2.29% 2.22% 2.50%
---------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
79
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Yield Bond Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.81 0.74
Net realized and unrealized gain/(loss) on
securities (0.57) (0.57)
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 0.24 0.17
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.81) (0.74)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.81) (0.74)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $9.43 $9.43
--------------------------------------------------------------------------------
Total Return 2.28% 1.53%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.25% 2.00%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 2.01% 2.37%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 5.69% 7.30%
--------------------------------------------------------------------------------
Portfolio turnover rate 72% 72%
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 4 69
--------------------------------------------------------------------------------
Net assets, end of period (000's) $34 $652
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Municipal Bond Fund
(formerly National Municipal Bond Fund)
------------------------------------------------
Class A
------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.22 $10.09 $9.73 $9.62 $8.82
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) 0.45 0.47 0.48 0.48 0.51
Net realized and unrealized
gain/(loss) on investments (0.74) 0.13 0.36 0.11 0.80
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations (0.29) 0.60 0.84 0.59 1.31
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment
income (0.45) (0.47) (0.48) (0.48) (0.51)
---------------------------------------------------------------------------------
Net Asset Value, End of Period $9.48 $10.22 $10.09 $9.73 $9.62
---------------------------------------------------------------------------------
Total Return (2.95%) 6.04% 8.85% 6.31% 15.26%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $4,435 $5,820 $6,347 $7,710 $7,618
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.00% 1.00% 0.99% 0.99% 0.80%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average net
assets 4.52% 4.60% 4.87% 4.99% 5.55%
---------------------------------------------------------------------------------
Portfolio turnover rate 46% 43% 29% 49% 44%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 1.41% 1.23% 1.23% 1.25% 1.34%
---------------------------------------------------------------------------------
</TABLE>
-------
80
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Municipal Bond Fund
(formerly National Municipal Bond Fund)
------------------------------------------------
Class B
------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.22 $10.09 $9.73 $9.62 $8.81
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) 0.37 0.38 0.40 0.40 0.43
Net realized and unrealized
gain/(loss) on investments (0.74) 0.13 0.36 0.11 0.81
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations (0.37) 0.51 0.76 0.51 1.24
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment
income (0.37) (0.38) (0.40) (0.40) (0.43)
---------------------------------------------------------------------------------
Net Asset Value, End of Period $9.48 $10.22 $10.09 $9.73 $9.62
---------------------------------------------------------------------------------
Total Return (3.77%) 5.15% 7.94% 5.41% 14.42%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $4,197 $5,273 $6,532 $6,130 $5,876
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.85% 1.85% 1.84% 1.84% 1.70%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average net
assets 3.67% 3.75% 4.02% 4.14% 4.59%
---------------------------------------------------------------------------------
Portfolio turnover rate 46% 43% 29% 49% 44%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.26% 2.08% 2.15% 2.11% 2.41%
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Municipal Bond Fund
(formerly National Municipal Bond Fund)
------------------------------------------------
Class C
------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.22 $10.09 $9.73 $9.62 $8.81
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) 0.37 0.38 0.40 0.40 0.43
Net realized and unrealized
gain/(loss) on investments (0.74) 0.13 0.36 0.11 0.81
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations (0.37) 0.51 0.76 0.51 1.24
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment
income (0.37) (0.38) (0.40) (0.40) (0.43)
---------------------------------------------------------------------------------
Net Asset Value, End of Period $9.48 $10.22 $10.09 $9.73 $9.62
---------------------------------------------------------------------------------
Total Return (3.77%) 5.15% 7.94% 5.41% 14.42%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $3,931 $5,147 $5,305 $5,693 $6,834
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.85% 1.85% 1.84% 1.84% 1.70%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average net
assets 3.67% 3.75% 4.02% 4.14% 4.53%
---------------------------------------------------------------------------------
Portfolio turnover rate 46% 43% 29% 49% 44%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.26% 2.08% 2.15% 2.25% 2.63%
---------------------------------------------------------------------------------
</TABLE>
-------
81
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Strategic Income Fund
--------------------------------------------------
Class A
--------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 * 10/31/98 10/31/97 10/31/96 10/31/95
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $8.99 $9.76 $9.80 $9.07 $8.90
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.72 0.67 0.70 0.80 0.78
Net realized and unrealized
gain/(loss) on investments
and foreign currency (0.53) (0.63) 0.28 0.72 0.18
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.19 0.04 0.98 1.52 0.96
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.73) (0.67) (0.84) (0.79) (0.79)
Distributions from realized
capital gains (0.05) (0.14) (0.18) - -
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.78) (0.81) (1.02) (0.79) (0.79)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $8.40 $8.99 $9.76 $9.80 $9.07
--------------------------------------------------------------------------------
Total Return 2.10% 0.22% 10.57% 17.35% 11.43%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
(000's) $8,997 $15,296 $15,924 $13,382 $10,041
--------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.50% 1.50% 1.50% 1.50% 1.07%
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 8.21% 7.02% 7.25% 8.28% 9.08%
--------------------------------------------------------------------------------
Portfolio turnover rate 119% 162% 193% 68% 180%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 1.67% 1.56% 1.61% 1.65% 1.69%
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Strategic Income Fund
--------------------------------------------------
Class B
--------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 * 10/31/98 10/31/97 10/31/96 10/31/95
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $8.99 $9.76 $9.80 $9.07 $8.90
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.66 0.61 0.64 0.73 0.73
Net realized and unrealized
gain/(loss) on investments
and foreign currency (0.52) (0.63) 0.28 0.73 0.17
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.14 (0.02) 0.92 1.46 0.90
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.67) (0.61) (0.78) (0.73) (0.73)
Distributions from realized
capital gains (0.05) (0.14) (0.18) - -
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.72) (0.75) (0.96) (0.73) (0.73)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $8.41 $8.99 $9.76 $9.80 $9.07
--------------------------------------------------------------------------------
Total Return 1.56% (0.43%) 9.86% 16.59% 10.72%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
(000's) $21,340 $29,210 $34,590 $30,890 $20,672
--------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 2.15% 2.15% 2.15% 2.15% 1.95%
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 7.58% 6.39% 6.60% 7.63% 8.10%
--------------------------------------------------------------------------------
Portfolio turnover rate 119% 162% 193% 68% 180%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 2.32% 2.21% 2.23% 2.27% 2.38%
--------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
82
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Strategic Income Fund
--------------------------------------------------
Class C
--------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 * 10/31/98 10/31/97 10/31/96 10/31/95
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $8.99 $9.76 $9.80 $9.07 $8.90
--------------------------------------------------------------------------------
Investment Operations:
Net investment
income/(loss) 0.66 0.61 0.64 0.73 0.73
Net realized and unrealized
gain/(loss) on investments
and foreign currency (0.52) (0.63) 0.28 0.73 0.17
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.14 (0.02) 0.92 1.46 0.90
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net
investment income (0.67) (0.61) (0.78) (0.73) (0.73)
Distributions from realized
capital gains (0.05) (0.14) (0.18) - -
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.72) (0.75) (0.96) (0.73) (0.73)
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $8.41 $8.99 $9.76 $9.80 $9.07
--------------------------------------------------------------------------------
Total Return 1.56% (0.43%) 9.86% 16.59% 10.72%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period
(000's) $20,749 $33,537 $32,683 $22,783 $14,273
--------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 2.15% 2.15% 2.15% 2.15% 1.95%
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 7.57% 6.37% 6.60% 7.63% 8.25%
--------------------------------------------------------------------------------
Portfolio turnover rate 119% 162% 193% 68% 180%
--------------------------------------------------------------------------------
Expense ratio before
expense reimbursement by
advisor 2.32% 2.21% 2.24% 2.28% 2.37%
--------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Government Securities Fund
------------------------------------------------
Class A
------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.08 $9.94 $9.80 $9.98 $9.45
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) 0.53 0.56 0.59 0.56 0.63
Net realized and unrealized
gain/(loss) on investments (0.48) 0.16 0.13 (0.12) 0.57
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.05 0.72 0.72 0.44 1.20
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment
income (0.58) (0.58) (0.58) (0.56) (0.67)
Distributions in excess of
net investment income - - - (0.06) -
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.58) (0.58) (0.58) (0.62) (0.67)
---------------------------------------------------------------------------------
Net Asset Value, End of Period $9.55 $10.08 $9.94 $9.80 $9.98
---------------------------------------------------------------------------------
Total Return 0.48% 7.41% 7.56% 4.64% 13.15%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $35,379 $49,624 $53,235 $72,774 $81,179
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.25% 1.25% 1.25% 1.25% 1.25%
---------------------------------------------------------------------------------
Ratio of net investment
income to average net assets 5.64% 5.65% 6.20% 5.71% 6.54%
---------------------------------------------------------------------------------
Portfolio turnover rate 63% 116% 364% 477% 469%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 1.46% 1.40% 1.42% 1.41% 1.45%
---------------------------------------------------------------------------------
</TABLE>
-------
83
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Government Securities Fund
------------------------------------------------
Class B
------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $10.07 $9.94 $9.80 $9.98 $9.45
---------------------------------------------------------------------------------
Investment Operations:
Net investment income/(loss) 0.47 0.49 0.54 0.50 0.56
Net realized and unrealized
gain/(loss) on investments (0.47) 0.15 0.11 (0.12) 0.58
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total from investment
operations 0.00 0.64 0.65 0.38 1.14
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment
income (0.51) (0.51) (0.51) (0.50) (0.61)
Distributions in excess of
net investment income - - - (0.06) -
<CAPTION>
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.51) (0.51) (0.51) (0.56) (0.61)
---------------------------------------------------------------------------------
Net Asset Value, End of Period $9.56 $10.07 $9.94 $9.80 $9.98
---------------------------------------------------------------------------------
Total Return 0.01% 6.60% 6.84% 3.97% 12.45%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $12,033 $17,850 $16,659 $19,444 $13,993
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.90% 1.90% 1.90% 1.90% 1.90%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average net
assets 5.00% 4.99% 5.55% 5.06% 5.53%
---------------------------------------------------------------------------------
Portfolio turnover rate 63% 116% 364% 477% 469%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 2.11% 2.05% 2.09% 2.06% 2.28%
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Market Fund
-------------------------------------------------
Class B
-------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------------------
Investment Operations:
Net investment income 0.04 0.05 0.05 0.05 0.05
Distributions
Dividends from net
investment income (0.04) (0.05) (0.05) (0.05) (0.05)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------------------
Total Return 4.56% 5.18% 5.13% 5.16% 5.60%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $4,551 $5,919 $3,332 $3,062 $1,564
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 4.47% 5.02% 5.02% 5.02% 5.52%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 0.99% 0.98% 1.05% 1.18% 1.41%
---------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
-------
84
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Market Fund
-------------------------------------------------
Class C
-------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/99* 10/31/98 10/31/97 10/31/96 10/31/95
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------------------
Investment Operations:
Net investment income 0.04 0.05 0.05 0.05 0.05
Distributions
Dividends from net
investment income (0.04) (0.05) (0.05) (0.05) (0.05)
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------------------
Total Return 4.56% 5.18% 5.13% 5.16% 5.60%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------------
Net assets, end of period
(000's) $8,644 $8,237 $7,539 $9,840 $9,394
---------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
---------------------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 4.48% 5.05% 5.01% 5.02% 5.46%
---------------------------------------------------------------------------------
Expense ratio before expense
reimbursement by advisor 1.01% 0.94% 1.00% 0.98% 0.95%
---------------------------------------------------------------------------------
</TABLE>
* Net investment income per share has been calculated using the average share
method
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Municipal Money Market Fund
-------------------------------
Class A Class B
-------- --------
Year Year
Ended Ended
10/31/99 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.02 0.01
Net realized and unrealized gain/(loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total income (loss) from investment operations 0.02 0.01
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Distributions
Dividends from net investment income (0.02) (0.01)
Distributions from net realized gain (loss) on
securities - -
<CAPTION>
------------------
<S> <C> <C> <C> <C> <C>
Total distributions (0.02) (0.01)
--------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00
--------------------------------------------------------------------------------
Total Return 2.18% 1.42%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.05% 1.80%
--------------------------------------------------------------------------------
Ratio of expenses to average net assets before
expense reductions 1.89% 2.69%
--------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average net assets 2.18% 1.42%
--------------------------------------------------------------------------------
Portfolio turnover rate N/A N/A
--------------------------------------------------------------------------------
Number of shares outstanding at end of period
(000's) 3,651 2,841
--------------------------------------------------------------------------------
Net assets, end of period (000's) $3,651 $2,841
--------------------------------------------------------------------------------
</TABLE>
-------
85
<PAGE>
North American Funds
286 Congress Street
Boston, Massachusetts 02210
(800) 872-8037
Class A Shares
Class B Shares
Class C Shares
<TABLE>
<S> <C>
U.S. Equity Funds Balanced Funds
Growth & Income Fund Balanced Fund
Large Cap Growth Fund LifeStyle Funds
Mid Cap Growth Fund Aggressive Growth LifeStyle Fund
Mid Cap Value Fund Conservative Growth LifeStyle Fund
Science & Technology Fund Moderate Growth LifeStyle Fund
Small Cap Growth Fund Income Funds
Small Cap Index Fund Core Bond Fund
Socially Responsible Fund High Yield Bond Fund
Stock Index Fund Municipal Bond Fund
International/Global Equity Funds Strategic Income Fund
Global Equity Fund U.S. Government Securities Fund
International Equity Fund Money Market Funds
International Small Cap Fund Money Market Fund
Municipal Money Market Fund
</TABLE>
For Additional Information
More information about the Funds, including the SAI, is available to you free of
charge.
To request additional information:
By Telephone
Call 1-800-872-8037
By Mail from the Funds (There is no fee.)
Write to:
North American Funds
286 Congress Street
Boston, MA 02210
By Mail or In Person from the Public Reference Room of the Securities and
Exchange Commission (SEC). (You will pay a duplication fee.)
Visit or Write to:
SEC's Public Reference Section
450 Fifth Street, NW
Washington, DC, 20549-6009
1-800-SEC-0330
Online at the SEC's Internet Site Text-only versions of fund documents can be
viewed online or downloaded from http://www.sec.gov.
Statement of Additional Information (SAI)
The SAI provides additional information about the Trust and the Funds. The SAI
and the auditor's report and financial statements included in the Trust's most
recent Annual Report to its shareholders are incorporated by reference as part
of this Prospectus.
Annual and Semi-annual Reports
The Annual and Semi-annual Reports describe the Funds' performance, list
portfolio holdings and include additional information about the Funds'
investments. The Annual Report discusses the market conditions and investment
strategies that significantly affected the Fund's performance during their last
fiscal year.
File No. 811-5797
0700:90201
NAF 12694
<PAGE>
North American Funds
Prospectus 2000
Institutional Class I Shares
<TABLE>
<S> <C>
U.S. Equity Funds Balanced Funds
Growth & Income Fund Balanced Fund
Large Cap Growth Fund LifeStyle Funds
Mid Cap Growth Fund Aggressive Growth LifeStyle Fund
Mid Cap Value Fund Conservative Growth LifeStyle Fund
Science & Technology Fund Moderate Growth LifeStyle Fund
Small Cap Growth Fund Income Funds
Small Cap Index Fund Core Bond Fund
Socially Responsible Fund High Yield Bond Fund
Stock Index Fund Strategic Income Fund
International/Global Equity Funds U.S. Government Securities Fund
Global Equity Fund Money Market Funds
International Equity Fund Money Market Fund
International Small Cap Fund
</TABLE>
The Securities and Exchange Commission has not approved or disapproved of these
securities or passed on the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
July 7, 2000
AMERICAN GENERAL FINANCIAL GROUP
<PAGE>
Table of Contents
Organization of Information
This Prospectus includes information about 21 different Funds.
.Section I includes a summary of each Fund.
.Section II includes additional information about the Funds' investment
strategies, additional risk information and information about the Funds'
management.
.Section III includes information about how to invest and manage your
North American Funds account.
<TABLE>
<S> <C>
Section I: Summaries of the Funds............. Page 1
.Investment Objective
.Principal Investment Strategies
.Main Investing Risks
.Investment Performance
.Description of Main Risks
North American Funds
U.S. Equity Funds
Growth & Income Fund Page 2
Large Cap Growth Fund Page 3
Mid Cap Growth Fund Page 4
Mid Cap Value Fund Page 5
Science & Technology Fund Page 6
Small Cap Growth Fund Page 8
Small Cap Index Fund Page 9
Socially Responsible Fund Page 11
Stock Index Fund Page 13
International/Global Equity Funds
Global Equity Fund Page 15
International Equity Fund Page 16
International Small Cap Fund Page 17
Balanced Funds
Balanced Fund Page 18
Lifestyle Funds
Aggressive Growth LifeStyle Fund Page 19
Conservative Growth LifeStyle Fund Page 21
Moderate Growth LifeStyle Fund Page 23
Income Funds
Core Bond Fund Page 25
High Yield Bond Fund Page 26
Strategic Income Fund Page 27
U.S. Government Securities Fund Page 28
Money Market Funds
Money Market Fund Page 29
Section II: Other Information about Each Page 33
Fund..........................................
.Fees and Expenses
.More Information About Investment
Strategies
.Other Risks of Investing
.Fund Management
Section III: Investing in the Funds........... Page 53
</TABLE>
This section includes the information you need about how to invest and how to
redeem shares. It also includes other important information about sales
charges, taxes and account privileges.
Additional Information
If you'd like information additional to that included in this Prospectus, the
back cover lists a number of places to call or to visit for additional
materials.
<PAGE>
Section I:
Fund Summaries
North American Funds (the "Trust") is a group of mutual funds that includes 23
separate investment portfolios, or "Funds." Each Fund has a specific investment
objective. Each Fund also has a subadvisor, a firm responsible for making
investment decisions for the Fund. This Prospectus includes information about
Institutional Class I shares for 21 of the Funds.
The summaries on the next 28 pages describe each Fund's investment objective
and principal investment strategies, list the main risks of investing in the
Fund, and show the Fund's past investment performance. Explanations of the main
risks of investing in each Fund starts on page 30.
Below the Funds' descriptions are a bar chart and a table.
The bar chart shows how the investment returns of one class of each Fund's
shares have varied in the past ten years, or in the years since the Fund began
if it is less than ten years old. In certain cases, the class shown in the bar
chart (either Class A shares or Class C shares, depending on the Fund) is not
offered by this Prospectus, but the performance would have been substantially
similar for Institutional Class I shares of the same fund, differing only to
the extent that the classes have different expenses. The bar chart does not
reflect sales charges; if it did, performance would be less than shown.
The table (the Average Annual Total Return Table) following each bar chart
shows how that Fund's average annual returns for each class of shares for the
last one, five and ten years (or since the Fund began, for newer Funds)
compared to returns of a broad-based securities market index. Like the bar
chart, in certain cases the Average Annual Total Return Table shows performance
information for either Class A shares or Class C shares, depending on the Fund,
neither of which are offered by this Prospectus. Where applicable, the table
reflects sales charges, including the maximum initial sales charge for Class A
shares, and the maximum applicable deferred sales charge for Class C shares.
A Fund's bar chart and Average Annual Total Return Table provide indications of
the historical risk/return of an investment in the Fund.
It is important to remember that past performance does not predict future
performance and that-as with any investment, it is possible to lose money by
investing in the Funds. An investment in any of the Funds is not a deposit in a
bank and is not insured by the Federal Deposit Insurance Corporation or any
other government agency.
------
1
<PAGE>
Growth & Income Fund
Investment Goal and Strategies
The investment objective of the Growth & Income Fund is to provide long-term
growth of capital and income consistent with prudent investment risk. Welling-
ton Management Company, LLP ("Wellington Management"), the Fund's subadvisor,
pursues this objective by investing mostly in a diversified portfolio of common
stocks of U.S. issuers that Wellington Management believes are of high quality.
High quality companies are companies that Wellington Management believes have
solid balance sheets, strong management teams, consistent earnings growth and
market leadership in their industry. The Fund will typically invest in divi-
dend-paying stocks of larger companies. The Fund may invest up to 20% of its
total assets in foreign securities.
To select stocks for the Fund, Wellington Management assesses a company and its
business environment, management, balance sheet, income statement, anticipated
earnings and dividends, and other related measures of fundamental value. Wel-
lington Management will also monitor and evaluate the economic and political
climate and the principal securities markets of the country in which each com-
pany is located.
Main Risks
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with value
stocks and the risk that the stocks the Fund buys may stop paying dividends)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. For periods prior to the
inception of Institutional Class I shares (7/7/00), the Average Annual Total
Return Table also shows estimated historical performance for Institutional
Class I Shares based on the performance of Class C shares, adjusted to reflect
that there are no sales charges paid by Institutional Class I shares.
[GRAPH]
Calendar Year Total Returns for C shares
Annual Total Returns
'91 0%
'92 8.29%
'93 9.20%
'94 2.11%
'95 26.78%
'96 20.90%
'97 31.64%
'98 25.39%
'99 16.74%
Best quarter: quarter ended 12/31/98 20.07%
Worst quarter: quarter ended 9/30/98 -9.81%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund
(since 5/1/91)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Class C 15.74% 24.18% 17.17%
-------------------------------------------------------------------------------
Institutional Class I 16.74% 24.18% 17.17%
-------------------------------------------------------------------------------
S&P 500
IndexTM 21.04% 28.54% 19.80%
</TABLE>
--------------------------------------------------------------------------------
------
2
<PAGE>
Large Cap Growth Fund
Investment Goal and Strategies
The investment objective of the Large Cap Growth Fund is to seek long-term cap-
ital growth. To achieve this goal, Founders Asset Management LLC ("Founders"),
the Fund's subadvisor, invests at least 65% of the Fund's total assets in the
common stocks of well-established, high-quality growth companies whose earnings
are expected by Founders to increase faster than the market average. High qual-
ity companies are companies that Founders believe have solid balance sheets,
strong management teams, consistent earnings growth and market leadership in
their industry.
The Fund may invest in other types of equity securities, such as preferred
stocks and convertible securities, that offer opportunities for capital appre-
ciation. The Fund may also invest in high-quality bonds. The Fund may invest up
to 100% of its total assets in American Depositary Receipts "ADRs" and up to
30% of its total assets in foreign securities (other than ADRs). The Fund may
not invest more than 25% of its total assets in any one foreign
country.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with growth
stocks)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. For periods prior to the
inception of Institutional Class I shares (7/7/00), the Average Annual Total
Return Table also shows estimated historical performance for Institutional
Class I Shares based on the performance of Class A shares, adjusted to reflect
that there are no sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 3/4/96)
-----------------------------------------------------
<S> <C> <C>
Class A 30.42% 24.39%
-----------------------------------------------------
Institutional Class I 38.37% 26.33%
-----------------------------------------------------
S&P 500
IndexTM 21.04% 26.26%
</TABLE>
--------------------------------------------------------------------------------
------
3
<PAGE>
Mid Cap Growth Fund
Investment Goal and Strategies
The investment objective of the Mid Cap Growth Fund is to seek long term capi-
tal appreciation. INVESCO Funds Group, Inc. ("INVESCO"), the Fund's subadvisor,
invests primarily in common stocks of mid-sized companies--those with market
capitalizations ranging from approximately $2 billion to $15 billion at the
time of purchase--but also has the flexibility to invest in other types of
securities including preferred stocks, convertible securities and bonds. The
core of the Fund's portfolio will be invested in securities of established com-
panies that are leaders in attractive growth markets with a history of strong
returns. The remainder of the portfolio will be invested in securities of com-
panies that show accelerating growth, driven by product cycles, favorable
industry or sector conditions and other factors that the subadviser believes
will lead to rapid sales or earnings growth. The Fund's strategy relies on many
short-term factors including current information about a company, investor
interest, price movements of a company's securities and general market and mon-
etary conditions. Consequently, the Fund's investments will usually be bought
and sold frequently, which may cause the Fund to incur higher trading costs
and/or to have a relatively high amount of short-term capital gains, which are
generally taxable to you at your ordinary income tax rate.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with invest-
ing in smaller companies)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. For periods prior to the
inception of Institutional Class I shares (7/7/00), the Average Annual Total
Return Table also shows estimated historical performance for Institutional
Class I Shares based on the performance of Class A shares, adjusted to reflect
that there are no sales charges paid by Institutional Class I shares.
[GRAPH]
Calendar Year Total Returns for A shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 15.89%
'98 29.65%
'99 32.20%
Best quarter: quarter ended 12/31/99 30.15%
Worst quarter: quarter ended 9/30/98 -16.39%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 3/4/96)
-----------------------------------------------------
<S> <C> <C>
Class A 24.60% 19.33%
-----------------------------------------------------
Institutional Class I 32.20% 21.10%
-----------------------------------------------------
S&P MidCap 14.72% 20.64%
400 IndexTM
-----------------------------------------------------
Russell 2000 IndexTM 21.26% 13.70%
</TABLE>
--------------------------------------------------------------------------------
------
4
<PAGE>
Mid Cap Value Fund
Investment Goal and Strategies
The investment objective of the Mid Cap Value Fund is to seek capital growth.
Neuberger Berman Management, Inc. ("NBM"), the Fund's subadvisor, pursues this
objective by investing at least 65% of the Fund's total assets in equity secu-
rities of medium capitalization companies using a value-oriented investment
approach.
Medium capitalization companies include companies with the characteristics of
companies included in the Russell Midcap(TM) Index. As of December 31, 1999,
the largest company included in the Russell Midcap(TM) Index had an approximate
market capitalization of $36.84 billion, while the average market capitaliza-
tion was approximately $4.4 billion.
NBM chooses securities it believes are undervalued based on strong fundamen-
tals, including a low price-to-earnings ratio, consistent cash flow, and the
company's track record through all parts of the market cycle. When selecting
securities for this Fund, NBM also considers other factors, including ownership
by a company's management of the company's stock and the dominance of a company
in its particular field. Up to 35% of the Fund's total assets may be invested
in other equity securities, including common and preferred stocks, convertible
securities, and related equities. The Fund may invest in derivatives.
The Fund may participate in the initial public offering ("IPO") market, and a
portion of the Fund's returns may be attributable to the Fund's investments in
IPOs. There is no guarantee that as the Fund's assets grow that it will be able
to experience significant improvement in performance by investing in IPOs. The
Fund will be actively traded, which will be reflected in its portfolio turnover
rate. The Fund's active trading strategy may cause the Fund to incur higher
trading costs and/or have a relatively high amount of short-term capital gains,
which are generally taxable to you at your ordinary income tax rate.
Main Risks
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks of investing in IPOs)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the variabil-
ity of the Fund's historical returns. Performance information shown for periods
prior to July 7, 2000 is that of the corresponding series of American General
Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the
Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective,
investment strategies and policies as does the Fund, and was also subadvised by
NBM.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/2/98)
-------------------------------------------------------------
<S> <C> <C>
Institutional Class I 23.80% 28.00%
-------------------------------------------------------------
Russell Midcap Value IndexTM (0.11)% 5.57%
-------------------------------------------------------------
</TABLE>
------
5
<PAGE>
Science & Technology Fund
Investment Goal and Strategies
The objective of the Science & Technology Fund is long-term growth of capital.
The Fund's subadvisor, T. Rowe Price Associates, Inc. ("T. Rowe Price"), pur-
sues this objective by investing at least 65% of the Fund's total assets in the
common stocks and equity-related securities of companies that are expected to
benefit from scientific breakthroughs and advancements in technology. Some of
the industries that are likely to be included in the portfolio are:
.Chemicals and synthetic materials, including pharmaceuticals
.Computers, including hardware and software
.Defense and aerospace
.E-Commerce
.Electronics, including hardware, software and components
.Media and information services
.Telecommunications
Stock selection reflects a growth approach and is based on intensive research
that assesses a company's fundamental prospects for above average earnings.
Holdings can range from small companies developing new technologies to blue
chip firms with established track records of developing and marketing technolo-
gy. Investments may also include companies that are expected to benefit from
technological advances even if they are not directly involved in research and
development.
The Fund may invest up to 30% of its assets in foreign securities, including
American Depositary Receipts ("ADRs") and other dollar-denominated foreign
securities. The Fund may invest up to 25% in other equity-related securities of
science and technology companies, including convertible debt securities and
convertible preferred stock. In addition, the Fund may invest in money market
securities in order to have cash available for redemptions. The Fund may invest
in derivatives.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Science & Technology Company Risk (the risk that the prices of securities of
science and technology companies will be particularly volatile)
------
6
<PAGE>
Prior Performance of Similar Accounts
The Fund commenced operations on July 7, 2000, when a corresponding series of
American General Series Portfolio Company 2 (the "AGSPC2 Fund") was reorganized
into the Fund. The performance information shown below is for the AGSPC1 Sci-
ence & Technology Fund and the T. Rowe Price Science & Technology Fund, and not
that of the Fund, or the AGSPC2 Fund, which had not completed a full year of
operations on July 7, 2000.
The Fund's investment objective, policies, and strategies are substantially
similar to those employed by T. Rowe Price Associates, Inc. for the AGSPC (1)
Science & Technology Fund, and for the T. Rowe Price Science & Technology Fund.
These are the only substantially similar funds for which T. Rowe Price is the
investment advisor or subadvisor.
The AGSPC 1 Science & Technology Fund is sold as an annuity only to registered
and unregistered separate accounts of The Variable Annuity Life Insurance Cor-
poration ("VALIC") and its affiliates or employee thrift plans maintained by
VALIC or American General Corporation. The returns shown reflect investment
management fees and other Fund expenses, and do not reflect any charges
included in the annuity contract or variable life insurance policy for mortal-
ity and expenses guarantees, administrative fees or surrender charges. The T.
Rowe Price Science & Technology Fund is sold to the general public.
Investments made by the Fund, may not be the same as those made by the AGSPC 1
Science & Technology Fund or the T. Rowe Price Science & Technology Fund. Each
of the funds will have different performance results, due to factors such as
the cash flow in and out, different fees and expenses, and diversity in portfo-
lio size and positions. Past performance shown below is no guarantee of similar
future performance for the Fund.
The bar charts show the annual returns and performance for each full calendar
year since inception of the AGSPC 1 Science & Technology Fund, and for the past
ten years for the T. Rowe Price Science & Technology Fund, assuming reinvest-
ment of dividends and distributions.
[GRAPH]
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 61.66%
'96 13.81%
'97 2.61%
'98 42.13%
'99 100.95%
AGSPCI Science & Technology Fund
Best quarter: quarter ended 6/30/99 48.04%
Worst quarter: quarter ended 9/30/99 -17.28%
[GRAPH]
Annual Total Return
'90 0%
'91 60.17%
'92 18.76%
'93 24.25%
'94 15.79%
'95 55.53%
'96 14.23%
'97 1.71%
'98 42.35%
'99 100.99%
T. Rowe Price Science & Technology Fund
Best quarter: quarter ended 6/30/99 47.89%
Worst quarter: quarter ended 9/30/99 -29.53%
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Since inception
------------------------------------------------------------
<S> <C> <C> <C> <C>
AGSPC 1 Science
& Technology 100.95% 40.07% N/A 40.13% (4/29/94)
------------------------------------------------------------
T. Rowe Price
Science &
Technology Fund 100.99% 38.90% 30.16% 38.73% (9/30/87)
------------------------------------------------------------
S&P 500 Index 21.04% 28.56% 18.21% --
</TABLE>
--------------------------------------------------------------------------------
------
7
<PAGE>
Small Cap Growth Fund
Investment Goal and Strategies
The investment objective of the Small Cap Growth Fund is maximum capital
appreciation. Credit Suisse Asset Management, LLC ("CSAM"), the Fund's
subadvisor, pursues this objective by investing primarily in equity securities
of U.S. companies. The focus of the Fund is emerging growth companies, which
often are small or medium-size companies (those with market capitalizations of
$250 million to $4 billion, with growth characteristics such as positive earn-
ings and potential for accelerated growth.
The Fund may also invest in high-quality bonds, and, to a certain extent, in
foreign securities.
The Fund is not "diversified," which means that it may invest in a relatively
small number of issuers of securities, and its value may be affected very sig-
nificantly by the change in value of a single security.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor
their obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with
investing in smaller companies)
.Foreign Investment Risk (the risk that the value of the Fund's foreign
investments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities
will decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regu-
lar basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Non-Diversification Risk (the risk that investing in a smaller number of
securities increases investment risks)
The bar chart and table provide an indication of risk by showing the variabil-
ity of the Fund's historical returns. For periods prior to the inception of
Institutional Class I shares (7/7/00), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class I Shares
based on the performance of Class A shares, adjusted to reflect that there are
no sales charges paid by Institutional Class I shares.
[GRAPH]
Calendar Year Total Returns for A shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 73.13%
Best quarter: quarter ended 12/31/99 45.94%
Worst quarter: quarter ended 9/30/99 -22.58%
-------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 1/6/98)
-------------------------------------------------------
<S> <C> <C>
Class A 63.18% 28.58%
-------------------------------------------------------
Institutional Class I 73.13% 32.17%
-------------------------------------------------------
Russell 2000 Growth(TM) 43.09% 20.35%
</TABLE>
-------------------------------------------------------------------------------
------
8
<PAGE>
Small Cap Index Fund
Investment Goal and Strategies
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. Performance information shown for
periods prior to July 7, 2000 is that of the corresponding series of American
General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized
into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objec-
tive, investment strategies and policies as does the Fund, and was managed by
the same portfolio managers. For periods prior to the inception of Institu-
tional Class I shares (7/7/00), the Average Annual Total Return Table also
shows estimated historical performance for Institutional Class I Shares based
on the performance of Class A shares, adjusted to reflect that there are no
sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Past Life of Fund
One Year (since 11/2/98)
---------------------------------------------------
<S> <C> <C>
Class A 11.54% 19.06%
---------------------------------------------------
Institutional Class I 18.35% 25.30%
---------------------------------------------------
Russell 2000 Index(TM) 21.26% 29.65%
</TABLE>
--------------------------------------------------------------------------------
The Small Cap Index Fund seeks to provide investment results that are similar
to the total return of the Russell 2000(R) Index (the "Index"). American Gen-
eral Investment Management, L.P. ("AGIM") acts as the subadvisor to the Fund.
The Index is a sub-index of the Russell 3000(R) Index, which follows the 3,000
largest U.S. companies based on total market capitaliza tion. The Index mea-
sures the per formance of the 2,000 smallest companies in the Russell 3000(R)
Index, and represents about 8% of the total market capitalization of the Rus-
sell 3000(R) Index. The average market capitalization in the Index was $650
million as of December 31, 1999. As of the same date, the largest company in
the Index had a market capitalization of nearly $13.04 billion.
Generally, an index fund tries to mirror the target index and its performance.
An index fund's performance will not exactly match that of an index because the
index fund incurs operating expenses and other investment overhead as part of
its normal operations. The index is an unmanaged group of securities, so it
does not have these expenses. These differences between an index fund and its
index are called tracking differences.
The tracking differences are reviewed monthly by AGIM for the Fund. If the Fund
does not accurately track an index, AGIM will rebalance the Fund's portfolio by
selecting securities which will provide a more representative sampling of the
securities in the index as a whole or the sector diversification within the
index, as appropriate.
Financial futures will be used to hedge cashflows and maintain liquidity in the
Fund's portfolio.
Main Risks
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation).
Although financial futures track the underlying Index fairly closely there is
the risk that, at times, their results will diverge from the Index.
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally) (including the risks associated with investing in smaller
companies)
------
9
<PAGE>
Small Cap Index Fund
Investment Goal and Strategies
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade
that security on a regular basis)
.Management Risk (the risk that the subadvisor of a Fund may not produce the
desired investment results)
.Index Risk (the risk that the Fund's performance will not match that of the
underlying index)
-------
10
<PAGE>
Socially Responsible Fund
Investment Goal and Strategies
The bar chart and table provide an indication of risk by showing the variabil-
ity of the Fund's historical returns. Performance information shown for periods
prior to July 7, 2000 is that of the corresponding series of American General
Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized into the
Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective,
investment strategies and policies as does the Fund, and was managed by the
same portfolio managers.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Life of Fund
Past One Year (since 11/2/98)
-------------------------------------------------------
<S> <C> <C>
Institiutional Class I 18.55% 26.16%
-------------------------------------------------------
S&P 500 IndexTM 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
The investment objective of the Socially Responsible Fund is to seek to obtain
growth of capital.
To achieve this objective, American General Investment Management, L.P.
("AGIM"), the Fund's subadvisor, invests at least 80% of the Fund's total
assets in the equity securities of companies meeting social criteria estab-
lished for the Fund. To find out which companies meet the Fund's social crite-
ria, AGIM relies on industry classifications and research services such as the
Investor Responsibility Research Center ("IRRC").
The Fund does not invest in companies that are significantly engaged in:
.the production of nuclear energy;
.the manufacture of weapons or delivery systems;
.the manufacture of alcoholic beverages or tobacco products;
.the operation of gambling casinos; or
.business practices or the production of products that significantly pollute
the environment.
Up to 20% of the Fund's total assets may be invested in high quality money mar-
ket securities and warrants, or in other types of equity securities of compa-
nies meeting social criteria, including American Depositary Receipts ("ADRs"),
foreign securities, preferred stock, and convertible securities. The Fund may
invest in derivatives.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
-------
11
<PAGE>
Socially Responsible Fund
Investment Goal and Strategies
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Social Criteria Risk (the risk that the securities of companies meeting the
Fund's criteria will underperform the market generally)
-------
12
<PAGE>
Stock Index Fund
Investment Goal and Strategies
The Stock Index Fund seeks to provide investment results that are similar to
the total return of the S&P 500 Index (the "Index"). American General Invest-
ment Management, L.P. ("AGIM") acts as the subadvisor to the Fund.
The Index is composed of 500 common stocks which are chosen by Standard &
Poor's Corporation. The Index approximates the general distribution of indus-
tries in the U.S. economy, and captures the price performance of a large cross-
section of the publicly traded stock market. The Index is capitalization-
weighted, meaning that it holds each stock in proportion to its total value in
the stock market.
Generally, an index fund tries to mirror the target index and its performance.
An index fund's performance will not exactly match that of an index because the
index fund incurs operating expenses and other investment overhead as part of
its normal operations. The index is an unmanaged group of securities, so it
does not have these expenses. These differences between an index fund and its
index are called tracking differences.
The tracking differences are reviewed monthly by AGIM for the Fund. If the Fund
does not accurately track an index, AGIM will rebalance the Fund's portfolio by
selecting securities which will provide a more representative sampling of the
securities in the index as a whole or the sector diversification within the
index, as appropriate.
Financial futures will be used to hedge cashflows and maintain liquidity in the
Fund's portfolio.
Main Risks
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation).
Although financial futures track the underlying Index fairly closely there is
the risk that, at times, their results will diverge from the Index.
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Interest Rate Risk (the risk that the value of the Fund's debt The bar chart
and table provide an indication of risk by showing the variability of the
Fund's historical returns. Performance information shown for periods prior to
July 7, 2000 is that of the corresponding series of American General Series
Portfolio Company 2 (the "AGSP2 Fund") that was reorganized into the Fund on
July 7, 2000. The AGSPC2 Fund had the same investment objective, investment
strategies and policies as does the Fund, and was managed by the same portfo-
lio managers. For periods prior to the inception of Institutional Class I
shares (7/7/00), the Average Annual Total Return Table also shows estimated
historical performance for Institutional Class I Shares based on the perfor-
mance of Class A shares, adjusted to reflect that there are no sales charges
paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/2/98)
------------------------------------------------------
<S> <C> <C>
Class A 13.46% 22.15%
------------------------------------------------------
Institutional Class I 20.39% 28.55%
------------------------------------------------------
S&P 500 Index(TM) 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
-------
13
<PAGE>
Stock Index Fund
Investment Goal and Strategies
securities will decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Index Risk (the risk that the Fund's performance will not match that of the
underlying Index)
-------
14
<PAGE>
Global Equity Fund
Investment Goal and Strategies
The investment objective of the Global Equity Fund is long-term capital appre-
ciation. To achieve this objective, Founders Asset Management, LLC ("Found-
ers"), the Fund's subadvisor, invests in a globally diversified portfolio of
equity securities.
The Fund normally invests at least 65% of total assets in equity securities of
growth companies in a variety of markets throughout the world. The Fund may
purchase securities in any foreign country, as well as the United States, and
emphasizes common stocks of both emerging and established growth companies that
generally have proven performance records and strong market positions. The
Fund's portfolio will always invest at least 65% of its total assets in three
or more countries. The Fund will not invest more than 50% of its total assets
in the securities of any one foreign country.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with invest-
ments in growth stocks)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns. For periods prior to the inception of
Institutional Class I shares (7/700), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class I Shares
based on the performance of Class C shares, adjusted to reflect that there are
no sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past Past Life of Fund
One Year Five Years (since 11/1/90)
--------------------------------------------------------------
<S> <C> <C> <C>
Class C 1.33% 9.85% 9.37%
--------------------------------------------------------------
Institutional Class I 2.33% 9.85% 9.37%
--------------------------------------------------------------
MSCI WORLD Index(TM) 24.93% 19.76% 14.88%
</TABLE>
--------------------------------------------------------------------------------
-------
15
<PAGE>
International Equity Fund
Investment Goal and Strategies
The investment objective of the International Equity Fund is to seek long-term
capital appreciation. Morgan Stanley Asset Management ("MSAM"), the Fund's
subadvisor, pursues this objective by investing primarily in accordance with
country and sector weightings determined by MSAM in equity securities of non-
U.S. issuers which, in the aggregate, replicate broad market indices.
MSAM seeks to maintain a diversified portfolio of international equity securi-
ties based on a top-down approach that emphasizes country and sector selection
and weighting rather than individual stock selection. MSAM capitalizes on the
significance of country and sector selection in international equity portfolio
returns by over- and underweighting countries based on three factors: (i) valu-
ation, (ii) fundamental change, and (iii) market momentum/technicals.
The Fund may use various instruments that derive their values from those of
specified securities, indices, currencies or other points of reference for both
hedging and non-hedging purposes. Derivatives may include futures, options,
forward contracts, swaps, and structured notes. These derivatives, including
those used to manage risk, are themselves subject to risks of the different
markets in which they trade and, therefore, may not serve their intended
purposes.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation). In
particular, the Fund may, but is not required to, buy or sell foreign curren-
cies and options and futures contracts on foreign currencies for hedging pur-
poses in connection with its foreign investments.
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns. For periods prior to the inception of
Institutional Class I shares (7/7/00), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class I Shares
based on the performance of Class A shares, adjusted to reflect that there are
no sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 1/9/95)
------------------------------------------------------
<S> <C> <C>
Class A 20.91% 9.55%
------------------------------------------------------
Institutional Class I 28.29% 10.86%
------------------------------------------------------
MSCI All Country World 30.91% 12.38%
EX-US Index(TM)
------------------------------------------------------
MSCI EAFE Index(TM) 26.96% 12.83%
</TABLE>
--------------------------------------------------------------------------------
-------
16
<PAGE>
International Small Cap Fund
Investment Goal and Strategies
The investment objective of the International Small Cap Fund is to seek capital
appreciation. To achieve this objective, Founders Asset Management, LLC
("Founders"), the Fund's subadvisor, invests primarily in equity securities
issued by foreign companies with market capitalization or annual revenue of $1
billion or less.
These companies are located in both established and emerging economies
throughout the world. Founders selects securities based on its evaluation of
their potential to offer capital appreciation opportunities. Small companies
are still in the developing stages of their life cycles and may have limited
product lines, markets or financial resources and/or lack management depth.
The Fund may invest in derivatives.
Main Risks
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally, including, in particular, the risks associated with invest-
ing in smaller companies)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns. For periods prior to the inception of
Institutional Class I shares (7/7/00), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class I Shares
based on the performance of Class A shares, adjusted to reflect that there are
no sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 2/20/96)
------------------------------------------------------
<S> <C> <C>
Class A 83.27% 23.09%
------------------------------------------------------
Institutional Class I 94.45% 25.01%
------------------------------------------------------
MSCI WORLD ex-U.S. 27.93% 13.18%
Index(TM)
</TABLE>
--------------------------------------------------------------------------------
-------
17
<PAGE>
Balanced Fund
Investment Goal and Strategies
The investment objective of the Balanced Fund is current income and capital
appreciation. To achieve this goal, INVESCO Funds Group, Inc. ("INVESCO"), the
Fund's subadvisor, invests in a combination of common stocks and fixed-income
securities, including preferred stocks, convertible securities and bonds. The
Fund normally invests the majority of its total assets in U.S. and foreign com-
mon stocks and approximately 25% of its total assets in investment grade debt
securities. The portion of the Fund's portfolio invested in equity securities
emphasizes companies INVESCO believes to have better-than-average earnings
growth potential, as well as companies within industries that INVESCO believes
are well-positioned for the current and expected economic climate. Since cur-
rent income is a component of total return, INVESCO also considers companies'
dividend payout records. Most of these holdings are traded on national stock
exchanges or in the over-the-counter market.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns. For periods prior to the inception of
Institutional Class I shares (7/7/00), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class I Shares
based on the performance of Class C shares, adjusted to reflect that there are
no sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past Past Life of Fund
One Year Five Years (since 7/10/92)
--------------------------------------------------------------
<S> <C> <C> <C>
Class C -4.74% 11.49% 7.74%
--------------------------------------------------------------
Institutional Class I -3.78% 11.49% 7.74%
--------------------------------------------------------------
S&P 500 21.04% 28.54% 21.24%
Index(TM)
--------------------------------------------------------------
Lehman Brothers -0.83% 7.73% 6.62%
Aggregate
Bond Index(TM)
</TABLE>
--------------------------------------------------------------------------------
-------
18
<PAGE>
Aggressive Growth Lifestyle Fund
Investment Goal and Strategies
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
seeks growth through investments in a combination of the North American Funds
("Underlying Funds"). This Fund is suitable for investors seeking the potential
for capital growth that a fund investing predominately in equity securities may
offer.
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies,
small capitalization companies and bonds is the most critical investment deci-
sion that you make as an investor. Selecting the appropriate combination should
be based on your personal investment goals, time horizons and risk tolerance.
The chart below reflects the projected asset allocation ranges and Underlying
Fund choices for this Fund.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
<TABLE>
<S> <C>
International Equity Securities 15%-35%
Underlying Fund:
International Equity Fund
(This Fund invests at least 65% in non-U.S.
companies.)
Domestic Equity Securities 60%-80%
Underlying Funds:
Small Cap Growth Fund
(This Fund invests in the equity securities of
small capitalization companies.)
Mid Cap Value Fund
Mid Cap Growth Fund
(These Funds invest in the equity securities
of medium capitalization companies.)
Large Cap Growth Fund
Growth & Income Fund
(These Funds invest in the equity securities
of large capitalization companies.)
Bonds 5%-15%
Underlying Funds:
Core Bond Fund
High Yield Bond Fund
(These Funds invest in fixed-income
securities.)
</TABLE>
-------
19
<PAGE>
Aggressive Growth Lifestyle Fund
Investment Goal and Strategies
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Non-Diversification Risk (the risk that investing in a smaller number of secu-
rities increases investment risks)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. Performance information shown for
periods prior to July 7, 2000 is that of the corresponding series of American
General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized
into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment
objective, investment strategies and policies as does the Fund, and was managed
by the same portfolio managers.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past Life of Fund
One Year (since 11/2/98)
----------------------------------------------------------------
<S> <C> <C>
Institutional Class I 28.85% 32.90%
----------------------------------------------------------------
Aggressive Growth LifeStyle Blended
Benchmark Index 18.43% 25.12%
----------------------------------------------------------------
S&P 500 Index(TM) 21.04% 29.87%
----------------------------------------------------------------
</TABLE>
-------
20
<PAGE>
Conservative Growth Lifestyle Fund
Investment Goal and Strategies
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
seeks current income and low to moderate growth of capital through investments
in a combination of the North American Funds ("Underlying Funds"). This Fund is
suitable for investors who wish to invest in equity securities, but who are not
willing to assume the market risks of either the Aggressive Growth Lifestyle
Fund or the Moderate Growth Lifestyle Fund.
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as
an investor. Selecting the appropriate combination should be based on your per-
sonal investment goals, time horizons and risk tolerance. The chart below
reflects the projected asset allocation ranges and Underlying Fund choices for
this Fund.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
<TABLE>
<S> <C>
International Equity Securities 5%-15%
Underlying Fund:
International Equity Fund
(This Fund invests at least 65% in non-U.S.
companies.)
Domestic Equity Securities 20%-50%
Underlying Funds:
Small Cap Growth Fund
(This Fund invests in the equity securities of small
capitalization companies.)
Underlying Funds:
Mid Cap Value Fund
Mid Cap Growth Fund
(These Funds invest in the equity securities of
medium capitalization companies.)
Large Cap Growth Fund
Growth & Income Fund
(These Funds invest in the equity securities of
large capitalization companies.)
Bonds 45%-65%
Underlying Funds:
Core Bond Fund
High Yield Bond Fund
(These Funds invest in fixed-income securities.)
</TABLE>
-------
21
<PAGE>
Conservative Growth Lifestyle Fund
Investment Goal and Strategies
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Non-Diversification Risk (the risk that investing in a smaller number of secu-
rities increases investment risks)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. Performance information shown for
periods prior to July 7, 2000 is that of the corresponding series of American
General Series Portfolio Company 2 (the "AGSPC2 Fund") that was reorganized
into the Fund on July 7, 2000. The AGSPC2 Fund had the same investment
objective, and had substantially similar investment strategies and policies as
does the Fund, and was also managed by the same portfolio managers.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/2/98)
----------------------------------------------------------------------
<S> <C> <C>
Institutional Class I 13.63% 18.01%
----------------------------------------------------------------------
Conservative Growth LifeStyle Blended
Benchmark Index 10.63% 15.27%
----------------------------------------------------------------------
S&P 500 IndexTM 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
-------
22
<PAGE>
Moderate Growth Lifestyle Fund
Investment Goal and Strategies
American General Investment Management. L.P. ("AGIM"), the Fund's subadvisor,
seeks growth and current income through investments in a combination of the
North American Funds ("Underlying Funds"). This Fund is suitable for investors
who wish to invest in equity securities, but who are not willing to assume the
substantial market risks of the Aggressive Growth Lifestyle Fund.
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as
an investor. Selecting the appropriate combination should be based on your per-
sonal investment goals, time horizons and risk tolerance. The chart below
reflects the projected asset allocation ranges and Underlying Fund choices for
this Fund.
The Fund is a non-diversified investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Derivatives Risk (the risk that the value of the Fund's derivative investments
will decline as a result of imperfect correlation or improper valuation)
.Equity Risk (the risk that the value of the Fund's equity investments will
decline as a result of factors affecting the particular issuers or financial
markets generally)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
<TABLE>
<S> <C>
International Equity Securities 10%-20%
Underlying Fund:
International Equity Fund
(This Fund invests at least 65% in non-U.S.
companies.)
Domestic Equity Securities 35%-65%
Underlying Funds:
Small Cap Growth Fund
(This Fund invests in the equity securities of
small capitalization companies.)
Mid Cap Value Fund
Mid Cap Growth Fund
(These Funds invest in the equity securities
of medium capitalization companies.)
Large Cap Growth Fund
Growth & Income Fund
(These Funds invest in the equity securities
of large capitalization companies.)
Bonds 25%-45%
Underlying Funds:
Core Bond Fund
High Yield Bond Fund
(These Funds invest in fixed-income
securities.)
</TABLE>
-------
23
<PAGE>
Moderate Growth Lifestyle Fund
Investment Goal and Strategies
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.Non-Diversification Risk (the risk that investing in a smaller number of secu-
rities increases investment risks)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. Performance information shown for
periods prior to July 7, 2000 is that of the corresponding series of American
General Series Portfolio Company 2 (the "AGSP2 Fund") that was reorganized into
the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective,
investment strategies and policies as does the Fund, and was managed by the
same portfolio managers.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Life of Fund
Past One Year (since 11/2/98)
----------------------------------------------------------------------------
<S> <C> <C>
Institutional Class I 18.69% 23.62%
----------------------------------------------------------------------------
Moderate Growth LifeStyle Blended Benchmark
Index 13.77% 19.45%
----------------------------------------------------------------------------
S&P 500 IndexTM 21.04% 29.87%
</TABLE>
--------------------------------------------------------------------------------
-------
24
<PAGE>
Core Bond Fund
Investment Goal and Strategies
The investment objective of the Core Bond Fund is to provide a high level of
current income consistent with the maintenance of principal and liquidity.
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
invests at least 65% of the Fund's total assets in medium to high quality
fixed-income securities, or in securities issued or guaranteed by the U.S. Gov-
ernment, mortgage-backed, or asset-backed securities (U.S. Government securi-
ties are securities issued or guaranteed by the U.S. Government which are sup-
ported by the full faith and credit of the U.S. Government, or by the right of
the issuer to borrow from the U.S. Treasury, or by the credit of the issuing
government agency, or by the authority of the U.S. Government to purchase obli-
gations of the agency). A portion of the 65% may be invested in U.S. dollar-
denominated fixed-income securities issued by foreign issuers, although the
Fund currently intends to limit these investments to no more than 40% of its
total assets. These fixed-income securities will be rated investment grade or
higher or comparable investment quality at the time of purchase. AGIM will not
be required to dispose of a security if its rating is downgraded, however.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations, including, in particular, the risks associated with junk bonds)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns. For periods prior to the inception of
Institutional Class I shares (7/7/00), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class I Shares
based on the performance of Class A shares, adjusted to reflect that there are
no sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund
(since 5/1/91)
---------------------------------------------------------------
<S> <C> <C> <C>
Class A -7.18% 5.79% 6.02%
---------------------------------------------------------------
Institutional -2.55% 6.82% 6.62%
Class I
---------------------------------------------------------------
100% Lehman -1.94% 8.16% 7.38%
Brothers
Corporate(TM)
---------------------------------------------------------------
50% Lehman -2.10% 7.80% 7.61%
Brothers
Corporate(TM)
50% Lehman
Brothers
Government(TM)
</TABLE>
------------------------------------------
-------
25
<PAGE>
High Yield Bond Fund
Investment Goal and Strategies
The High Yield Bond Fund seeks the highest possible total return consistent
with conservation of capital through investment in a diversified portfolio of
high yielding, high risk fixed-income securities.
To achieve this objective, American General Investment Management, L.P.
("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total
assets in below-investment grade U.S. and foreign junk bonds. These high yield-
ing, high risk fixed-income securities are rated below Baa3 by Moody's and BBB-
by S&P or comparable investment quality at the time of purchase. Up to 15% can
be rated below Caa3 by Moody's or CCC-by S&P or comparable investment quality
at the time of purchase. The Fund may also invest up to 35% of total assets in
below-investment grade foreign fixed-income securities.
The Fund may invest up to 35% in investment grade securities, those rated Baa3
or higher by Moody's and BBB- or higher by S&P or comparable investment quality
at the time of purchase. In addition, the Fund may invest up to 15% in zero
coupon securities (securities not paying current cash interest), and up to 20%
of total assets in equity securities. Equity securities include common or pre-
ferred stocks, warrants, and convertible securities. AGIM is not required to
dispose of a bond that is downgraded to below-investment grade.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations, including, in particular, risks associated with junk bonds)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. Performance information shown for
periods prior to July 7, 2000 is that of the corresponding series of American
General Series Portfolio Company 2 (the "AGSP2 Fund") that was reorganized into
the Fund on July 7, 2000. The AGSPC2 Fund had the same investment objective,
investment strategies and policies as does the Fund, and was also subadvised by
AGIM.
Calendar Year Total Returns for Institutional Class I shares
Annual Total Return
[GRAPH]
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 4.21%
Best quarter: quarter ended 3/31/99 3.89%
Worst quarter: quarter ended 9/30/99 -1.51%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/4/98)
------------------------------------------------------
<S> <C> <C>
Institutional Class I 4.21% 4.67%
------------------------------------------------------
Salomon Smith Barney
High Yield Market
Index(TM) 1.74% 5.75%
</TABLE>
--------------------------------------------------------------------------------
-------
26
<PAGE>
Strategic Income Fund
Investment Goal and Strategies
The investment objective of the Strategic Income Fund is to seek a high level
of total return consistent with preservation of capital. To achieve this goal,
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
invests at least 65% of the Fund's total assets in a broad range of fixed-
income securities, including investment grade bonds (rated Baa or higher by
Moody's and BBB or higher by S&P) of comparable investment quality at the time
of purchase, U.S. Government and agency obligations, mortgage- backed securi-
ties, and U.S., Canadian, and foreign high-risk, high-yield bonds (rated C or
higher by
Moody's and CC or higher by S&P, or comparable unrated securities, commonly
known as "junk bonds"). Up to 25% of the Fund's total assets may be invested in
foreign emerging market debt, and up to an additional 25% in non-U.S. dollar
bonds. The Fund may invest up to 20% of total assets in equity securities, such
as common and preferred stocks, convertible securities, and warrants. The Fund
may invest in asset-backed securities, foreign currency, futures and options,
illiquid securities (limited to 15% of the Fund's assets), investment compa-
nies, loan participations, money market securities, mortgage-related securi-
ties, real estate securities, repurchase agreements, reverse repurchase agree-
ments, dollar rolls, structured securities, swaps, variable amount master
demand notes, variable rate demand notes, and when-issued securities.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations including, in particular, the risks associated with junk bonds)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns. For periods prior to the inception of
Institutional Class I shares (7/7/00), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class I Shares
based on the performance of Class A shares, adjusted to reflect that there are
no sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund
(Since 11/1/93)
----------------------------------------------------------------
<S> <C> <C> <C>
Class A -3.45% 7.96% 5.40%
----------------------------------------------------------------
Institutional 1.36% 9.01% 6.24%
Class I
----------------------------------------------------------------
Lehman Brothers -0.83% 7.73% 5.66%
Aggregate Bond
Index(TM)
</TABLE>
--------------------------------------------------------------------------------
-------
27
<PAGE>
U.S. Government Securities Fund
Investment Goal and Strategies
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 main-
tenance of liquidity. American General Investment Management, L.P. ("AGIM"),
the Fund's subadvisor, pursues this objective by emphasizing investments in
debt obligations and mortgage-backed securities by such securities and related
repurchase agreements).
issued or guaranteed by the U.S. Government or its agencies (including the Gov-
ernment National Mortgage Association ("Ginnie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Associa-
tion ("Fannie Mae")), and in derivative investments (such as privately-issued
mortgage obligations collateralized by such securities and related repurchase
agreements).
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns. For periods prior to the inception of
Institutional Class I shares (7/7/00), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class I Shares
based on the performance of Class A shares, adjusted to reflect that there are
no sales charges paid by Institutional Class I shares.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past Past Past
One Year Five Years Ten Years
--------------------------------------------------------------
<S> <C> <C> <C>
Class A -5.67% 5.25% 6.09%
--------------------------------------------------------------
Institutional Class I -0.96% 6.28% 6.59%
--------------------------------------------------------------
Merrill Lynch 1-10 year 0.55% 6.9% %
Government Index(TM)
</TABLE>
------------------------------------------
-------
28
<PAGE>
Money Market Fund
Investment Goal and Strategies
The investment objective of the Money Market Fund is to obtain maximum current
income consistent with preservation of principal and liquidity. American Gen-
eral Investment Management, L.P. ("AGIM") is, the Fund's subadvisor. The Fund
invests in short-term money market securities to provide you with liquidity,
protection of your investment and current income. In accordance with Rule 2a-7
of the Investment Company Act, such securities must mature in 13 months or less
and the Fund must have a dollar-weighted average portfolio maturity of 90 days
or less. The investments of the Fund may include securities issued or guaran-
teed by the U.S. Government (and its agencies or instrumentalities), certifi-
cates of deposit and other obligations of domestic banks that have total assets
in excess of $1 billion, commercial paper sold by corporations and finance com-
panies, corporate debt obligations with remaining maturities of 13 months or
less, repurchase agreements, money market instruments of foreign issuers pay-
able in U.S. dollars (limited to no more than 20% of the fund's net assets),
asset-backed securities, loan participations, adjustable rate securities, Vari-
able Rate Demand Notes, illiquid and restricted securities (limited to 10% of
the Fund's net assets at all times), and Rule 144A securities. The Fund may
invest in investment companies, real estate securities, and reverse repurchase
agreements.
Main Risks
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
.An investment in the Money Market Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or by any other government agency.
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns.
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past Past Past
One Year Five Years Ten Years
----------------------------------------
<S> <C> <C> <C>
Class A 4.62% 5.12% 4.73%
</TABLE>
--------------------------------------------------------------------------------
To obtain the Fund's current 7-day yield, please call 1-800-872-8037.
-------
29
<PAGE>
Descriptions of Main Risks
The value of your investment in a Fund can change for many reasons, and may
decrease. The primary reasons for possible decreases in a Fund's value are
called "Main Risks," and are explained in this section. Because the types of
investments a Fund may change over time, the types of risks affecting the Fund
may change as well. Section II of the Prospectus includes more information
about other risks that could affect the Funds' values.
Credit Risk
Credit risk is the risk that the issuer or the guarantor (the entity that
agrees to pay the debt if the issuer cannot) of a debt or fixed income securi-
ty, or the counterparty to a derivatives contract or a securities loan, will
not repay the principal and interest owed to the investors or otherwise honor
its obligations. There are different levels of credit risk. Debt securities
rated in one of the four highest rating categories by a rating agency (and com-
parable unrated securities) are known as "investment grade." Debt securities
rated below the four highest rating categories by a rating agency (and compara-
ble unrated securities) are known as "lower-rated" or junk bonds." Funds that
invest in lower-rated securities have higher levels of credit risk. Lower-rated
or unrated securities of equivalent quality (generally known as junk bonds)
have very high levels of credit risk. Securities that are highly rated have
lower levels of credit risk.
Funds may be subject to greater credit risk because they may invest in debt
securities issued in connection with corporate restructurings by highly
leveraged (indebted) issuers and in debt securities not current in the payment
of interest or principal, or in default.
Funds that invest in foreign securities are also subject to increased credit
risk because of the difficulties of requiring foreign entities, including
issuers of sovereign (national) debt, to honor their contractual commitments,
and because a number of foreign governments and other issuers are already in
default.
Currency Risk
Funds that invest in securities that are denominated in and/or are receiving
revenues in foreign currencies are subject to currency risk. Currency risk is
the risk that foreign currencies will decline in value relative to the U.S.
dollar. In the case of hedging positions, it is the risk that the U.S. dollar
will decline in value relative to the currency hedged.
Derivatives Risk
Derivatives are financial contracts whose value depends on, or is derived from,
the change in value of an underlying asset, reference rate or index. When the
value of the underlying security or index changes, the value of the derivative
changes as well. As a result, derivatives can lose all of their value very
quickly. Derivatives involve credit risk if the other party to the derivative
should fail to meet its obligations to the Fund. Additional risks associated
with derivatives include imperfect correlation (between the values of the
derivative and the underlying investment) and improper valuation. Derivatives
risk for some Funds will be increased by their investments in structured secu-
rities.
Equity Risk
Equity securities, such as a company's common stock, may fall in value in
response to factors relating to the issuer, such as management decisions or
falling demand for a company's goods or services. Additionally, factors affect-
ing a company's particular industry, such as increased production costs, may
affect the value of its equity securities. Equity securities also rise and fall
in value as a result of factors affecting entire financial markets, such as
political or economic developments, or changes in investor psychology.
Growth stocks are the stocks of companies that have earnings that are expected
to grow relatively rapidly. As a result, the values of growth stocks may be
more sensi-
-------
30
<PAGE>
tive to changes in current or expected earnings than the values of other
stocks.
Value stocks are the stocks of companies that are not expected to experience
significant earnings growth, but that are undervalued, or are inexpensive rela-
tive to the value of the company and its business as a whole. These companies
may have experienced recent troubles that have caused their stocks to be out of
favor with investors. If the market does not recognize the value of the company
over time, the price of its stock may fall, or simply may not increase as
expected.
Market capitalization refers to the total value of a company's outstanding
stock. Smaller companies with market capitalizations of less than $1 billion or
so are more likely than larger companies to have limited product lines, smaller
markets for their products and services, and they may depend on a small or
inexperienced management group. Small company stocks may not trade very active-
ly, and their prices may fluctuate more than stocks of larger companies. Stocks
of smaller companies may be more vulnerable to negative changes than stocks of
larger companies.
The risks associated with equity securities are typically higher for equity
securities purchased in IPOs. Issuers in IPOs typically have a limited operat-
ing history, and the prices of equity securities are often very volatile for
some time following an IPO.
Foreign Investment Risk
Funds investing in foreign securities may experience rapid changes in value.
One reason for this volatility is that the securities markets of many foreign
countries are relatively small, with a limited number of companies representing
a small number of industries. Also, foreign securities issuers are usually not
subject to the same degree of regulation as U.S. issuers. Reporting, accounting
and auditing standards of foreign countries differ, in some cases significant-
ly, from U.S. standards.
The possibility of political instability or diplomatic developments in foreign
countries could trigger nationalization of companies and industries, expropria-
tion (confiscation of property), extremely high levels of taxation, and other
negative developments. In the event of nationalization, expropriation or other
confiscation, a Fund could lose its entire investment. Funds that invest in
sovereign debt obligations are exposed to the risks of political, social and
economic change in the countries that issued the bonds.
Interest Rate Risk (Market Risk)
Interest rate risk, or market risk, is the risk that a change in interest rates
will negatively affect the value of a security. This risk applies primarily to
debt securities such as bonds, notes and asset backed securities. Debt securi-
ties are obligations of the issuer to make payments of principal and/ or inter-
est on future dates. As interest rates rise, an investment in a Fund can lose
value, because the value of the securities the Fund holds may fall.
Market risk is generally greater for Funds that invest in debt securities with
longer maturities. This risk may be increased for Funds that invest in mort-
gage-backed or other types of asset-backed securities that are often prepaid.
Even Funds that invest in the highest quality debt securities are subject to
interest rate risk.
Liquidity Risk
Liquidity risk is the risk that a Fund will not be able to sell a security
because there are too few people who actively buy and sell, or trade, that
security on a regular basis. A Fund holding an illiquid security may not be
able to sell the security at a fair price. Liquidity risk increases for Funds
investing in derivatives, foreign investments or restricted securities.
Management Risk
Management risk is the risk that the subadvisor of a Fund, despite using vari-
ous investment and risk analysis techniques, may not produce the desired
investment results.
Non-Diversification Risk
Investment professionals believe that investment risk can be reduced through
diversification, which is simply the practice of choosing more than one type of
investment. On the other hand, concentrating investments in a smaller number of
securities increases risk.
-------
31
<PAGE>
Social Criteria Risk
This risk applies only to the Socially Responsible Fund. If a company stops
meeting the Fund's social criteria after the Fund invested in it, the Fund will
sell these investments even if this means the Fund loses money. Also, if the
Fund changes its social criteria and the companies the Fund has already
invested in no longer qualify, the Fund will sell these investments, even if
this means the Fund loses money. Social criteria screening will limit the
availability of investment opportunities for the Fund more than for funds hav-
ing no such criteria.
Science & Technology Company Risk
Companies in the rapidly changing fields of science and technology often face
unusually high price volatility, both in terms of gains and losses. The poten-
tial for wide variation in performance is based on the special risks common to
these stocks. For example, products or services that at first appear promising
may not prove commercially successful or may become obsolete quickly. Earnings
disappointments can result in sharp price declines. A portfolio focused primar-
ily on these stocks is, therefore, likely to be much more volatile.
-------
32
<PAGE>
Section II:
Fees and Expenses of the North American Funds--Institutional Class I Shares
This table describes the fees and expenses that you may pay if you invest in
the Funds.
Shareholder Fees (fees paid directly from your investment)
<TABLE>
<CAPTION>
Institutional
Class I
-------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (as a percentage of
original purchase price or redemption price, whichever is
lower) None
Annual Fund Operating Expenses (expenses that are deducted
from fund assets)
<CAPTION>
Institutional
Class I
-------------------------------------------------------------------------
<S> <C>
Growth & Income Fund
Management Fees 0.67%
Other Expenses 0.56%
Total Annual Fund Operating Expenses 1.23%
----------------------------------------------------------------------------
Large Cap Growth Fund
Management Fees 0.90%
Other Expenses 0.82%
Total Annual Fund Operating Expenses 1.72%
Fee Waiver and/or Expense Reimbursement 0.65%
Net Expenses/1/ 1.07%
----------------------------------------------------------------------------
Mid Cap Growth Fund
Management Fees 0.93%
Other Expenses 0.79%
Total Annual Fund Operating Expenses 1.72%
Fee Waiver and/or Expense Reimbursement 0.34%
Net Expenses/1/ 1.38%
----------------------------------------------------------------------------
Mid Cap Value Fund
Management Fees 0.90%
Other Expenses 0.85%
Total Annual Fund Operating Expenses 1.75%
Fee Waiver and/or Expense Reimbursement 0.07%
Net Expenses/1/ 1.68%
----------------------------------------------------------------------------
</TABLE>
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33
<PAGE>
<TABLE>
<CAPTION>
Institutional
Fund Class I
------------------------------------------------------
<S> <C>
Science & Technology Fund
Management Fees 0.90%
Other Expenses 1.25%
Total Annual Fund Operating Expenses 2.15%
Fee Waiver and/or Expense Reimbursement 1.15%
Net Expenses/1/ 1.00%
------------------------------------------------------
Small Cap Growth Fund
Management Fees 0.95%
Other Expenses 0.84%
Total Annual Fund Operating Expenses 1.79%
Fee Waiver and/or Expense Reimbursement 0.67%
Net Expenses/1/ 1.12%
------------------------------------------------------
Small Cap Index Fund
Management Fees 0.28%
Other Expenses 1.34%
Total Annual Fund Operating Expenses 1.62%
Fee Waiver and/or Expense Reimbursement 0.72%
Net Expenses/1/ 0.90%
------------------------------------------------------
Socially Responsible Fund
Management Fees 0.65%
Other Expenses 1.03%
Total Annual Fund Operating Expenses 1.68%
Fee Waiver and/or Expense Reimbursement 0.58%
Net Expenses/1/ 1.10%
------------------------------------------------------
Stock Index Fund
Management Fees 0.27%
Other Expenses 0.91%
Total Annual Fund Operating Expenses 1.18%
Fee Waiver and/or Expense Reimbursement 0.58%
Net Expenses/1/ 0.60%
------------------------------------------------------
Global Equity Fund
Management Fees 0.88%
Other Expenses 0.78%
Total Annual Fund Operating Expenses 1.66%
Fee Waiver and/or Expense Reimbursement 0.01%
Net Expenses/1/ 1.65%
------------------------------------------------------
</TABLE>
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34
<PAGE>
<TABLE>
<CAPTION>
Institutional
Fund Class I
-------------------------------------------------------------------
<S> <C>
International Equity Fund
Management Fees 0.90%
Other Expenses 0.91%
Total Annual Fund Operating Expenses 1.81%
Fee Waiver and/or Expense Reimbursement 0.41%
Net Expenses/1/ 1.40%
-------------------------------------------------------------------
Aggressive Growth LifeStyle Fund
Management Fees 0.10%
Other Expenses 0.25%
Total Annual Fund Operating Expenses 0.35%
Fee Waiver and/or Expense Reimbursement 0.25%
Net Expenses/1/ 0.10%
Estimated Total Annual Combined Indirect Expenses/2/ 1.37%
-------------------------------------------------------------------
Conservative Growth LifeStyle Fund
Management Fees 0.10%
Other Expenses 0.25%
Total Annual Fund Operating Expenses 0.35%
Fee Waiver and/or Expense Reimbursement 0.25%
Net Expenses/1/ 0.10%
Estimated Total Annual Combined Indirect Expenses/2/ 1.33%
-------------------------------------------------------------------
Moderate Growth LifeStyle Fund
Management Fees 0.10%
Other Expenses 0.00%
Total Annual Fund Operating Expenses 0.35%
Fee Waiver and/or Expense Reimbursement 0.25%
Net Expenses/1/ 0.10%
Estimated Total Annual Combined Indirect Expenses/2/ 1.35%
-------------------------------------------------------------------
Core Bond Fund
Management Fees 0.60%
Other Expenses 0.69%
Total Annual Fund Operating Expenses 1.29%
Fee Waiver and/or Expense Reimbursement 0.09%
Net Expenses/1/ 1.20%
-------------------------------------------------------------------
High Yield Bond Fund
Management Fees 0.83%
Other Expenses 0.80%
Total Annual Fund Operating Expenses 1.63%
Fee Waiver and/or Expense Reimbursement 0.25%
Net Expenses/1/ 1.45%
-------------------------------------------------------------------
Strategic Income Fund
Management Fees 0.75%
Other Expenses 0.75%
Total Annual Fund Operating Expenses 1.50%
Fee Waiver and/or Expense Reimbursement 0.05%
Net Expenses/1/ 1.45%
-------------------------------------------------------------------
</TABLE>
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35
<PAGE>
<TABLE>
<CAPTION>
Institutional
Fund Class I
------------------------------------------------------
<S> <C>
U.S. Government Securities Fund
Management Fees 0.60%
Other Expenses 0.69%
Total Annual Fund Operating Expenses 1.29%
Fee Waiver and/or Expense Reimbursement 0.14%
Net Expenses/1/ 1.15%
------------------------------------------------------
Money Market Fund
Management Fees 0.20%
Other Expenses 0.97%
Total Annual Fund Operating Expenses 1.17%
Fee Waiver and/or Expense Reimbursement 0.47%
Net Expenses/1/ 0.70%
------------------------------------------------------
</TABLE>
1 Reflects AGAM's contractual obligation to waive and to the extent necessary
reimburse certain fees and expenses of the Fund through February 28, 2001.
2 These estimates are based upon the Funds' Expenses shown above and the
expenses of the Underlying Funds' Institutional Class I shares shown in the
current prospectus for such shares. The estimates assume the following con-
stant allocation by the Funds of their assets among the Underlying Funds:
<TABLE>
<CAPTION>
Aggressive Growth Moderate Growth Conservative Growth
Lifestyle Fund Lifestyle Fund Lifestyle Fund
<S> <C> <C> <C>
International Equity 25% 15% 8%
Fund
Small Cap Growth Fund 20% 13% 8%
Mid Cap Value Fund 10% 9% 6%
Mid Cap Growth Fund 5% 3% 2%
Large Cap Growth Fund 20% 15% 13%
Growth & Income Fund 10% 15% 13%
Core Bond Fund 10% 30% 50%
High Yield Bond Fund 0% 0% 0%
</TABLE>
The Funds' actual expense may be higher or lower as a result of the allocation
of their assets among the Underlying Funds, the expenses of the Underlying
Funds, and/or the Funds' own expenses. The Net expense and Total Annual
Operating Expenses shown above with respect to the LifeStyle Funds and used to
calculate the 1 year and 3, 5 and 10 years examples, respectively, shown on the
following pages with respect to such Funds.
By translating "Total Annual Fund Operating Expenses" into dollar amounts,
these examples help you compare the costs of investing in a particular Fund, or
a particular class of shares, with the costs of investing in other mutual
funds.
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36
<PAGE>
The examples assume that you:
. Invest $10,000 in a Fund for the time period indicated and then redeem all
of your shares at the end of those periods.
. Your investment earns a 5% return each year and that each Fund's operating
expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth & Income Fund
Institutional Class I Shares $131 $409 $ 708 $1,556
-------------------------------------------------------------------
Large Cap Growth Fund
Institutional Class I Shares 175 542 933 2,030
-------------------------------------------------------------------
Mid Cap Growth Fund
Institutional Class I Shares 175 542 933 2,030
-------------------------------------------------------------------
Mid Cap Value Fund
Institutional Class I Shares 178 551 949 2,062
-------------------------------------------------------------------
Science & Technology
Institutional Class I Shares 218 673 1,154 2,483
-------------------------------------------------------------------
Socially Responsible Fund
Institutional Class I Shares 171 530 913 1,987
-------------------------------------------------------------------
Small Cap Growth Fund
Institutional Class I Shares 182 563 970 2,105
-------------------------------------------------------------------
Small Cap Index Fund
Institutional Class I Shares 92 440 813 1,855
-------------------------------------------------------------------
Stock Index Fund
Institutional Class I Shares 120 375 649 1,432
-------------------------------------------------------------------
Global Equity Fund
Institutional Class I Shares 169 523 902 1,965
-------------------------------------------------------------------
International Equity Fund
Institutional Class I Shares 184 569 933 2,127
-------------------------------------------------------------------
International Small Cap Fund
Institutional Class I Shares 210 649 1,114 2,400
-------------------------------------------------------------------
Balanced Fund
Institutional Class I Shares 146 452 782 1,713
-------------------------------------------------------------------
Aggressive Growth Lifestyle Fund
Institutional Class I Shares 10 87 171 417
-------------------------------------------------------------------
Conservative Growth Lifestyle Fund
Institutional Class I Shares 10 87 171 417
-------------------------------------------------------------------
Moderate Growth Lifestyle Fund
Institutional Class I Shares 10 87 171 417
-------------------------------------------------------------------
Core Bond Fund
Institutional Class I Shares 131 409 708 1,556
-------------------------------------------------------------------
High Yield Bond Fund
Institutional Class I Shares 166 514 887 1,933
-------------------------------------------------------------------
Strategic Income Fund
Institutional Class I Shares 153 474 818 1,791
-------------------------------------------------------------------
U.S. Government Securities Fund
Institutional Class I Shares 131 409 708 1,556
-------------------------------------------------------------------
Money Market fund
Institutional Class I Shares 119 372 644 1,420
-------------------------------------------------------------------
</TABLE>
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<PAGE>
More Information About
Investment Strategies and Risks
This Prospectus does not attempt to disclose all of the different investment
techniques that the Funds might use, or all of the types of securities in which
the Funds might invest. As with any mutual fund, investors must rely on the
professional judgment and skill of the Funds' management. A subadvisor may
choose not to use some or all of the investment techniques available to a Fund,
and these choices may cause the Fund to lose money or not achieve its invest-
ment objective.
Each Fund has a unique investment objective (see the Fund Summaries) that it
tries to achieve through its investment strategies. The investment objectives
of the following Funds cannot be changed without the approval of the holders of
a majority of the outstanding shares of each Fund: Growth & Income Fund, Large
Cap Growth Fund, Mid Cap Growth Fund, Small Cap Growth Fund, Global Equity
Fund, International Equity Fund, international Small Cap, Balanced Fund, Core
Bond Fund, Strategic Income Fund, U.S. Government Securities Fund and Money
Market Fund. The Investment objectives of the other Funds may be changed by the
Trustees. Except as noted for certain investment restrictions, the strategies a
Fund uses to achieve its investment objective also may be changed by the Trust-
ees without approval of the shareholders. Because each Fund is different, they
have different investment policies and risks, and will also have different
returns over time. This section provides additional information about the
Funds, and should be read in conjunction with the Fund Summaries.
Growth & Income Fund
Wellington Management seeks to achieve the Fund's objective by investing pri-
marily in a diversified portfolio of common stocks of U.S. issuers which Wel-
lington Management believes are of high quality. Wellington Management believes
that high quality companies are evidenced by a leadership position within an
industry, a strong or improving balance sheet, relatively high return on equi-
ty, steady or increasing dividend payout, and strong management skills. The
Fund's investments will emphasize primarily dividend paying stocks of larger
companies. The Fund may invest in securities that can be converted into, or
that include the right to buy common stocks, including convertible securities
issued in the Euromarket and preferred stocks. The Fund may also invest in mar-
ketable 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
unrated securities considered to be of equivalent quality in Wellington Manage-
ment's judgment. Under normal market conditions, the subadvisor expects that
the Fund's portfolio will consist primarily of equity securities.
The Fund may invest in derivatives.
Large Cap Growth Fund
At least 65% of the Fund's total assets will be invested in common stocks of
well-established, high-quality growth companies. The Fund may also invest in
convertible securities, preferred stocks, debentures and other corporate
obligations when Founders believes that these investments offer opportunities
for capital appreciation. Although these securities may produce current income,
income will not be a substantial factor in selecting these securities.
The Fund may invest in investment grade bonds, debentures and corporate obliga-
tions rated at the time of purchase of Baa or higher by Moody's or BBB or
higher by S&P or comparable quality at the time of purchase. The Fund may
choose to invest in lower-rated (Ba or lower by Moody's and BB or lower by S&P
or comparable quality at the time of purchase) convertible and preferred stocks
but not rated below B. The Fund may also invest in unrated convertible securi-
ties and preferred stocks if Founders
-------
38
<PAGE>
believes that they are equivalent in quality to the rated securities the Fund
may buy.
The Fund will never have more than 5% of its total assets invested in unrated
or below-investment-grade fixed income securities, with the exception of pre-
ferred stocks. If the Fund holds securities that are downgraded after they are
purchased, the Fund does not have to sell them unless the Fund assets in
unrated and below investment-grade securities reaches 5% of total assets.
The Fund is also permitted to use forward foreign currency contracts and
futures contracts. The Fund may also purchase and/or write options on securi-
ties and on indices, and may invest in Rule 144A securities.
Mid Cap Growth Fund
The Fund invests in equity securities, including common and preferred stocks,
and securities that can be converted into or exchanged for equity securities,
including warrants and rights. The Fund will typically invest in companies
whose securities are traded on domestic stock exchanges or in the over-the-
counter market.
To give the Fund the flexibility to take advantage of new opportunities that
can help to meet the Fund's investment objectives, the Fund can invest up to
15% of its net assets 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.
The Fund 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. The Fund may
also purchase American Depositary Receipts ("ADRs") or U.S. dollar-denominated
securities of foreign issuers that are not included in the 20% foreign securi-
ties limitation.
The Fund may invest in derivatives.
Mid Cap Value Fund
Although primarily investing in equity securities of mid cap companies using a
value-oriented approach, the Fund may use certain practices and securities
involving additional risks. Borrowing, securities lending, and derivatives
could create leverage, meaning that certain gains or losses could be amplified,
increasing NAV price movements. In using certain derivatives to gain stock mar-
ket exposure for excess cash holdings, the Fund increases its risk of loss.
Although they may add diversification, foreign securities can be riskier,
because foreign markets tend to be more volatile and exchange rates fluctuate.
When the Fund anticipates adverse market, economic, political or other condi-
tions, it may temporarily depart from its goal and invest substantially in
high-quality short-term fixed-income investments. This could help the Fund
avoid losses but may also mean lost opportunities.
Science & Technology Fund
At least 65% of the Fund's total assets will be invested in common stocks.
Other securities may also be purchased, including foreign stocks, futures, and
options, in keeping with the Fund's objectives. The Fund may sell securities
for a variety of reasons, such as to secure gains, limit losses, or redeploy
assets into more promising opportunities.
Since this Fund is focused on the science and technology industries, it is less
diversified than stock funds investing in a broader range of industries and,
therefore, could experience significant volatility. Companies in the rapidly
changing fields of science and technology often face unusually high price vola-
tility, in terms of both gains and losses. The potential for wide variation in
performance is based on the special risks common to these stocks. For example,
products or services that at first appear promising may not prove commercially
successful or may become obsolete quickly. Earnings disappointments can result
in sharp price declines.
The level of risk will rise to the extent that the Fund has significant expo-
sure to smaller or unseasoned companies (those with less than a three-year
operating history), which may not have established products or more experienced
management.
Foreign stock holdings are subject to the risk that some holdings may lose
value because of declining foreign currencies or adverse political or economic
events overseas. Investment in futures and options, if any, are subject to
additional volatility and potential losses.
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39
<PAGE>
As with any mutual fund, there can be no guarantee the Fund will achieve its
objectives.
Small Cap Growth Fund
The Fund will usually 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 beyond their start-up phase showing positive
earnings or the potential for accelerated earnings growth.
Although the Fund will typically invest in smaller companies, the Fund may
invest in emerging growth companies of any size. Emerging growth companies gen-
erally benefit from new products or services, technological developments,
changes in management or other factors. The Fund may also invest in companies
experiencing unusual developments affecting their market value, called "special
situation" companies. These companies may be involved in acquisitions or con-
solidations, reorganization, recapitalization, mergers, liquidation, or distri-
bution of cash, securities or other assets, tender or exchange offers, a
breakup or workout of a holding company, lawsuits which, if resolved favorably,
would improve the value of the company's stock, or a change in corporate con-
trol.
The 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. The Fund may also invest up to 20% of its
total assets in the securities of foreign issuers, which have certain risks
associated with them. The Fund's status is non-diversified , although its port-
folio managers have typically diversified the Fund's investments.
The interest income to be derived may be considered as one factor in selecting
debt securities for investment. Because the market value of debt obligations
can be expected to vary inversely with changes in prevailing interest rates,
investing in debt obligations may provide an opportunity for capital apprecia-
tion when interest rates are expected to decline. The success of such a strat-
egy is dependent upon the manager's ability to accurately forecast changes in
interest rates.
A security will be considered investment grade if it is rated within the four
highest grades by Moody's or S&P or, if unrated, is determined by the manager
to be of comparable quality. Bonds rated in the fourth highest grade may have
speculative characteristics. If a security held by the Fund is no longer rated,
or is rated below the Fund's minimum allowed rating, the manager factors this
information into the decision about whether the Fund should continue to hold
the securities. The Fund can normally invest up to 20% of its total assets in
domestic and foreign short-term money market obligations.
Investing in securities of emerging growth and small-sized companies can
involve greater risks because these securities may have limited marketability.
Because small and medium-sized companies normally have fewer shares outstanding
than larger companies, it may be more difficult for the Fund to buy or sell
large numbers of shares without affecting current prices. Small- and medium-
sized companies are typically subject to a greater degree of changes in earn-
ings 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. And companies with
small market capitalizations may also be dependent upon a single proprietary
product or market niche, may have limited product lines, markets or financial
resources, or may depend on a limited management group.
The Fund may invest in derivatives.
Small Cap Index Fund
The Fund's subadvisor pursues the Fund's objective by investing in companies
that are listed in the Russell 2000 Index (the "Index"), except for a small
portion in cash, to be available for redemptions. Since it may not be possible
to buy every stock included in the Index, or in the same proportions, the Fund
invests in a sampling of common stocks in the Index. The common stocks of the
Index will be selected utilizing a statistical sampling technique known as "op-
timization". This process selects stocks for the Fund so that various industry
weightings, market capital-
-------
40
<PAGE>
izations and fundamental characteristics (e.g., price-to-book, price-to-earn-
ings, debt-to-asset ratios and dividend yields) closely approximate those of
the Index. The common stocks held by the Fund are weighted to make the Fund's
aggregate investment characteristics similar to those of the Index as whole.
Socially Responsible Fund
The manager of the Fund determines whether a company "significantly" engages in
prohibited activities by screening the Fund's investable universe against a
proprietary database of stocks. Companies in the database generating more than
5% of revenues from any violating activity are not purchased by the Fund.
In addition to this database, the manager uses various other resources to
screen out companies whose operations appear to violate the social criteria.
At least once a year, the Investor Responsibility Research Center ("IRRC") sur-
veys state laws to see if there are any new or revised state laws that govern
or affect the investment of public funds. If the survey shows that at least 20
states have adopted laws that restrict public funds from being invested in a
clearly definable category of investments, this category is automatically added
to the Fund's social criteria list.
The manager of the Fund determines whether a company "significantly pollutes
the environment" by screening the Fund's investable universe against a list of
the top 75 global emitters. Emissions data is collected from various sources
including, but not limited to, government agencies and company filings. In
addition to this list, the manager uses various publications to screen out com-
panies whose operations appear to violate the social criteria.
Stock Index Fund
The Fund's subadvisor pursues the Fund's objective by investing in companies
that are listed in the S&P 500 Index (the "Index"), except for a small portion
in cash, to be available for redemptions. Since it may not be possible to buy
every stock included in the Index, or in the same proportions, the Fund invests
in a sampling of common stocks in the Index. The common stocks of the Index
will be selected utilizing a statistical sampling technique known as "optimiza-
tion". This process selects stocks for the Fund so that various industry
weightings, market capitalizations and fundamental characteristics (e.g.,
price-to-book, price-to-earnings, debt-to-asset ratios and dividend yields)
closely approximate those of the Index. The common stocks held by the Fund are
weighted to make the Fund's aggregate investment characteristics similar to
those of the Index as whole.
Global Equity Fund
The Fund invests primarily in equity securities of issuers throughout the
world, including issuers in the U.S. and emerging market countries.
The Fund may also invest in money market instruments. Although the Fund 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. Pri-
vately traded securities may have additional liquidity risks. The Fund may also
engage in forward foreign currency transactions and purchase when-issued or
delayed delivery securities.
International Equity Fund
MSAM's Active International Allocation team analyzes both the global economic
environment and the economies of the industrialized countries comprising the
MSCI Europe, Australasia, Far East (EAFE) Index. EAFE countries include Japan,
most nations in Western Europe, Australia, New Zealand, Hong Kong and
Singapore. MSAM views each country and sector as unique investment
opportunities and evaluates prospects for value, growth, inflation, interest
rates, corporate earnings, liquidity and risk characteristics, investor
sentiment and currency outlook. After determining to invest in a country or
sector, MSAM establishes overweight, underweight or neutral positions relative
to the broad market index for that country or sector. Within the countries or
sectors selected for investment, MSAM purchases optimized baskets of equity
securities designed to track the local market index. The Fund does not invest
in securities of U.S. issuers. MSAM
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41
<PAGE>
considers an issuer to be from a particular country if: (i) its principal
securities trading market is in that country; (ii) alone or on a consolidated
basis it derives 50% or more of its annual revenue from either goods produced,
sales made or services performed in that country; or (iii) it is organized
under the laws of, and has a principal office in, that country.
The Fund will limit its use of derivatives for non-hedging purposes to 33 1/3%
of its total assets measured by the aggregate notional amount of outstanding
derivatives. While the use of derivatives may be advantageous to the Fund, if
MSAM is not successful in employing them, the Fund's performance may be worse
than if it did not make such investments.
The Fund may invest in emerging market countries and, with regard to such
investments, make global and regional allocations to emerging markets, as well
as allocations to specific emerging market countries. Emerging market countries
are countries that major international financial institutions, such as the
World Bank, generally consider to be less economically mature than developed
nations, such as the United States or most nations in Western Europe. Emerging
market countries can include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most countries located in
Western Europe. Emerging market countries may be more likely to experience
political turmoil or rapid changes in economic conditions than more developed
countries, and the financial condition of issuers in emerging market countries
may be more precarious than in other countries. The characteristics result in
greater risk of price volatility in emerging market countries, which may be
heightened by currency fluctuations relative to the U.S. dollar.
International Small Cap Fund
The Fund may invest without limit in American Depositary Receipts and American
Depositary Shares (collectively, "ADRs"). ADRs are receipts representing shares
of a foreign corporation held by a U.S. bank that entitle the holder to all
dividends and capital gains on the underlying foreign shares. ADRs are
denominated in U.S. dollars and trade in the U.S. securities markets.
The Fund may invest a significant portion of its assets in the securities of
small companies. The securities of small companies may have limited marketabil-
ity and may experience more abrupt or erratic movements in price than securi-
ties of larger companies or the market averages in general. Because of this,
the net asset value of the International Small Cap Fund may fluctuate more
widely than popular market averages.
The Fund 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.
The Fund may invest in investment-grade bonds, debt securities and corporate
obligations. For purposes of this Fund, investment grade securities are those
rated Baa or higher by Moody's, or BBB or higher by S&P or of comparable
investment quality at the time of purchase. The Fund may choose to invest in
lower-rated convertible securities and preferred stocks (securities rated Ba or
lower by Moody's and BB or lower by S&P) or of comparable investment quality at
the time of purchase. The Fund may also invest in unrated convertible securi-
ties and preferred stocks if Founders believes they are equivalent in quality
to the rated securities that the Fund may buy.
The Fund will not invest more than 5% of its total assets in unrated or below
investment-grade fixed-income securities, with the exception of preferred
stocks. If the Fund holds securities that are downgraded to below investment
grade after they are purchased, the Fund does not have to sell them unless the
Fund's investments in unrated and below investment grade securities are equal
to or greater than 5% of total fund assets.
Since the Fund's assets will be invested primarily in foreign securities and
since substantially all of the Fund's revenues will be received in foreign cur-
rencies, the Fund's net asset values will be affected by changes in currency
exchange rates. The Fund will pay dividends in dollars and will incur currency
conversion costs.
Balanced Fund
The Fund may invest in convertible securities, preferred stocks, bonds, deben-
tures, and other corporate obligations when INVESCO
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42
<PAGE>
believes that these investments offer opportunities for capital appreciation.
Current income is also a factor in the selection of these securities.
The Fund may invest without limit in ADRs and up to 30% of its total assets in
foreign securities (other than ADRs). The Fund will not invest more than 25% of
its total assets in the securities of any one foreign country. The 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.
The Fund may also take positions in securities traded on regional or foreign
exchanges. The portion of the Fund's portfolio invested in debt securities may
include obligations of the U.S. government, government agencies, and investment
grade corporate bonds. Obligations issued by U.S. government agencies may
include some supported only by the credit of the issuing agency rather than by
the full faith and credit of the U.S. government. The Fund may hold securities
of any maturity, with the average maturity of the portfolio varying depending
upon economic and market conditions.
The Fund may invest in derivatives.
Aggressive Growth LifeStyle Fund
The Fund is managed so that it can serve as a complete investment program or as
a core part of your larger portfolio. The combination of the North American
Funds ("Underlying Funds") has been selected to represent a reasonable spectrum
of investment options for the Fund. The manager may change the asset allocation
ranges and the particular Underlying Funds in which the Fund may invest from
time to time.
Conservative Growth LifeStyle Fund
The Fund is managed so that it can serve as a complete investment program or as
a core part of your larger portfolio. The combination of the North American
Funds ("Underlying Funds") has been selected to represent a reasonable spectrum
of investment options for the Fund. The manager may change the asset allocation
ranges and the particular Underlying Funds in which the Fund may invest from
time to time.
Moderate Growth LifeStyle Fund
The Fund is managed so that it can serve as a complete investment program or as
a core part of your larger portfolio. The combination of the North American
Funds ("Underlying Funds") has been selected to represent a reasonable spectrum
of investment options for the Fund. The manager may change the asset allocation
ranges and the particular Underlying Funds in which the Fund may invest from
time to time.
Core Bond Fund
Credit research on corporate bonds includes examining both quantitative (mathe-
matical) and qualitative criteria established by AGIM. These criteria include
an issuer's industry, operating and financial profiles, business strategy, man-
agement quality, and projected financial and business conditions.
Up to 10% of the Fund's total assets may be invested in lower quality fixed-
income securities, those rated below Baa3 by Moody's and BBB by S&P or compara-
ble investment quality at the time of purchase. Up to 35% of the Fund's total
assets may be invested in interest-bearing short-term investments, such as com-
mercial paper, bankers' acceptances, bank certificates of deposit, and other
cash equivalents and cash. Equity securities, including common or preferred
stocks, convertible securities, and warrants, may comprise up to 20% of the
Fund's total assets. The Fund may invest in depositary receipts, foreign cur-
rency, futures and options, illiquid securities (limited to 15% of the Fund's
assets), investment companies, loan participations, real estate securities,
repurchase agreements, reverse repurchase agreements, dollar rolls, structured
securities, variable amount master demand notes, variable rate demand notes,
and when-issued securities.
The Fund may invest in derivatives.
High Yield Bond Fund
At least 65% of the Fund's total assets are invested in below investment-grade
U.S. and foreign junk bonds. To balance this risk, the Fund may invest up to
35% in investment grade securities, which are those securities rated Baa3 or
higher by Moody's and BBB- or higher by S&P or comparable investment quality at
the time of
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<PAGE>
purchase. In addition, the Fund may invest up to 15% in zero coupon securities
(securities not paying current cash or interest), and up to 20% of total
assets in equity securities. Equity securities includes common or preferred
stocks, warrant, and convertible securities.
The sub-advisor can also employ a temporary defensive strategy, which means
that under certain market conditions the Fund may take temporary defensive
positions that are inconsistent with its principal investment strategies, in
attempting to respond to adverse market, economic, political or other condi-
tions. If the Fund takes such a temporary defensive position, it may not
achieve its stated investment objective.
Strategic Income Fund
The Fund may invest in debt obligations issued or guaranteed by a foreign sov-
ereign government or one of its agencies or political subdivisions, and debt
obligations issued or guaranteed by 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. These securi-
ties may be denominated in multi-national currency units.
The purpose of investing a portion of the Fund's assets in below investment
grade, mortgage, and international debt securities, is to provide investors
with a higher yield than a high-quality domestic corporate bond fund, and with
less risk than a fund that invests principally in below investment grade secu-
rities. Some of the debt securities the Fund may select may be considered com-
parable 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) or comparable investment quality at the time of purchase.
The Fund may invest in derivatives.
U.S. Government Securities Fund
The Fund may invest in:
.Mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA"), popularly known as "Ginnie Maes," that are backed by
the full faith and credit of the U.S. Government. These are known as a
"modified pass through" type of mortgage- backed security ("GNMA
Certificates"). These securities entitle the holder to receive all interest
and principal payments due whether or not payments are actually made on the
underlying mortgages
.U.S. Treasury obligations
.Obligations issued or guaranteed by agencies or instrumentalities of the U.S.
Government. These securities are backed by their own credit, and may not be
backed by the full faith and credit of the U.S. Government
.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 Mort-
gage Corporation and the Federal National Mortgage Association;
.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; and
.Repurchase agreements collateralized by any of the foregoing.
Money Market Fund
The Fund invests in high quality, U.S. dollar-denominated money market instru-
ments, as described on page 29.
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<PAGE>
Other Risks of Investing in the North American Funds
Although a Fund may have the flexibility to use some or all of the investments
or strategies described in this Prospectus and the Statement of Additional
Information, its subadvisor may choose not to use these investments or strate-
gies for a variety of reasons. These choices may cause a Fund to miss opportu-
nities, lose money or not achieve its goal.
High Yield/High Risk Securities
High yield securities (often known as "junk bonds") include debt instruments
that have an equity security attached to them. Securities rated below invest-
ment grade and comparable unrated securities offer yields that fluctuate over
time, but generally offer higher yields than do higher rated securities. Howev-
er, 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 qual-
ity and protective characteristics that are outweighed by large uncertainties
or major risk exposures to adverse conditions.
Some of the debt securities in which the Funds may choose to invest may be, or
may be similar to, the lowest rated non-subordinated debt (securities rated C
by Moody's or CCC or lower by S&P) or comparable investment quality at the time
of purchase. This type of security is very risky, as issuers may not have the
ability to repay principal and interest, and may even default. If this should
occur, the value of shares of the Fund holding them would likely fall.
Foreign Securities
There are risks associated with investing in foreign securities. These risks
include unforeseen changes in tax laws, political changes, and changes in for-
eign currency values and exchange rates.
There may be less publicly available information about foreign issuers. 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 for domestic issuers. Foreign stock markets generally have
substantially less volume than the U.S. exchanges and securities of foreign
issuers are generally less liquid and more volatile, relative to U.S. issuers.
For emerging markets, these risks can be more extreme.
There is frequently less governmental regulation of foreign exchanges, broker-
dealers and issuers than in the United States, and brokerage costs may be high-
er. In addition, investments in foreign companies may be subject to the possi-
bility of nationalization or other changes in policy. Policy changes may allow
foreign governments to withhold dividends, expropriate (confiscate, or keep)
investment returns, or raise taxes to extremely high levels, among other
things. Also, should a foreign issuer default, it may be difficult to recover
anything in a bankruptcy proceeding.
Lending Fund Securities
Each Fund may lend up to 33% of its total portfolio assets, or securities, to
brokers, dealers and other financial institutions. These loans must be callable
(the Fund may ask that the loan be repaid in full) at any time by the Fund. The
loans must be at all times fully secured by cash, cash equivalents or securi-
ties issued or guaranteed by the U.S. Government or its agencies or instrumen-
talities, and marked to market (priced at market value) 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 collat-
eral should the borrower of the securities fail financially. However, these
loans of Fund securities will only be made to firms deemed by the subadvisors
to be creditworthy.
Leverage Risk
Funds that borrow money to buy securities are using leverage. Leverage risk is
the risk that leverage, or debt, will enable a Fund to buy more of a security
that falls in value. In this case, the Fund would still need to repay the money
it borrowed. Funds can create leverage, or borrow money, by using different
types of techniques including reverse repurchase agreements, dollar rolls, and
derivatives including inverse floating rate instruments.
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<PAGE>
Hedging and Other
Strategic Transactions
Individual Funds 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 Fund. Hedging is simply believing that certain securi-
ties will fall, or rise, in value, and structuring transactions that take
advantage of those changes. These transactions are generally used to protect
against possible changes in the market value of securities a Fund already owns
or plans to buy, to protect unrealized gains or to improve the Fund's return in
some way.
Where allowed, individual Funds may 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. This category
includes derivative transactions. A "derivative" is generally defined as an
instrument whose value is based upon, or derived from, some underlying index or
rate. Interest rate transactions may include swaps, caps, floors and collars,
and currency transactions may include currency forward contracts, currency
futures contracts, currency swaps and options on currencies or currency futures
contracts.
Frequent Trading
A Fund may buy or sell investments frequently, increasing brokerage commissions
and other expenses of the Fund. Frequent trading may also increase the amount
of capital gains realized by a Fund, including short-term capital gains, which
are generally taxable to shareholders at ordinary income tax rates.
Temporary Defensive Strategies
A Fund's subadvisor may at certain times decide that pursuing the Fund's
investment strategies is inconsistent with market conditions. A subadvisor may
then employ defensive strategies designed mostly to limit losses. However, the
subadvisor may choose not to use defensive strategies, even in volatile or
unsettled market conditions. Such defensive strategies may cause the Fund to
miss opportunities or to not achieve its goal.
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<PAGE>
Management of the Funds
Under the federal securities laws, Massachusetts law and the Trust's Agreement
and Declaration of Trust and By-Laws, the business and affairs of the Trust are
managed under the direction of the Trustees.
American General Asset Management Corp. ("AGAM"), formerly CypressTree Asset
Management Corporation, Inc., is the investment adviser for the Trust. AGAM was
formed in 1996 to advise, acquire and distribute mutual funds through broker-
dealers, banks and other intermediaries. AGAM's address is 286 Congress Street,
Boston, Massachusetts 02210.
According to its Advisory Agreement with the Trust (the "Advisory Agreement"),
AGAM:
.Oversees the administration of all aspects of the business and affairs of the
Funds
.Selects, contracts with and compensates subadvisors to manage the assets of
the Funds
The following table shows the management fees each Fund paid (or, in the case
of new Funds will pay) to AGAM for the last fiscal year under the Advisory
Agreement as a percentage of the Fund's average daily net asset value.
<TABLE>
<CAPTION>
Funds Management
Fees
--------------------------------------------------------------------------
<S> <C>
Growth & Income Fund .67%
Large Cap Growth Fund .90%
Mid Cap Growth Fund .93%
Mid Cap Value Fund 0.900% on the first $100 million
0.875% on the next $150 million
0.850% on the next $250 million
0.825% on the next $250 million
0.800% on the assets over $750 million
Science and Technology Fund 0.90%
Small Cap Growth Fund .95%
Small Cap Index Fund 0.28% on the first $500 million
0.27% on assets over $500 million
Socially Responsible Fund 0.65%
Stock Index Fund 0.27% on the first $500 million
0.26% on assets over $500 million
Global Equity Fund .88%
International Equity Fund .90%
International Small Cap Fund 1.05%
Balanced Fund .78%
Aggressive Growth Lifestyle Fund 0.10%
Conservative Growth Lifestyle 0.10%
Fund
Moderate Growth Lifestyle Fund 0.10%
Core Bond Fund .60%
High Yield Bond Fund 0.825% on the first $200 million
0.725% on the next $300 million
0.675% on assets over $500 million
Strategic Income Fund .74%
U.S. Government Securities Fund .60%
Money Market Fund .20%
</TABLE>
--------------------------------------------------------------------------------
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<PAGE>
.Makes recommendations to the Trustees regarding the hiring, termination and
replacement of subadvisors
.Reimburses the Fund if the total of certain expenses allocated to any Fund
exceeds certain limitations
.Monitors the subadvisors for compliance with the investment objectives and
related policies of each Fund
.Reviews the performance of the subadvisors
.Periodically reports to the Trustees
Under an order granted to the Funds by the Securities and Exchange Commission,
AGAM is permitted to appoint a subadvisor, to create a subadvisory agreement,
and to terminate or amend a subadvisory agreement, in each case without share-
holder approval. This "Manager of Managers" structure permits the Funds to
change subadvisors or the fees paid to subadvisors without the expense and
delays associated with obtaining shareholder approval. AGAM has ultimate
responsibility under the Manager of Managers structure to oversee the
subadvisors, including making recommendations to the Trust regarding the hir-
ing, termination and replacement of subadvisors.
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<PAGE>
Subadvisory Agreements
Wellington Management Company, LLP
Wellington Management Company, LLP, the subadvisor to the Growth & Income Fund
("Wellington Management"), whose principal business address is 75 State Street,
Boston, Massachusetts 02109.
Wellington Management and its predecessor organizations have provided invest-
ment management services to investment companies, employee benefit plans,
endowments, foundations and other institutions and individuals since 1928. As
of September 30, 1999, Wellington Management had investment management author-
ity with respect to approximately $217 billion of assets.
Matthew E. Megargel, Senior Vice President of Wellington Management, has served
as fund manager to the Growth & Income Fund since February 1992. Mr. Megargel
joined Wellington Management in 1983 as a research analyst and took on addi-
tional responsibilities as a fund manager in 1988. In 1991, he became solely a
fund manager with Wellington Management.
Credit Suisse Asset Management, LLC.
Credit Suisse Asset Management, LLC., the subadvisor to the Small Cap Growth
Fund ("CSAM"), is located at 153 E. 53rd Street, New York, New York, 10022.
CSAM 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 November 30, 1999,
CSAM managed approximately $60 billion of assets, and together with its global
affiliates, managed $168 billion worldwide.
The co-fund managers of the Small Cap Growth Fund are Elizabeth B. Dater and
Stephen J. Lurito. Ms. Dater, a managing director, has been fund manager of the
Small Cap Growth Fund since its inception and has been a fund manager since
1978. Mr. Lurito, a managing director, has been a fund manager of the Small Cap
Growth Fund since its inception and has been with the firm since 1987.
Founders Asset Management, LLC.
Investment decisions for the Large Cap Growth Fund, International Small Cap
Fund and Global Equity Funds are made by their subadvisor, Founders Asset Man-
agement, LLC, located at 2930 East Third Avenue, Denver, Colorado 80206. Found-
ers is a registered investment adviser first established as an asset manager in
1938, and is a subsidiary of Mellon Bank, N.A. As of September 30, 1999, Found-
ers had over $7.5 billion of assets under management, including approximately
$5.2 billion in mutual fund accounts and $2.3 billion in other advisory
accounts.
To facilitate the day-to-day investment management of the Large Cap Growth
Fund, International Small Cap Fund, and Global Equity Fund, Founders employs a
unique team-and-lead-manager system. The management team is composed of several
members of the Investment Department, including lead portfolio managers, port-
folio traders and research analysts. Team members share responsibility for pro-
viding ideas, information, knowledge and expertise in the management of the
Funds. Each team member has one or more areas of expertise that is applied to
the management of the Fund. Daily decisions on Fund selection for the Fund
rests with a lead fund manager assigned to the Fund.
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<PAGE>
Tracy P. Stouffer, Vice President of Investments, has been the lead fund man-
ager for the International Small Cap Fund since July 1999. Previously, Mr.
Stouffer was a vice president and portfolio manager with Federated Global
Incorporated from 1995 to July 1999 and a vice president and portfolio manager
with Clariden Asset Management from 1988 to 1995.
Thomas M. Arrington, Vice President of Investments, is a Chartered Financial
Analyst who has been the co-portfolio manager, along with Scott Chapman, of the
Large Cap Growth Fund since December 1998. Mr. Arrington has served as co-port-
folio manager to the Global Equity Fund since March 2000. Prior to joining
Founders, he was vice president and director of income equity strategy at
HighMark Capital Management, a subsidiary of Union BanCal Corp., where he man-
aged the HighMark Income Equity Fund, a large-cap fund. He received a bache-
lor's degree in economics from the University of California, Los Angeles and an
MBA from San Francisco State University.
Scott Chapman, Vice President of Investments, is a Chartered Financial Analyst
who has been the co-portfolio manager, along with Thomas Arrington, of the
Large Cap Growth Fund since December 1998. Mr. Chapman has served as co-portfo-
lio manager to the Global Equity Fund since March 2000. Before joining Found-
ers, Chapman was vice president and director of growth strategy for HighMark
Capital. He has more than 10 years experience in equity investment management,
including security analysis positions with McCullough, Andrews and Cappiello
and Cooper Development Co. Chapman received a bachelor of science degree in
accounting from Santa Clara University and an MBA in finance from Golden Gate
University.
Douglas A. Loeffler, Vice President of Investments, is a Chartered Financial
Analyst who has served as the co-portfolio manager of the Global Equity Fund
since March, 2000. Mr. Loeffler has been the lead portfolio manager for Dreyfus
Founders Worldwide Growth Fund since July, 1999. Prior to joining Founders in
1995, Mr. Loeffler was an investment professional at Scudder, Stevens & Clark
for seven years.
INVESCO Funds Group, Inc. ("INVESCO")
INVESCO, with principal offices at 7800 E. Union Blvd., Denver, Colorado 80237,
has been the subadvisor to the Balanced Fund and the Mid Cap Growth Fund since
March 2000. Established in 1932, INVESCO Funds Group is one of the oldest
existing mutual fund management companies in the United States. Some of the
world's largest institutions and more than one million individual investors
rely on the knowledge of INVESCO's investment specialists. As of December 31,
1999, INVESCO and its affiliates managed approximately $357 billion in assets,
including $40 billion in shareholder accounts.
Charles P. Mayer, Director of Investments & Senior Vice President, manages the
equity portion of the Balanced Fund. Mr. Mayer, who joined INVESCO in 1993, has
been an investment professional since 1969. Mr. Mayer holds a BA from St.
Peter's College, and an MBA from St. John's University.
Donovan J. Paul, Senior Vice President, manages the fixed-income portion of the
Balanced Fund. Mr. Paul, who joined INVESCO in 1994, has been an investment
professional since 1976. Mr. Paul holds a BBA from the University of Iowa, and
an MBA from the University of Northern Iowa.
Peter Lovell, Vice President, is a co-manager of the Balanced Fund. Mr. Lovell,
who joined INVESCO in 1994, has been an investment professional since 1976. Mr.
Lovell holds a BBA from the University of Iowa, and an MBA from the University
of Northern Iowa.
Timothy J. Miller, Senior Vice President, manages the Mid Cap Growth Fund. Mr.
Miller, who joined INVESCO in 1992, has been an investment professional since
1979. Mr. Miller holds a BSBA from St. Louis University, and an MBA from the
University of Missouri.
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<PAGE>
Morgan Stanley Dean Witter Investment Management Inc.
Morgan Stanley Dean Witter Investment Management Inc., with principal offices
at 1221 Avenue of the Americas, New York, New York 10020, has been the
subadvisor to the International Equity Fund since April 1, 1999. Morgan Stanley
Dean Witter Investment Management Inc. in certain instances does business using
the name Morgan Stanley Asset Management ("MSAM"). MSAM, a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co., conducts a worldwide fund
management business, providing a broad range of fund management services to
customers in the United States and abroad. As of September 30, 1999, MSAM,
together with its affiliated institutional asset management companies, managed
investments totaling approximately $173.5 billion.
Ann D. Thivierge shares portfolio management responsibility for the Interna-
tional Equity Fund with Barton M. Biggs. Ms. Thivierge is a Managing Director
of MSAM. She joined MSAM in 1986 and holds a B.A. in International Relations
from James Madison College, Michigan State University, and an M.B.A. in Finance
from New York University.
Barton M. Biggs has been Chairman and a director of MSAM since 1980. He is also
a director and chairman of various registered investment companies to which
MSAM and certain of its affiliates provide investment advisory services. Mr.
Biggs holds a B.A. from Yale University and an M.B.A. from New York University.
American General Investment Management, L.P. ("AGIM")
AGIM has been the subadvisor to the Strategic Income Fund, the Core Bond Fund,
the U.S. Government Securities Fund, and the Money Market Fund since March,
2000, and of the Stock Index Fund, the Socially Responsible Fund, the High
Yield Bond Fund, the Aggressive Growth Lifestyle Fund, the Moderate Growth
Lifestyle Fund, and the Conservative Growth Lifestyle Fund since inception.
AGIM was formed in 1998 as a successor to the investment management division of
American General Corporation, and is an indirect wholly-owned subsidiary of
American General Corporation. AGIM also provides investment management and
advisory services to pension and profit sharing plans, financial institutions
and other investors. Accounts managed by AGIM had combined assets, as of
December 31, 1999, of approximately $68.9 billion. AGIM is located at 2929
Allen Parkway, Houston, Texas 77019.
Magali E. Azema-Barac is responsible for AGIM's equity group. She heads the
team making investment decisions for each of the Index Funds, as well as for
the Socially Responsible Fund. Ms. Azema-Barac joined American General in Sep-
tember, 1999. Prior to that, she worked on the equity desk of US West Invest-
ment Management Company in Englewood, Colorado, where she managed an enhanced
equity portfolio.
Steven Guterman, Executive Vice President portfolio manager of the Strategic
Income Fund, joined AGIM in 1998. Mr. Guterman served as Managing Director at
Salomon Brothers, Inc. from 1996 to 1998 and as Senior Portfolio Manager and
head of the U.S. Fixed Income Portfolio Group from 1990 to 1998.
Robert N. Kase, Portfolio Manager, who serves as the portfolio manager of the
Core Bond Fund and the U.S. Government Securities Fund, joined AGIM in 1998.
Mr. Kase has served as Investment Officer of Variable Annuity Life Insurance
Company and Senior Portfolio Manager of AGIM since 1998, and was Senior Portfo-
lio Manager with CL Capital Management, Inc. from 1992 to 1998.
Investment decisions for the High Yield Bond Fund are made by a team, headed by
Gordon Massie. Mr. Massie, Senior Vice President, joined AGIM in April 1998.
Previously, Mr. Massie was Director of High Yield Research at American General
Corporation from August 1985 to April 1998.
Investment decisions for the Municipal Money Market Fund are made by a team of
investment professionals at AGIM.
Teresa Moro, Portfolio Manager, who serves as the portfolio manager of the
Money Market Fund, has served as Vice President and Investment Officer of Amer-
ican General Series Portfolio Company and as portfolio manager of the American
General Series Portfolio Company Money Market Fund since 1991.
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<PAGE>
Neuberger Berman
Management, Inc. ("NBM") 605 Third Avenue, Second Floor, New York, New York
10158-0180
NBM is the subadvisor for the Mid Cap Value Fund. NBM and its predecessor firms
have specialized in the management of no-load mutual funds since 1950. As of
December 31, 1999, NBM and its affiliates managed approximately $54 billion in
aggregate net assets.
Robert I. Gendelman and S. Basu Mullick serve as co-managers of the Mid Cap
Value Fund. Messrs. Gendelman and Mullick are Vice Presidents of NBM and Mr.
Gendelman is a managing director of Neuberger Berman, LLC. Messrs. Gendelman
and Mullick have been associated with NBM since 1994 and 1998, respectively.
Prior to joining NBM, Mr. Mullick was Managing Director of Ark Asset Management
from 1993-1998.
T. Rowe Price Associates, Inc., ("T. Rowe Price") 100 East Pratt Street,
Baltimore, MD 21202
T. Rowe Price is the subadvisor for the Science & Technology Fund. Founded in
1937 by Thomas Rowe Price, Jr., the Baltimore-based investment management firm
is one of the nation's leading providers of no-load mutual funds for individual
investors and corporate retirement programs. As of September 30, 1999, T. Rowe
Price and its affiliates served as investment advisor to more than 75 stock,
bond, and money market funds and managed about $157.4 billion.
The Fund is managed by an investment advisory committee, chaired by Charles A.
Morris. Mr. Morris has day-to-day responsibility for managing the portfolio and
works with the committee to develop and execute the Fund's investment program.
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<PAGE>
Section III:
Investing in the North American Funds
Institutional Classes of Shares
Institutional Class I shares of each Fund are available to you through your
employer plan. Institutional Class I shares are available to any qualifying
employer plan once the plan establishes a minimum account balance of $1 million
with the Trust. Institutional Class I shares are also available for purchase by
the Aggressive, Moderate and Conservative Growth Lifestyle Funds. A plan's
account balance is equal at any time to the aggregate of all amounts contrib-
uted by the plan to the Trust, less the cost of all redemptions by such plan
from the Trust. The Distributor may waive the minimum account balance require-
ment if it reasonably anticipates that the size of the plan and/or the antici-
pated amount of contributions will present economies of scale. As a participant
in an employer retirement plan, you do not purchase Institutional Class I
shares of the Funds directly. Rather, Institutional Class I shares of a Fund
are purchased for you when you elect to allocate your retirement contributions
to a Fund plan that is available as an investment
option in your retirement or savings plan. You may be permitted to elect dif-
ferent investment options, alter the amounts contributed to your plan, or
change how contributions are allocated among your investment options in accor-
dance with your plan's specific provisions. See your plan administrator or
employee benefits office for more details. Investments by individual partici-
pants in employer retirement plans are made through their plan sponsor or
administrator, who is responsible for transmitting instructions for all orders
for the purchase, redemption and exchange of Fund shares. The availability of
an investment by a plan participant in the Funds, and the procedures for
investing depend upon the provisions of the plan and whether the plan sponsor
or administrator has contracted with the Trust or designated agent for special
processing services.
For more information on how to participate in the Funds through an employee
retirement plan, please refer to your plan materials or contact your employee
benefits office.
Transfer or exchange of balances
An employer retirement plan may allow you to exchange all or part of your
existing plan balance from one investment option to another. Check with your
plan administrator for details on the rules governing exchanges in your plan.
Exchanges will be accepted by the Trust only as permitted by your plan. Your
plan administrator can explain how frequently exchanges are allowed. The Trust
reserves the right to re-fuse any exchange purchase request.
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<PAGE>
Pricing of Fund Shares
The price of the shares of each Fund is the net asset value per share (next
determined following receipt of a properly completed order). The net asset
value of the shares of each class of each Fund is calculated separately and,
except as described below, is determined once daily as of the close of regu-
larly scheduled trading on the New York Stock Exchange generally, 4:00 p.m.,
Eastern Time. Net asset value per share of each class of each Fund is calcu-
lated by dividing the value of the portion of the Fund'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 Fund's securities
holdings will not materially affect the current net asset value of the shares
of the Fund and (ii) days when the New York Stock Exchange is closed (for exam-
ple, national holidays). Generally, trading in non-U.S. Government securities
as well as U.S. Government Securities and money market instruments, is substan-
tially completed each day at various times prior to the close of regularly
scheduled trading on the New York Stock Exchange. The values of such securities
used in computing the net asset value of the shares of a class of a Fund 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 gener-
ally 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 deter-
mined in good faith by the subadvisors under procedures established and regu-
larly reviewed by the Trustees.
All instruments held by the Money Market Fund and short-term debt instruments
with a remaining maturity of 60 days or less held by the other Funds are valued
on an amortized cost basis.
Unless you request cash payment, all dividends and distributions will be rein-
vested. All Funds except the Money Market Fund declare and pay capital gains
annually.
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<PAGE>
Dividends and Distributions from North American Funds
These Funds declare and pay income dividends annually:
.International Small Cap Fund
.Global Equity Fund
.Small Cap Growth Fund
.Mid Cap Growth Fund
.Large Cap Growth Fund
.Balanced Fund
.Science & Technology Fund
These Funds declare and pay income dividends semi-annually:
.International Equity Fund
.Growth & Income Fund
These Funds declare income dividends daily and pay quarterly:
.Conservative Growth Lifestyle Fund
.Aggressive Growth Lifestyle Fund
.Mid Cap Value Fund
.Moderate Growth Lifestyle Fund
.Socially Responsible Fund
.Small Cap Index Fund
.Stock Index Fund
These Funds declare income dividends daily and pay monthly:
.Strategic Income Fund
.Core Bond Fund
.U.S. Government Securities Fund
.Money Market Fund
.High Yield Bond Fund
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<PAGE>
Taxes
It is expected that each Fund of the Trust will qualify as a "regulated invest-
ment company" under the Code and that it 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.
A Fund's distributions derived from interest, dividends and certain other
income, including gains from investments that the Fund held for one year or
less, will generally result in taxable ordinary income to the shareholders of
the Fund. Distributions of net gains from investments held by a Fund for more
than one year are taxable as long-term gains (generally at a 20% rate for non-
corporate shareholders). Distributions will be treated as described above for
federal income tax purposes whether they are paid in cash or reinvested in
additional shares and regardless of how long a shareholder has held shares in
the Fund. Distributions are taxed as described in this paragraph even if such
distributions economically represent a return of a particular shareholder's
investment. Distributions that represent a return of a particular shareholder's
investment are likely to occur in respect of shares purchased at a time when a
Fund's net asset value reflects gains that are either unrealized, or realized
but not distributed.
The redemption, sale or exchange of Fund shares (including the exchange of
shares of one Fund 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 disposi-
tion of shares of the Fund will be taxed as a long-term capital gain or loss if
the shares are capital assets in the shareholder's hands and if the shareholder
held the shares have been held for more than one year. (such gains are gener-
ally taxed at a 20% rate for noncorporate shareholders).
Descriptions of tax consequences set forth in this Prospectus and in the State-
ment of Additional Information are intended to be a general guide. Investors
should consult their tax advisers with respect to the specific tax consequences
of an investment in the Fund, including the effect and applicability of state,
local, foreign, and other tax laws and the possible effects of changes in fed-
eral or other tax laws. This discussion is not intended as a substitute for
careful tax planning.
-------
56
<PAGE>
Financial Highlights
[LOGO OF FINANCIAL HIGHLIGHTS]
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five years or, if shorter, the period of the
Fund's operations. Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the return that an
investor would have earned or lost on an investment in a Fund (assuming
reinvestment of all dividends and distributions). This information has been
derived from each Fund's financial statements, which have been audited by Ernst
& Young LLP (Mid Cap Value Fund, Small Cap Index Fund, Socially Responsible
Fund, Stock Index Fund, Aggressive Growth LifeStyle Fund, Conservative Growth
LifeStyle Fund, Moderate Growth LifeStyle Fund, and the High Yield Bond Fund).
The annual report of Ernst & Young LLP, along with the above listed funds
financial statements, is included in the annual report of American General
Series Portfolio 2, and is also available upon request.
-------
57
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mid Cap
Value Fund
-------------
Institutional
Class I
-------------
Year
Ended
10/31/99
--------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
--------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.07
Net realized and unrealized gain/(loss) on securities 1.94
-------------
Total income (loss) from investment operations 2.01
-------------
Distributions
Dividends from net investment income (0.06)
Distributions from net realized gain (loss) on securities -
-------------
Total distributions (0.06)
--------------------------------------------------------------------------
Net Asset Value, End of Period $11.95
--------------------------------------------------------------------------
Total Return 20.18%
--------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------
Ratio of expenses to average net assets 1.17%
--------------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 2.51%
--------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets 0.64%
--------------------------------------------------------------------------
Portfolio turnover rate 177%
--------------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 126
--------------------------------------------------------------------------
Net assets, end of period (000's) $1,507
--------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap
Index Fund
----------
Class A
----------
Year
Ended
10/31/99
-----------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
-----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.10
Net realized and unrealized gain/(loss) on securities 1.03
----------
Total income (loss) from investment operations 1.13
----------
Distributions
Dividends from net investment income (0.10)
Distributions from net realized gain (loss) on securities -
----------
Total distributions (0.10)
-----------------------------------------------------------------------
Net Asset Value, End of Period $11.03
-----------------------------------------------------------------------
Total Return 11.32%
-----------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------
Ratio of expenses to average net assets 0.83%
-----------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 1.69%
-----------------------------------------------------------------------
Ratio ot net investment income (loss) to average net assets 0.97%
-----------------------------------------------------------------------
Portfolio turnover rate 48%
-----------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 263
-----------------------------------------------------------------------
Net assets, end of period (000's) $2,900
-----------------------------------------------------------------------
</TABLE>
58
-------
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Socially
Responsible Fund
----------------
Institutional
Class I
----------------
Year
Ended
10/31/99
------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.11
Net realized and unrealized gain/(loss) on securities 2.16
----------------
Total income (loss) from investment operations 2.27
----------------
Distributions
Dividends from net investment income (0.11)
Distributions from net realized gain (loss) on
securities -
----------------
Total distributions (0.11)
------------------------------------------------------------------------
Net Asset Value, End of Period $12.16
------------------------------------------------------------------------
Total Return 22.73%
------------------------------------------------------------------------
Ratios/Supplemental Data
------------------------------------------------------------------------
Ratio of expenses to average net assets 0.68%
------------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 1.89%
------------------------------------------------------------------------
Ratio ot net investment income (loss) to average net
assets 0.97%
------------------------------------------------------------------------
Portfolio turnover rate 24%
------------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 173
------------------------------------------------------------------------
Net assets, end of period (000's) $2,098
------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Stock
Index Fund
----------
Class A
----------
Year
Ended
10/31/99
-----------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
-----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.11
Net realized and unrealized gain/(loss) on securities 2.32
----------
Total income (loss) from investment operations 2.43
----------
Distributions
Dividends from net investment income (0.11)
Distributions from net realized gain (loss) on securities -
----------
Total distributions (0.11)
-----------------------------------------------------------------------
Net Asset Value, End of Period $12.32
-----------------------------------------------------------------------
Total Return 24.36%
-----------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------
Ratio of expenses to average net assets 0.82%
-----------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 1.53%
-----------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets 1.08%
-----------------------------------------------------------------------
Portfolio turnover rate 14%
-----------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 457
-----------------------------------------------------------------------
Net assets, end of period (000's) $5,634
-----------------------------------------------------------------------
</TABLE>
-------
59
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Aggressive
Growth
Lifestyle Fund
--------------
Institutional
Class I
--------------
Year
Ended
10/31/99
-------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
-------------------------------------------------------------------------
Income Operations:
Net investment income/(loss) 0.07
Net realized and unrealized gain/(loss) on securities 1.90
--------------
Total income (loss) from investment operations 1.97
--------------
Distributions
Dividends from net investment income (0.06)
Distributions from net realized gain (loss) on securities -
--------------
Total distributions (0.06)
-------------------------------------------------------------------------
Net Asset Value, End of Period $11.91
-------------------------------------------------------------------------
Total Return 19.71%
-------------------------------------------------------------------------
Ratios/Supplemental Data
-------------------------------------------------------------------------
Ratio of expenses to average net assets 0.10%
-------------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 0.10%
-------------------------------------------------------------------------
Ratio of net investment income (loss) to average net
assets 0.62%
-------------------------------------------------------------------------
Portfolio turnover rate 9%
-------------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 130
-------------------------------------------------------------------------
Net assets, end of period (000's) $1,547
-------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Conservative
Growth
Lifestyle Fund
--------------
Institutional
Class I
--------------
Year
Ended
10/31/99
-------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
-------------------------------------------------------------------------
Income Operations:
Net investment income/(loss) 0.21
Net realized and unrealized gain/(loss) on securities 1.02
--------------
Total income (loss) from investment operations 1.23
--------------
Distributions
Dividends from net investment income (0.20)
Distributions from net realized gain (loss) on securities -
--------------
Total distributions (0.20)
-------------------------------------------------------------------------
Net Asset Value, End of Period $11.03
-------------------------------------------------------------------------
Total Return 12.24%
-------------------------------------------------------------------------
Ratios/Supplemental Data
-------------------------------------------------------------------------
Ratio of expenses to average net assets 0.10%
-------------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 0.10%
-------------------------------------------------------------------------
Ratio ot net investment income (loss) to average net
assets 2.01%
-------------------------------------------------------------------------
Portfolio turnover rate 10%
-------------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 137
-------------------------------------------------------------------------
Net assets, end of period (000's) $1,508
-------------------------------------------------------------------------
</TABLE>
-------
60
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moderate
Growth
Lifestyle Fund
--------------
Institutional
Class I
--------------
Year
Ended
10/31/99
-------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
-------------------------------------------------------------------------
Income Operations:
Net investment income/(loss) 0.15
Net realized and unrealized gain/(loss) on securities 1.38
--------------
Total income (loss) from investment operations 1.53
--------------
Distributions
Dividends from net investment income (0.14)
Distributions from net realized gain (loss) on securities -
--------------
Total distributions (0.14)
-------------------------------------------------------------------------
Net Asset Value, End of Period $11.39
-------------------------------------------------------------------------
Total Return 15.35%
-------------------------------------------------------------------------
Ratios/Supplemental Data
-------------------------------------------------------------------------
Ratio of expenses to average net assets 0.10%
-------------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 0.10%
-------------------------------------------------------------------------
Ratio ot net investment income (loss) to average net
assets 1.42%
-------------------------------------------------------------------------
Portfolio turnover rate 11%
-------------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 135
-------------------------------------------------------------------------
Net assets, end of period (000's) $1,537
-------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Yield
Bond Fund
-------------
Institutional
Class I
-------------
Year
Ended
10/31/99
--------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
--------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.83
Net realized and unrealized gain/(loss) on securities (0.57)
-------------
Total income (loss) from investment operations 0.26
-------------
Distributions
Dividends from net investment income (0.83)
Distributions from net realized gain (loss) on securities -
-------------
Total distributions (0.83)
--------------------------------------------------------------------------
Net Asset Value, End of Period $9.43
--------------------------------------------------------------------------
Total Return 2.44%
--------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------
Ratio of expenses to average net assets 1.13%
--------------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 2.05%
--------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets 5.57%
--------------------------------------------------------------------------
Portfolio turnover rate 72%
--------------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 1
--------------------------------------------------------------------------
Net assets, end of period (000's) $14
--------------------------------------------------------------------------
</TABLE>
-------
61
<PAGE>
North American Funds
286 Congress Street
Boston, Massachusetts 02210
(800) 872-8037
<TABLE>
<S> <C>
Institutional Class I Shares
U.S. Equity Funds Balanced Funds
Growth & Income Fund Balanced Fund
Large Cap Growth Fund LifeStyle Funds
Mid Cap Growth Fund Aggressive Growth LifeStyle Fund
Mid Cap Value Fund Conservative Growth LifeStyle Fund
Science & Technology Fund Moderate Growth LifeStyle Fund
Small Cap Growth Fund Income Funds
Small Cap Index Fund Core Bond Fund
Socially Responsible Fund High Yield Bond Fund
Stock Index Fund Strategic Income Fund
International/Global Equity Funds U.S. Government Securities Fund
Global Equity Fund Money Market Funds
International Equity Fund Money Market Fund
International Small Cap Fund
</TABLE>
For Additional Information
More information about the Funds, including the SAI, is available to you free of
charge. To request additional information:
By Telephone
Call 1-800-872-8037
By Mail from the Funds (There is no fee.)
Write to:
North American Funds
286 Congress Street
Boston, MA 02210
By Mail or In Person from the Public Reference Room of the Securities and
Exchange Commission (SEC). (You will pay a duplication fee.)
Visit or Write to:
SEC's Public Reference Section
450 Fifth Street, NW
Washington, DC, 20549-6009
1-800-SEC-0330
Online at the SEC's Internet Site
Text-only versions of fund documents can be viewed online or downloaded from
http://www.sec.gov.
Statement of Additional Information (SAI)
The SAI provides additional information about the Trust and the Funds. The SAI
and the auditor's report and financial statements included in the Trust's most
recent Annual Report to its shareholders are incorporated by reference as part
of this Prospectus.
Annual and Semi-annual Reports
The Annual and Semi-annual Reports describe the Funds' performance, list
portfolio holdings and include additional information about the Funds'
investments. The Annual Report discusses the market conditions and investment
strategies that significantly affected the Fund's performance during their last
fiscal year.
File No. 811-5797
0700:90201I
NAF 12695
<PAGE>
North American Funds
Prospectus 2000
Institutional Class II Shares
Income Funds
Core Bond Fund
High Yield Bond Fund
The Securities and Exchange Commission has not approved or disapproved of these
securities or passed on the adequacy or accuracy of this prospectus. Any
representative to the contrary is a criminal offense.
July 7, 2000
[LOGO OF AMERICAN GENERAL FINANCIAL GROUP]
<PAGE>
Table of Contents
Organization of Information
This Prospectus includes information about 2 Funds.
<TABLE>
<S> <C>
.Section I includes a summary of each Fund.
.Section II includes additional information about the Funds'
investment strategies, additional risk information and
information about the Funds' management.
.Section III includes information about how to invest and
manage your North American Funds account.
Section I: Summaries of the Funds...................... Page 1
.Investment Objective
.Principal Investment Strategies
.Main Investing Risks
.Investment Performance
.Description of Main Risks
North American Funds
Core Bond Fund Page 2
High Yield Bond Fund Page 3
Section II: Other Information about Each Fund.......... Page 6
.Fees and Expenses
.More Information About Investment
Strategies
.Other Risks of Investing
.Fund Management
Section III: Investing in the Funds.................... Page 13
</TABLE>
This section includes the information you need about how to invest and how to
redeem shares. It also includes other important information about sales
charges, taxes and account privileges.
Additional Information
If you'd like information additional to that included in this Prospectus, the
back cover lists a number of places to call or to visit for additional
materials.
<PAGE>
Section I:
Fund Summaries
North American Funds (the "Trust") is a group of mutual funds that includes 23
separate investment portfolios, or "Funds." Each Fund has a specific investment
objective. Each Fund also has a subadvisor, a firm responsible for making
investment decisions for the Fund. This Prospectus includes information about
Institutional Class II shares for 2 of the Funds.
The summaries on the next 2 pages describe each Fund's investment objective and
principal investment strategies, list the main risks of investing in the Fund,
and show the Fund's past investment performance. Explanations of the main risks
of investing in each Fund starts on page 7.
Below the Funds' descriptions are a bar chart and a table.
The bar chart shows how the investment returns of one class of each Fund's
shares have varied in the past ten years, or in the years since the Fund began
if it is less than ten years old. For the Core Bond Fund, the class shown in
the bar chart (Class A shares) is not offered by this Prospectus, but the
performance would have been substantially similar for Institutional Class II
shares of the same Fund, differing only to the extent that the classes have
different expenses. The bar chart does not reflect sales charges; if it did,
performance would be less than shown.
The table (the Average Annual Total Return Table) following each bar chart
shows how that Fund's average annual returns for different periods, depending
on when the Fund began operations, compared to returns of a broad-based
securities market index. Like the bar chart, in certain cases the Average
Annual Total Return Table shows performance information for either Class A
shares or Class C shares, depending on the Fund, neither of which are offered
by this Prospectus. Where applicable, the table reflects sales charges,
including the maximum initial sales charge for Class A shares, and the maximum
applicable deferred sales charge for Class C shares.
A Fund's bar chart and Average Annual Total Return Table provide indications of
the historical risk/return of an investment in the Fund.
It is important to remember that past performance does not predict future
performance and that-as with any investment, it is possible to lose money by
investing in the Funds. An investment in any of the Funds is not a deposit in a
bank and is not insured by the Federal Deposit Insurance Corporation or any
other government agency.
------
1
<PAGE>
Core Bond Fund
Investment Goal and Strategies
The investment objective of the Core Bond Fund is to provide a high level of
current income consistent with the maintenance of principal and liquidity.
American General Investment Management, L.P. ("AGIM"), the Fund's subadvisor,
invests at least 65% of the Fund's total assets in medium to high quality
fixed-income securities, or in securities issued or guaranteed by the U.S. Gov-
ernment, mortgage-backed, or asset-backed securities (U.S. Government securi-
ties are securities issued or guaranteed by the U.S. Government which are sup-
ported by the full faith and credit of the U.S. Government, or by the right of
the issuer to borrow from the U.S. Treasury, or by the credit of the issuing
government agency, or by the authority of the U.S. Government to purchase obli-
gations of the agency). A portion of the 65% may be invested in U.S. dollar-
denominated fixed-income securities issued by foreign issuers, although the
Fund currently intends to limit these investments to no more than 40% of its
total assets. These fixed-income securities will be rated investment grade or
higher. AGIM will not be required to dispose of a security if its rating is
downgraded, however.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations, including, in particular, the risks associated with junk bonds)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the vari-
ability of the Fund's historical returns. For periods prior to the inception of
Institutional Class II shares (7/7/00), the Average Annual Total Return Table
also shows estimated historical performance for Institutional Class II shares
based on the performance of Class A shares adjusted to reflect that there are
no sales charges paid by Institutional Class II shares.
[GRAPH]
Calendar Year Total Returns for A shares
Annual Total Return
'91 0%
'92 8.27%
'93 9.29%
'94 -5.43%
'95 18.79%
'96 2.17%
'97 9.28%
'98 7.61%
'99 -2.55%
Best quarter: quarter ended 6/30/95 6.23%
Worst quarter: quarter ended 12/31/94 -4.53%
--------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Past Five Years Life of Fund
(since 5/1/91)
---------------------------------------------------------------
<S> <C> <C> <C>
Class A -8.15% 5.56% 5.89%
---------------------------------------------------------------
Institutional --2.55% 6.82% 6.62%
Class II
---------------------------------------------------------------
100% Lehman -1.94% 8.16% 7.38%
Brothers
Corporate(TM)
---------------------------------------------------------------
50% Lehman -2.10% 7.80% 7.61%
Brothers
Corporate(TM)
50% Lehman
Brothers
Government(TM)
</TABLE>
------------------------------------------
-------
2
<PAGE>
High Yield Bond Fund
Investment Goal and Strategies
The High Yield Bond Fund seeks the highest possible total return consistent
with conservation of capital through investment in a diversified portfolio of
high yielding, high risk fixed-income securities.
To achieve this objective, American General Investment Management, L.P.
("AGIM"), the Fund's subadvisor, invests at least 65% of the Fund's total
assets in below-investment grade U.S. and foreign junk bonds. These high yield-
ing, high risk fixed-income securities are rated below Baa3 by Moody's and BBB-
by S&P. Up to 15% can be rated below Caa3 by Moody's or CCC- by S&P. The Fund
may also invest up to 35% of total assets in below-investment grade foreign
fixed-income securities.
The Fund may invest up to 35% in investment grade securities, those rated Baa3
or higher by Moody's and BBB- or higher by S&P. In addition, the Fund may
invest up to 15% in zero coupon securities (securities not paying current cash
interest), and up to 20% of total assets in equity securities. Equity securi-
ties include common or preferred stocks, warrants, and convertible securities.
AGIM is not required to dispose of a bond that is downgraded to below-invest-
ment grade.
Main Risks
.Credit Risk (the risk that the companies in which the Fund invests, or with
which it does business, will fail financially or otherwise fail to honor their
obligations, including, in particular, risks associated with junk bonds)
.Currency Risk (the risk that the Fund's investments in securities denominated
in foreign currencies will decline as a result of changes in exchange rates)
.Foreign Investment Risk (the risk that the value of the Fund's foreign invest-
ments will decline as a result of foreign political, social or economic
changes)
.Interest Rate Risk (the risk that the value of the Fund's debt securities will
decline as a result of a change in interest rates)
.Liquidity Risk (the risk that the Fund may be unable to sell a security
because there are too few people who actively trade that security on a regular
basis)
.Management Risk (the risk that the Fund's subadvisor may not produce the
desired investment results)
The bar chart and table provide an indication of risk by showing the
variability of the Fund's historical returns. The Fund commenced operations on
July 10, 2000. Performance information shown for periods prior to that date is
that of the corresponding series of American General Series Portfolio Company 2
(the "AGSP2 Fund") that was reorganized into the Fund on July 10, 2000. The
AGSPC2 Fund had a substantially similar investment objective, and had
substantially similar investment strategies and policies as does the Fund, and
was also subadvised by AGIM.
[GRAPH]
Calendar Year Total Returns for Institutional Class II shares
Annual Total Return
'91 0%
'92 0%
'93 0%
'94 0%
'95 0%
'96 0%
'97 0%
'98 0%
'99 4.05%
Best quarter: quarter ended 3/31/99 3.89%
Worst quarter: quarter ended 9/30/99 -1.51%
--------------------------------------------------------------------------------
Average Annual Returns as of 12/31/99
<TABLE>
<CAPTION>
Past One Year Life of Fund
(since 11/4/98)
-------------------------------------------------------
<S> <C> <C>
Institutional Class II 4.21% 4.67%
-------------------------------------------------------
Salomon Smith Barney
High Yield Market
Index(TM) 1.74% 5.75%
</TABLE>
--------------------------------------------------------------------------------
-------
3
<PAGE>
Descriptions of Main Risks
The value of your investment in a Fund can change for many reasons, and may
decrease. The primary reasons for possible decreases in a Fund's value are
called "Main Risks," and are explained in this section. Because the types of
investments a Fund may change over time, the types of risks affecting the Fund
may change as well. Section II of the Prospectus includes more information
about other risks that could affect the Funds' values.
Credit Risk
Credit risk is the risk that the issuer or the guarantor (the entity that
agrees to pay the debt if the issuer cannot) of a debt or fixed income securi-
ty, or the counterparty to a derivatives contract or a securities loan, will
not repay the principal and interest owed to the investors or otherwise honor
its obligations. There are different levels of credit risk. Debt securities
rated in one of the four highest rating categories by a rating agency (and com-
parable unrated securities) are known as "investment grade." Debt securities
rated below the four highest rating categories by a rating agency (and compara-
ble unrated securities) are known as "lower-rated" or junk bonds." Funds that
invest in lower-rated securities have higher levels of credit risk. Lower-rated
or unrated securities of equivalent quality (generally known as junk bonds)
have very high levels of credit risk. Securities that are highly rated have
lower levels of credit risk.
Funds may be subject to greater credit risk because they may invest in debt
securities issued in connection with corporate restructurings by highly
leveraged (indebted) issuers and in debt securities not current in the payment
of interest or principal, or in default.
Funds that invest in foreign securities are also subject to increased credit
risk because of the difficulties of requiring foreign entities, including
issuers of sovereign (national) debt, to honor their contractual commitments,
and because a number of foreign governments and other issuers are already in
default.
Currency Risk
Funds that invest in securities that are denominated in and/or are receiving
revenues in foreign currencies are subject to currency risk. Currency risk is
the risk that foreign currencies will decline in value relative to the U.S.
dollar. In the case of hedging positions, it is the risk that the U.S. dollar
will decline in value relative to the currency hedged.
Foreign Investment Risk
Funds investing in foreign securities may experience rapid changes in value.
One reason for this volatility is that the securities markets of many foreign
countries are relatively small, with a limited number of companies representing
a small number of industries. Also, foreign securities issuers are usually not
subject to the same degree of regulation as U.S. issuers. Reporting, accounting
and auditing standards of foreign countries differ, in some cases significant-
ly, from U.S. standards.
The possibility of political instability or diplomatic developments in foreign
countries could trigger nationalization of companies and industries, expropria-
tion (confiscation of property), extremely high levels of taxation, and other
negative developments. In the event of nationalization, expropriation or other
confiscation, a Fund could lose its entire investment. Funds that invest in
sovereign debt obligations are exposed to the risks of political, social and
economic change in the countries that issued the bonds.
Interest Rate Risk (Market Risk)
Interest rate risk, or market risk, is the risk that a change in interest rates
will negatively affect the value of a security. This risk applies primarily to
debt securities such as bonds, notes and asset backed securities. Debt securi-
ties are obligations of the issuer to make payments of principal and/ or inter-
est on future dates. As interest rates rise, an investment in a Fund can lose
value, because
-------
4
<PAGE>
the value of the securities the Fund holds may fall.
Market risk is generally greater for Funds that invest in debt securities with
longer maturities. This risk may be increased for Funds that invest in mort-
gage-backed or other types of asset-backed securities that are often prepaid.
Even Funds that invest in the highest quality debt securities are subject to
interest rate risk.
Liquidity Risk
Liquidity risk is the risk that a Fund will not be able to sell a security
because there are too few people who actively buy and sell, or trade, that
security on a regular basis. A Fund holding an illiquid security may not be
able to sell the security at a fair price. Liquidity risk increases for Funds
investing in derivatives, foreign investments or restricted securities.
Management Risk
Management risk is the risk that the subadvisor of a Fund, despite using vari-
ous investment and risk analysis techniques, may not produce the desired
investment results.
-------
5
<PAGE>
Section II:
Fees and Expenses Institutional Class II Shares
This table describes the fees and expenses that you may pay if you invest in
the Funds.
Shareholder Fees (fees paid directly from your investment)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (as a percentage of
original purchase price or redemption price, whichever is lower) None
Annual Fund Operating Expenses (expenses that are deducted from fund
assets)
<CAPTION>
Fund
-----------------------------------------------------------------------
<S> <C>
Core Bond Fund
Management Fees 0.60%
Other Expenses 0.44%
Total Annual Fund Operating Expenses 1.04%
Fee Waiver and/or Expense Reimbursement 0.09%
Net Expenses/1/ 0.95%
-----------------------------------------------------------------------
High Yield Bond Fund
Management Fees 0.83%
Other Expenses 0.55%
Total Annual Fund Operating Expenses 1.38%
Fee Waiver and/or Expense Reimbursement 0.25%
Net Expenses/1/ 1.13%
-----------------------------------------------------------------------
</TABLE>
1 Reflects AGAM's contractual obligation to waive and to the extent necessary
reimburse certain fees and expenses of the Fund through February 28, 2001.
By translating "Total Annual Fund Operating Expenses" into dollar amounts,
these examples help you compare the costs of investing in a particular Fund, or
a particular class of shares, with the costs of investing in other mutual
funds.
The examples assume that you:
. Invest $10,000 in a Fund for the time period indicated and then redeem all
of your shares at the end of those periods.
. Your investment earns a 5% return each year and that each Fund's operating
expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------
<S> <C> <C> <C> <C>
Core Bond Fund 106 331 574 1,271
-----------------------------------------------------
High Yield Bond Fund 140 437 755 1,657
-----------------------------------------------------
</TABLE>
-------
6
<PAGE>
More Information About
Investment Strategies and Risks
This Prospectus does not attempt to disclose all of the different investment
techniques that the Funds might use, or all of the types of securities in
which the Funds might invest. As with any mutual fund, investors must rely on
the professional judgment and skill of the Funds' management. A subadvisor may
choose not to use some or all of the investment techniques available to a
Fund, and these choices may cause the Fund to lose money or not achieve its
investment objective.
Each Fund has a unique investment objective (see the Fund Summaries) that it
tries to achieve through its investment strategies. The investment objective
of the Core Bond Fund cannot be changed without the approval of the holders of
a majority of the outstanding shares of the Fund. The investment objective of
the High Yield Bond Fund may be changed by the Trustees. Except as noted for
certain investment restrictions, the strategies a Fund uses to achieve its
investment objective also may be changed by the Trustees without approval of
the shareholders. Because each Fund is different, they have different invest-
ment policies and risks, and will also have different returns over time. This
section provides additional information about the Funds, and should be read in
conjunction with the Fund Summaries.
Core Bond Fund
Credit research on corporate bonds includes examining both quantitative (math-
ematical) and qualitative criteria established by AGIM. These criteria include
an issuer's industry, operating and financial profiles, business strategy,
management quality, and projected financial and business conditions.
"High quality" debt securities are those rated (at the time of purchase) "A"
or better by Moody's or S&P (in the three highest rating tiers), or unrated
debt securities considered to be of comparable quality by AGIM. The Fund may
only invest up to 20% of its total assets in debt securities rated below "Baa"
by Moody's or "BBB" by S&P, or unrated debt securities considered to be of
comparable quality by AGIM. The Fund will not be required to sell any down-
graded bonds that cause the Fund to exceed this 20% maximum guideline.
The Fund may invest up to 20% of its assets in domestic and foreign high yield
corporate and government debt securities, commonly referred to as "high
yield/high risk" or "junk" bonds. These bonds may be rated "B" or below by
Moody's (Moody's lowest rating is "C"), or "BB" or below by S&P (S&P's lowest
rating is "D"), or they may be unrated but considered to be of comparable
quality by AGIM. There is no minimum rating required by the Fund. Domestic and
foreign high yield debt securities involve greater risks than higher quality
securities, including price volatility and risk of default in the payment of
interest and principal.
Up to 10% of the Fund's total assets may be invested in lower quality fixed-
income securities, those rated below Baa3 by Moody's and BBB by S&P. Up to 35%
of the Fund's total assets may be invested in interest-bearing short-term
investments, such as commercial paper, bankers' acceptances, bank certificates
of deposit, and other cash equivalents and cash. Equity securities, including
common or preferred stocks, convertible securities, and warrants, may comprise
up to 20% of the Fund's total assets. The Fund may invest in depositary
receipts, foreign currency, futures and options, illiquid securities (limited
to 15% of the Fund's assets), investment companies, loan participations, real
estate securities, repurchase agreements, reverse repurchase agreements, dol-
lar rolls, structured securities, variable amount master demand notes, vari-
able rate demand notes, and when-issued securities.
The Fund may invest in derivatives.
-------
7
<PAGE>
High Yield Bond Fund
At least 65% of the Fund's total assets are invested in below investment-grade
U.S. and foreign junk bonds. To balance this risk, the Fund may invest up to
35% in investment grade securities, which are those securities rated Baa3 or
higher by Moody's and BBB- or higher by S&P. In addition, the Fund may invest
up to 15% in zero coupon securities (securities not paying current cash or
interest), and up to 20% of total assets in equity securities. Equity securi-
ties includes common or preferred stocks, warrant, and convertible securities.
The subadvisor can also employ a temporary defensive strategy, which means that
under certain market conditions the Fund may take temporary defensive positions
that are inconsistent with its principal investment strategies, in attempting
to respond to adverse market, economic, political or other conditions. If the
Fund takes such a temporary defensive position, it may not achieve its stated
investment objective.
-------
8
<PAGE>
Other Risks of Investing in the North American Funds
Although a Fund may have the flexibility to use some or all of the investments
or strategies described in this Prospectus and the Statement of Additional
Information, its subadvisor may choose not to use these investments or strate-
gies for a variety of reasons. These choices may cause a Fund to miss opportu-
nities, lose money or not achieve its goal.
High Yield/High Risk Securities
High yield securities (often known as "junk bonds") include debt instruments
that have an equity security attached to them. Securities rated below invest-
ment grade and comparable unrated securities offer yields that fluctuate over
time, but generally offer higher yields than do higher rated securities. Howev-
er, 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 qual-
ity and protective characteristics that are outweighed by large uncertainties
or major risk exposures to adverse conditions.
Some of the debt securities in which the Funds may choose to invest may be, or
may be similar to, the lowest rated non-subordinated debt (securities rated C
by Moody's or CCC or lower by S&P). This type of security is very risky, as
issuers may not have the ability to repay principal and interest, and may even
default. If this should occur, the value of shares of the Fund holding them
would likely fall.
Foreign Securities
There are risks associated with investing in foreign securities. These risks
include unforeseen changes in tax laws, political changes, and changes in for-
eign currency values and exchange rates.
There may be less publicly available information about foreign issuers. 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 for domestic issuers. Foreign stock markets generally have
substantially less volume than the U.S. exchanges and securities of foreign
issuers are generally less liquid and more volatile, relative to U.S. issuers.
For emerging markets, these risks can be more extreme.
There is frequently less governmental regulation of foreign exchanges, broker-
dealers and issuers than in the United States, and brokerage costs may be high-
er. In addition, investments in foreign companies may be subject to the possi-
bility of nationalization or other changes in policy. Policy changes may allow
foreign governments to withhold dividends, expropriate (confiscate, or keep)
investment returns, or raise taxes to extremely high levels, among other
things. Also, should a foreign issuer default, it may be difficult to recover
anything in a bankruptcy proceeding.
Lending Fund Securities
Each Fund may lend up to 33% of its total portfolio assets, or securities, to
brokers, dealers and other financial institutions. These loans must be callable
(the Fund may ask that the loan be repaid in full) at any time by the Fund. The
loans must be at all times fully secured by cash, cash equivalents or securi-
ties issued or guaranteed by the U.S. Government or its agencies or instrumen-
talities, and marked to market (priced at market value) 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 collat-
eral should the borrower of the securities fail financially. However, these
loans of Fund securities will only be made to firms deemed by the subadvisors
to be creditworthy.
Leverage Risk
Funds that borrow money to buy securities are using leverage. Leverage risk is
the risk that leverage, or debt, will enable a Fund to buy more of a security
that falls in value. In this case, the Fund would still need to repay the money
it borrowed. Funds can create leverage, or borrow money, by using different
types of techniques including reverse repurchase agreements, dollar rolls, and
derivatives including inverse floating rate instruments.
-------
9
<PAGE>
Hedging and Other
Strategic Transactions
Individual Funds 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 Fund. Hedging is simply believing that certain securi-
ties will fall, or rise, in value, and structuring transactions that take
advantage of those changes. These transactions are generally used to protect
against possible changes in the market value of securities a Fund already owns
or plans to buy, to protect unrealized gains or to improve the Fund's return in
some way.
Where allowed, individual Funds may 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. This category
includes derivative transactions. A "derivative" is generally defined as an
instrument whose value is based upon, or derived from, some underlying index or
rate. Interest rate transactions may include swaps, caps, floors and collars,
and currency transactions may include currency forward contracts, currency
futures contracts, currency swaps and options on currencies or currency futures
contracts.
Frequent Trading
A Fund may buy or sell investments frequently, increasing brokerage commissions
and other expenses of the Fund. Frequent trading may also increase the amount
of capital gains realized by a Fund, including short-term capital gains, which
are generally taxable to shareholders at ordinary income tax rates.
Temporary Defensive Strategies
A Fund's subadvisor may at certain times decide that pursuing the Fund's
investment strategies is inconsistent with market conditions. A subadvisor may
then employ defensive strategies designed mostly to limit losses. However, the
subadvisor may choose not to use defensive strategies, even in volatile or
unsettled market conditions. Such defensive strategies may cause the Fund to
miss opportunities or to not achieve its goal.
-------
10
<PAGE>
Management of the Funds
Under the federal securities laws, Massachusetts law and the Trust's Agreement
and Declaration of Trust and By-Laws, the business and affairs of the Trust are
managed under the direction of the Trustees.
American General Asset Management Corp. ("AGAM"), formerly CypressTree Asset
Management Corporation, Inc., is the investment adviser for the Trust. AGAM was
formed in 1996 to advise, acquire and distribute mutual funds through broker-
dealers, banks and other intermediaries. AGAM's address is 286 Congress Street,
Boston, Massachusetts 02210.
According to its Advisory Agreement with the Trust (the "Advisory Agreement"),
AGAM:
.Oversees the administration of all aspects of the business and affairs of the
Funds
.Selects, contracts with and compensates subadvisors to manage the assets of
the Funds
The following table shows the management fees the Core Bond Fund paid (or, in
the case of the High Yield Bond Fund will pay) to AGAM for the last fiscal year
under the Advisory Agreement as a percentage of the Fund's average daily net
asset value.
<TABLE>
<CAPTION>
Funds Management
Fees
----------------------------------------------------------
<S> <C>
Core Bond Fund .60%
High Yield Bond Fund 0.825% on the first $200 million
0.725% on the next $300 million
0.675% on assets over $500 million
</TABLE>
----------------------------------------------------------
.Makes recommendations to the Trustees regarding the hiring, termination and
replacement of subadvisors
.Reimburses the Fund if the total of certain expenses allocated to any Fund
exceeds certain limitations
.Monitors the subadvisors for compliance with the investment objectives and
related policies of each Fund
.Reviews the performance of the subadvisors
.Periodically reports to the Trustees
Under an order granted to the Funds by the Securities and Exchange Commission,
AGAM is permitted to appoint a subadvisor, to create a subadvisory agreement,
and to terminate or amend a subadvisory agreement, in each case without share-
holder approval. This "Manager of Managers" structure permits the Funds to
change subadvisors or the fees paid to subadvisors without the expense and
delays associated with obtaining shareholder approval. AGAM has ultimate
responsibility under the Manager of Managers structure to oversee the
subadvisors, including making recommendations to the Trust regarding the hir-
ing, termination and replacement of subadvisors.
-------
11
<PAGE>
Subadvisory Agreements
American General Investment Management, L.P. ("AGIM")
AGIM has been the subadvisor to the Core Bond Fund since March, 2000, and to
the High Yield Bond Fund since inception. AGIM was formed in 1998 as a
successor to the investment management division of American General
Corporation, and is an indirect wholly-owned subsidiary of American General
Corporation. AGIM also provides investment management and advisory services to
pension and profit sharing plans, financial institutions and other investors.
Accounts managed by AGIM had combined assets, as of December 31, 1999, of
approximately $68.9 billion. AGIM is located at 2929 Allen Parkway, Houston,
Texas 77019.
Robert N. Kase, Portfolio Manager, who serves as the portfolio manager of the
Core Bond Fund joined AGIM in 1998. Mr. Kase has served as Investment Officer
of Variable Annuity Life Insurance Company and Senior Portfolio Manager of AGIM
since 1998, and was Senior Portfo- lio Manager with CL Capital Management, Inc.
from 1992 to 1998.
Investment decisions for the High Yield Bond Fund are made by a team, headed by
Gordon Massie. Mr. Massie, Senior Vice President, joined AGIM in April 1998.
Previously, Mr. Massie was Director of High Yield Research at American General
Corporation from August 1985 to April 1998.
-------
12
<PAGE>
Section III:
Investing in the North American Funds
Institutional Classes of Shares
Institutional Class II shares of the Core Bond Fund and High Yield Bond Fund
are available to you through your employer plan. Institutional Class II shares
are available to any qualifying employer plan once the plan establishes a mini-
mum account balance of $500 million with the Trust. A plan's account balance is
equal at any time to the aggregate of all amounts contributed by the plan to
the Trust, less the cost of all redemptions by such plan from the Trust. The
Distributor may waive the minimum account balance requirement if it reasonably
anticipates that the size of the plan and/or the anticipated amount of contri-
butions will present economies of scale. As a participant in an employer
retirement plan, you do not purchase Institutional Class II shares of the Funds
directly. Rather, Institutional Class II shares of a Fund are purchased for you
when you elect to allocate your retirement contributions to a Fund plan that is
avail- able as an investment option in your retirement or savings plan. You may
be permitted to elect different investment options, alter the amounts contrib-
uted to your plan, or change how contributions are allocated among your invest-
ment options in accordance with your plan's specific provisions. See your plan
administrator or employee benefits office for more details. Investments by
individual participants in employer retirement plans are made through their
plan sponsor or administrator, who is responsible for transmitting instructions
for all orders for the purchase, redemption and exchange of Fund shares. The
availability of an investment by a plan participant in the Funds, and the pro-
cedures for investing depend upon the provisions of the plan and whether the
plan sponsor or administrator has contracted with the Trust or designated agent
for special processing services.
For more information on how to participate in the Funds through an employee
retirement plan, please refer to your plan materials or contact your employee
benefits office.
Transfer or exchange of balances
An employer retirement plan may allow you to exchange all or part of your
existing plan balance from one investment option to another. Check with your
plan administrator for details on the rules governing exchanges in your plan.
Exchanges will be accepted by the Trust only as permitted by your plan. Your
plan administrator can explain how frequently exchanges are allowed. The Trust
reserves the right to re-fuse any exchange purchase request.
-------
13
<PAGE>
Pricing of Fund Shares
The price of the shares of each Fund is the net asset value per share (next
determined following receipt of a properly completed order). The net asset
value of the shares of each class of each Fund is calculated separately and,
except as described below, is determined once daily as of the close of regu-
larly scheduled trading on the New York Stock Exchange generally, 4:00 p.m.,
Eastern Time. Net asset value per share of each class of each Fund is calcu-
lated by dividing the value of the portion of the Fund'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 Fund's securities
holdings will not materially affect the current net asset value of the shares
of the Fund and (ii) days when the New York Stock Exchange is closed (for exam-
ple, national holidays). Generally, trading in non-U.S. Government securities
as well as U.S. Government Securities and money market instruments, is substan-
tially completed each day at various times prior to the close of regularly
scheduled trading on the New York Stock Exchange. The values of such securities
used in computing the net asset value of the shares of a class of a Fund 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 gener-
ally 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 deter-
mined in good faith by the subadvisors under procedures established and regu-
larly reviewed by the Trustees.
Unless you request cash payment, all dividends and distributions will be rein-
vested. Both Funds declare and pay capital gains annually.
-------
14
<PAGE>
Dividends and Distributions from North American Funds
The Funds declares income dividends daily and pays monthly:
.Core Bond Fund
.High Yield Bond Fund
-------
15
<PAGE>
Taxes
It is expected that each Fund of the Trust will qualify as a "regulated invest-
ment company" under the Code and that it 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.
A Fund's distributions derived from interest, dividends and certain other
income, including gains from investments that the Fund held for one year or
less, will generally result in taxable ordinary income to the shareholders of
the Fund. Distributions of net gains from investments held by a Fund for more
than one year are taxable as long-term gains (generally at a 20% rate for non-
corporate shareholders). Distributions will be treated as described above for
federal income tax purposes whether
they are paid in cash or reinvested in additional shares and regardless of how
long a shareholder has held shares in the Fund. Distributions are taxed as
described in this paragraph even if such distributions economically represent a
return of a particular shareholder's investment. Distributions that represent a
return of a particular shareholder's investment are likely to occur in respect
of shares purchased at a time when a Fund's net asset value reflects gains that
are either unrealized, or realized but not distributed.
The redemption, sale or exchange of Fund shares (including the exchange of
shares of one Fund 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 disposi-
tion of shares of the Fund will be
taxed as a long-term capital gain or loss if the shares are capital assets in
the shareholder's hands and if the shareholder held the shares have been held
for more than one year. (such gains are generally taxed at a 20% rate for
noncorporate shareholders).
Descriptions of tax consequences set forth in this Prospectus and in the State-
ment of Additional Information are intended to be a general guide. Investors
should consult their tax advisers with respect to the specific tax consequences
of an investment in the Fund, including the effect and applicability of state,
local, foreign, and other tax laws and the possible effects of changes in fed-
eral or other tax laws. This discussion is not intended as a substitute for
careful tax planning.
-------
16
<PAGE>
shareholder's hands. Generally, a shareholder's gain or loss will be a long-
term gain or loss if the shares have been held for more than one year.
If a shareholder sells or otherwise disposes of a share of a Fund before hold-
ing it for more than six months, any loss on the sale or other disposition of
such share shall be treated as a long-term capital loss to the extent of any
capital gain dividends received by the shareholder with respect to such share.
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 Fund includes his or her taxpayer iden-
tification 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 divi-
dends (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 restric-
tion) to its shareholders state and local income tax exemptions available to
direct owners of certain types of U.S. government securities. Thus, for resi-
dents of these states, distributions derived from a Fund's investment in cer-
tain 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.
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 of an investment in the Fund, including the effect and applica-
bility 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.
-------
17
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand High Yield
Bond Fund's financial performance since inception. Certain information reflects
financial results for a single Fund share. The total return in the table
represents the return that an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the Fund's financial
statements, which have been audited by Ernst & Young LLP. The annual report of
Ernst & Young LLP, along with the Fund's financial statements, is included in
the Annual Report of American General Series Portfolio Company 2, which is
available upon request.
The Core Bond Fund had no Institutional Class II shares outstanding prior to
July 7, 2000.
-------
18
<PAGE>
NORTH AMERICAN FUNDS
FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout the Period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Yield
Bond Fund
-------------
Institutional
Class II
-------------
Year
Ended
10/31/99
---------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $10.00
---------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income/(loss) 0.86
Net realized and unrealized gain/(loss) on securities (0.57)
--------
Total income (loss) from investment operations 0.29
--------
Distributions
Dividends from net investment income (0.86)
Distributions from net realized gain (loss) on securities -
--------
Total distributions (0.86)
---------------------------------------------------------------------------
Net Asset Value, End of Period $9.43
---------------------------------------------------------------------------
Total Return 2.74%
---------------------------------------------------------------------------
Ratios/Supplemental Data
---------------------------------------------------------------------------
Ratio of expenses to average net assets .88%
---------------------------------------------------------------------------
Ratio of expenses to average net assets before expense
reductions 1.35%
---------------------------------------------------------------------------
Ratio ot net investment income (loss) to average net assets 8.84%
---------------------------------------------------------------------------
Portfolio turnover rate 72%
---------------------------------------------------------------------------
Number of shares outstanding at end of period (000's) 6,630
---------------------------------------------------------------------------
Net assets, end of period (000's) $65,506
---------------------------------------------------------------------------
</TABLE>
-------
19
<PAGE>
North American Funds
286 Congress Street
Boston, Massachusetts 02210
(800) 872-8037
Institutional Class II Shares
Income Funds
Core Bond Fund
High Yield Bond Fund
For Additional Information
More information about the Funds, including the SAI, is available to you free of
charge. To request additional information:
By Telephone
Call 1-800-872-8037
By Mail from the Funds (There is no fee.)
Write to:
North American Funds
286 Congress Street
Boston, MA 02210
By Mail or In Person from the Public Reference Room of the Securities and
Exchange Commission (SEC). (You will pay a duplication fee.)
Visit or Write to:
SEC's Public Reference Section
450 Fifth Street, NW
Washington, DC, 20549-6009
1-800-SEC-0330
Online at the SEC's Internet Site
Text-only versions of fund documents can be viewed online or downloaded from
http://www.sec.gov.
Statement of Additional Information (SAI)
The SAI provides additional information about the Trust and the Funds. The SAI
and the auditor's report and financial statements included in the Trust's most
recent Annual Report to its shareholders are incorporated by reference as part
of this Prospectus.
Annual and Semi-annual Reports
The Annual and Semi-annual Reports describe the Funds' performance, list
portfolio holdings and include additional information about the Funds'
investments. The Annual Report discusses the market conditions and investment
strategies that significantly affected the Fund's performance during their last
fiscal year.
File No. 811-5797
0700:90201II
NAF 12695II
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NORTH AMERICAN FUNDS
North American Funds (the "Trust") is an open-end investment company
that currently has twenty-three investment portfolios, or series: the Small Cap
Growth Fund, the International Small Cap Fund, the Mid Cap Growth Fund, the
Global Equity Fund, the Large Cap Growth Fund, the International Equity Fund,
the Growth and Income Fund, the Balanced Fund, the Strategic Income Fund, the
Core Bond Fund, the Municipal Bond Fund, the U.S. Government Securities Fund,
the Money Market Fund, the Mid Cap Value Fund, the Stock Index Fund, the Small
Cap Index Fund, the Socially Responsible Fund, the High Yield Bond Fund, the
Aggressive Growth Lifestyle Fund, the Moderate Growth Lifestyle Fund, the
Conservative Growth Lifestyle Fund, the Municipal Money Market Fund, and the
Science & Technology Fund (collectively, the "Funds," and each a "Fund"). The
investment objective of each Fund is described in the Trust's Prospectus dated
July 7, 2000.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus dated July 7, 2000 as revised from
time to time. Certain disclosure has been incorporated by reference from the
Trust's Annual Report. A free copy of both the Prospectus and the Annual Report
may be obtained by writing to North American Funds, 286 Congress Street, Boston,
Massachusetts, 02210, or by telephone request at 800-872-8037.
The date of this Statement of Additional Information is July 7, 2000.
<PAGE>
TABLE OF CONTENTS
HISTORY AND CLASSIFICATION....................................................
INVESTMENT POLICIES AND RISKS.................................................
INVESTMENTS AND RISK FACTORS APPLICABLE TO MULTIPLE FUNDS.....................
HEDGING AND OTHER STRATEGIC TRANSACTIONS......................................
INVESTMENT RESTRICTIONS.......................................................
TEMPORARY DEFENSIVE POSITIONS.................................................
MANAGEMENT OF THE FUND........................................................
INVESTMENT MANAGEMENT ARRANGEMENTS............................................
DISTRIBUTION PLANS............................................................
PORTFOLIO BROKERAGE...........................................................
MULTIPLE PRICING SYSTEM.......................................................
CAPITAL STOCK.................................................................
PURCHASE, REDEMPTION AND PRICING..............................................
PERFORMANCE INFORMATION.......................................................
TAXES.........................................................................
INDEPENDENT ACCOUNTANTS.......................................................
FINANCIAL STATEMENTS..........................................................
APPENDIX A - RATINGS OF CORPORATE DEBT INSTRUMENTS............................
<PAGE>
HISTORY AND CLASSIFICATION
The Trust is an open-end, management investment company organized as a
business trust under the laws of the Commonwealth of Massachusetts on
September 28, 1988.
Each Fund is an open-end, management investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). Each
Fund (other than the Small Cap Growth Fund, the Aggressive Growth Lifestyle
Fund, the Moderate Growth Lifestyle Fund, and the Conservative Growth Lifestyle
Fund) is also a "diversified" investment company under the Investment Company
Act. This means that with respect to 75% of a Fund's total assets, the Fund may
not invest in securities of any issuer if, immediately after such investment,
more than 5% of the total assets of the Fund (taken at current value) would be
invested in the securities of that issuer (this limitation does not apply to
investments in U.S. Government securities). A Fund is not subject to this
limitation with respect to the remaining 25% of its total assets. To the extent
a Fund invests a significant portion of its assets in the securities of a
particular issuer, it will be subject to an increased risk of loss if the market
value of the issuer's securities declines.
None of the Funds 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 Fund segregate cash or other liquid assets to
the extent a Fund's obligations are not otherwise "covered" through ownership of
the underlying security, financial instrument or currency.
In connection with a reorganization of several of the Funds on
approximately May 31, 2000, the Small Cap Growth Fund (formerly named the
"Emerging Growth Fund"), the Mid Cap Growth Fund (formerly named the "Small/Mid
Cap Fund"), the Large Cap Growth Fund (formerly named the "Growth Equity Fund"),
the Core Bond Fund (formerly named the "Investment Quality Bond Fund"), and the
Municipal Bond Fund (formerly named the "National Municipal Bond Fund") changed
their names.
INVESTMENT POLICIES AND RISKS
The following discussion supplements the descriptions of certain of the
Funds and their possible investments and associated risks, as set forth in the
Prospectus. Although the Funds may have the flexibility to use some or all of
the investments and strategies described in the Prospectus and in this SAI, the
Subadvisors may choose not to use such investments or strategies for a variety
of reasons. These choices may cause a Fund to miss opportunities, lose money or
not achieve its objective.
International Small Cap Fund
The Fund may invest in 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 issued by those companies may be more volatile, less
liquid and more uncertain as to payment of dividends, interest and principal.
Additionally, investments of the Fund may include securities created through the
Brady Plan, a program under which heavily indebted countries have restructured
their bank debt into bonds.
International Equity Fund
The Fund intends to manage its portfolio actively in pursuit of its
investment objective. The Fund 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.
The Fund may invest in securities on a when-issued or delayed delivery
basis, enter into repurchase and reverse repurchase agreements, loan its Fund
securities and purchase certain privately placed securities.
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U.S. Government Securities Fund
The mortgage-backed securities in which the 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 Fund securities held by the U.S.
Government Securities Fund and not to the purchase of shares of the Fund.
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 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 Fund.
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 Fund of scheduled principal payments and
unscheduled prepayments may
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occur at higher or lower rates than the original investment, thus affecting the
yield of the Fund. Monthly interest payments received by the Fund 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 Fund 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 Fund 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 Fund are neither
insured nor guaranteed by the U.S. Government, its agencies or
instrumentalities.
In order to make the Fund an eligible investment for federal credit
unions ("FCUs"), federal savings and loan institutions and national banks, the
Fund 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 Fund 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.
Money Market Fund
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 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 Fund will invest only in U.S. dollar-denominated instruments. All
of the Fund's investments will mature in 397 days or less and the Fund will
maintain a dollar-weighted average fund maturity of 90 days or less. By limiting
the maturity of its investments, the 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 Fund will tend to have a lower
yield than, and the value of its underlying investments will be less volatile
than the investments of, funds that invest in longer-term securities. In
addition, the 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 Investment Company 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.
INVESTMENTS AND RISK FACTORS APPLICABLE TO MULTIPLE FUNDS
Index Funds and Tracking an Index
The factors that cause a Fund to perform differently from the index it
tries to track are called tracing differences. There is no assurance that an
Index Fund can track its index.
The coefficient of correlation (r) is an index number which shows how
closely two variables are related. If r = 0 there is no tendency for one
variable to change with the other. A value of + 1 means that one variable will
vary exactly with the other. Index funds try to keep their coefficient of
correlation as close to 1 as possible.
Tracking accuracy is reviewed monthly by the subadvisor for each of the
Index Funds. If an Index Fund does not accurately track an index, the subadvisor
will rebalance the Fund's portfolio by selecting securities which will provide a
more representative sampling of the securities in the index as a whole or the
sector diversification within the index, as appropriate.
The index may remove one stock and substitute another, requiring the
Fund to do the same. When a stock is sold and the new stock purchased, the Fund
incurs transaction costs. The index incurs no transaction costs. Therefore, any
index fund portfolio manager cannot match exactly the performance of an index.
An index fund may not buy every single stock in its index or in the
same proportions as the index. The subadvisor may rely on a statistical
selection technique to figure out, of the stocks tracked by their index, how
many and which ones to buy. Stocks are bought and sold in response to cash flows
into and out of the Fund and when they are added to or dropped from the index.
This generally helps to keep brokerage fees and other transaction costs lower
than other funds.
Money Market Instruments
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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 Funds in accordance with their investment policies and
certain Funds may purchase such instruments to invest otherwise idle cash or for
defensive purposes.
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.
The Funds 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 Fund, as lender, and the borrower. These notes
permit daily changes in the amounts borrowed. A Fund 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 Fund 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
Subadvisor has determined present minimal risk of loss to the Fund. A Subadvisor
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 Fund'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.
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 Fund 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 Fund 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 Fund to earn a return on
cash which is only temporarily available. Repurchase agreements entered into by
the Fund will be with banks, brokers or dealers. However, a Fund 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 Fund decrease below the resale price.
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The Trustees have adopted procedures that establish certain
creditworthiness, asset and collateralization requirements for the
counterparties to a Fund'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 Subadvisors 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 Fund, if any, would be the difference
between the repurchase price and the underlying obligation's market value. A
Fund 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 Fund
might be delayed or limited. Generally, repurchase agreements are of a short
duration, often less than one week but on occasion for longer periods.
6. Canadian and Provincial Government and Crown Agency Obligations.
Canadian Government obligations are debt securities issued or guaranteed as to
principal or interest by the Government of Canada pursuant to authority granted
by the Parliament of Canada and approved by the Governor in Council, where
necessary. These securities include treasury bills, notes, bonds, debentures and
marketable Government of Canada loans. Canadian Crown agency obligations are
debt securities issued or guaranteed by a Crown corporation, company or agency
("Crown agencies") pursuant to authority granted by the Parliament of Canada and
approved by the Governor in Council, where necessary. Certain Crown agencies are
by statute agents of Her Majesty in right of Canada, and their obligations, when
properly authorized, constitute direct obligations of the Government of Canada.
Such obligations include, but are not limited to, those issued or guaranteed by
the Export Development Corporation, Farm Credit Corporation, Federal Business
Development Bank and Canada Post Corporation. In addition, certain Crown
agencies which are not by law agents of Her Majesty may issue obligations which
by statute the Governor in Council may authorize the Minister of Finance to
guarantee on behalf of the Government of Canada. Other Crown agencies which are
not by law agents of Her Majesty may issue or guarantee obligations not entitled
to be guaranteed by the Government of Canada. No assurance can be given that the
Government of Canada will support the obligations of Crown agencies which are
not agents of Her Majesty, which it has not guaranteed, since it is not
obligated to do so by law.
Provincial Government obligations are debt securities issued or guaranteed
as to principal or interest by the government of any province of Canada pursuant
to authority granted by the Legislature of any such province and approved by the
Lieutenant Governor in Council of any such province, where necessary. These
securities include treasury bills, notes, bonds and debentures. Provincial Crown
agency obligations are debt securities issued or guaranteed by a provincial
Crown corporation, company or agency ("provincial Crown agencies") pursuant to
authority granted by a provincial Legislature and approved by the Lieutenant
Governor in Council of such province, where necessary. Certain provincial Crown
agencies are by statute agents of Her Majesty in right of a particular province
of Canada, and their obligations, when properly authorized, constitute direct
obligations of such province. Other provincial Crown agencies which are not by
law agents of Her Majesty in right of a particular province of Canada may issue
obligations which by statute the Lieutenant Governor in Council of such province
may guarantee, or may authorize the Treasurer thereof to guarantee, on behalf of
the government of such province. Finally, other provincial Crown agencies which
are not by law agencies of Her Majesty may issue or guarantee obligations not
entitled to be guaranteed by a provincial government. No assurance can be given
that the government of any province of Canada will support the obligations of
provincial Crown agencies which are not agents of Her Majesty, which it has not
guaranteed, as it is not obligated to do so by law. Provincial Crown agency
obligations described above include, but are not limited to, those issued or
guaranteed by a provincial railway 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.
Preferred Stock and Convertible Securities
Preferred stock is a class of capital stock that pays dividends at a
specified rate and that has preference over common stock in the payment of
dividends and the liquidation of assets. Preferred stock does not ordinarily
carry voting rights. Convertible securities are securities (usually preferred
shares or bonds) that are exchangeable for a set number of another form of
securities (usually common stock) at a prestated price. The convertible feature
is usually designed as a sweetener to enhance the marketability of the security.
Mortgage Securities
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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
Fund receives monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. When a Fund 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 Fund 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 Fund 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 Fund 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 Fund would likely
decrease. Also, the Fund'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 Fund derived from adjustable rate mortgages which
remain in a mortgage pool will decrease in contrast to the income on fixed rate
mortgages, which will remain constant. Adjustable rate mortgages also have less
potential for appreciation in value as interest rates decline than do fixed rate
investments.
Privately-Issued Mortgage Securities. Privately-issued pass through
securities provide for the monthly principal and interest payments made by
individual borrowers to pass through to investors on a corporate basis, and in
privately-issued collateralized mortgage obligations, as further described
below. Privately-issued mortgage securities are issued by private originators
of, or investors in, mortgage loans, including mortgage bankers, commercial
banks, investment banks, savings and loan associations and special purpose
subsidiaries of the foregoing. Since privately-issued mortgage certificates are
not guaranteed by an entity having the credit status of GNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. For a description of the types of credit enhancements that may
accompany privately-issued mortgage securities, see "Asset-Backed
Securities--Types of Credit Support" below. A Fund 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:
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(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 Funds 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 Fund 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 the illiquidity restriction on a Fund's assets.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive not only to changes in prevailing
interest rates but also the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on a Fund's yield to maturity. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, a Fund 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 Fund'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 Fund.
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 Fund. See "Taxes --
Pay-in-kind Bonds, Zero Coupon Bonds and Discount Obligations."
Inverse Floaters. The Strategic Income and 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 Fund 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 the illiquidity restriction on the
Fund's 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
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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.
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 Fund'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 Fund must
reinvest the prepaid amounts in securities the yields of which reflect interest
rates prevailing at the time. Therefore, a Fund'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 Fund 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 Subadvisor, 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 Fund will not limit its
investments to asset-backed securities with credit enhancements. Although
asset-backed securities are not generally traded on a national securities
exchange, such securities are widely traded by brokers and dealers, and to such
extent will not be considered illiquid securities.
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 Funds 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.
Zero Coupon Securities and Pay-in-Kind Bonds
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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 Funds 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 Fund 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.
High Yield/High Risk Domestic Corporate Debt Securities
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 Fund 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).
Because the Strategic Income and Core Bond Funds will invest primarily
in fixed-income securities, the net asset value of each Fund'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 Fund can
generally be expected to rise. Conversely, when interest rates rise, the value
of a fixed-income Fund 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 Fund investments and may limit the ability of
those Funds to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Fund 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 Fund's investment Fund 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 Fund's ability to
sell securities at their fair value. In addition, each Fund may invest a limited
percentage of its 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 Fund's assets invested in illiquid
securities may increase.
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
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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.
High Yield/High Risk Foreign Sovereign Debt Securities
The Strategic Income, High Yield and Core 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 Funds 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
Funds may invest in emerging market governmental obligations issued as a result
of debt restructuring agreements outside of the scope of the Brady Plan.
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 Funds 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 Funds may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased and
sold in secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories.
Foreign Sovereign Debt Securities
Investing in foreign sovereign debt securities will expose a Fund 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 Funds 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
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these foreign governments, multilateral organizations and others to make such
disbursements may be conditioned on the government's implementation of economic
reforms and/or economic performance and the timely service of its obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due may result in the cancellation of such
third parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund 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 Funds may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect a Fund'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 Funds may also invest in investment grade foreign securities.
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 Funds 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 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 Fund is uninvested and no return is earned thereon. The inability of
a Fund to make intended security purchases due to settlement could cause the
Fund to miss attractive investment opportunities. Inability to dispose of Fund
securities due to settlement problems could result in losses to a Fund due to
subsequent declines in values of the Fund securities or, if the Fund 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 Fund 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 Fund of any
restrictions on investments.
Warrants
Subject to certain restrictions, each of the Funds except the Municipal
Bond Fund and Money Market Fund may purchase warrants, including warrants traded
independently of the underlying securities. Warrants are rights to purchase
securities at specific prices valid for a specific period of time. Their prices
do not necessarily move parallel to the prices of the underlying securities, and
warrant holders receive no dividends and have no voting rights or rights with
respect to the assets of an issuer. Warrants cease to have value if not
exercised prior to the expiration date. It is a non-fundamental investment
restriction of each Fund (except the
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Small Cap Growth Fund) not to purchase warrants if as a result that Fund would
then have more than 10% of its total net assets invested in warrants, or if more
than 5% of the value of the Fund'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.
When-Issued Securities ("forward commitments")
In order to help ensure the availability of suitable securities, each
of the Funds may purchase debt securities on a "when-issued" or on a "forward
delivery" basis, which means that the obligations will be delivered to the Fund
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 Fund purchasing securities on a when-issued or forward delivery
basis will take delivery of the securities, but the Fund may sell the securities
before the settlement date, if such action is deemed advisable. In general, a
Fund 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 Fund 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 Fund's ability to meet its current obligations, to honor
requests for redemption and to have its investment Fund managed properly will
limit the extent to which the Fund 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 Fund's total assets that may be committed to such transactions.
Illiquid Securities
Each of the International Small Cap Fund, the Mid Cap Growth Fund, the
Global Equity Fund, the Large Cap Growth Fund, the International Equity Fund,
the Growth and Income Fund, and the Balanced Fund is precluded from investing in
excess of 10% of its net assets in securities that are not readily marketable
(the Small Cap Growth Fund is subject to a restriction on illiquid investments
of no more than 15% of its net assets, and the remaining Funds are subject to
restrictions on illiquid investments as provided in the section of this
Statement of Additional Information that describes investment restrictions that
apply to individual Funds). Investment in illiquid securities involves the risk
that, because of the lack of consistent market demand for such securities, a
Fund may be forced to sell them at a discount from the last offer price.
Excluded from the limitation on investment in illquid securities 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 Subadvisors, subject to the Trustees' oversight
and for which the Trustees are ultimately responsible. The Subadvisors will also
monitor the liquidity of Rule 144A securities held by the Funds for which they
are responsible. To the extent Rule 144A securities held by a Fund should become
illiquid because of a lack of interest on the part of qualified institutional
investors, the overall liquidity of the Fund 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
Subadvisor 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 Subadvisor
will monitor the liquidity of Section 4(2) commercial paper held by the Money
Market Fund, subject to the Trustees' oversight and for which the Trustees are
ultimately responsible.
Repurchase Agreements and Reverse Repurchase Agreements
Each of the Funds may enter into repurchase agreements and reverse
repurchase agreements. Repurchase agreements involve the acquisition by a Fund
of debt securities subject to an agreement to resell them at an agreed-upon
price. Under a repurchase agreement, at the time the Fund 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.
A Fund'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
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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 of the Funds may enter into "reverse" repurchase agreements. Under
a reverse repurchase agreement, a Fund may sell a debt security and agree to
repurchase it at an agreed upon time and at an agreed upon price. The Fund
retains record ownership of the security and the right to receive interest and
principal payments thereon. At an agreed upon future date, the Fund repurchases
the security by remitting the proceeds previously received, plus interest. The
difference between the amount the Fund receives for the security and the amount
it pays on repurchase is deemed to be payment of interest. The Fund will
maintain in a segregated custodial account cash, Treasury bills or other U.S.
Government securities having an aggregate value equal to the amount of such
commitment to repurchase including accrued interest, until payment is made. In
certain types of agreements, there is no agreed-upon repurchase date and
interest payments are calculated daily, often based on the prevailing overnight
repurchase rate. While a reverse repurchase agreement may be considered a form
of leveraging and may, therefore, increase fluctuations in a Fund's net asset
value per share, each Fund will cover the transaction as described above.
Mortgage Dollar Rolls
Each of the Funds (except the Money Market Fund) may enter into
mortgage dollar rolls. Under a mortgage dollar roll, a Fund 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 Fund forgoes principal and interest paid on the mortgage-backed
securities. A Fund 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 Fund may also be compensated by receipt of a commitment fee. A
Fund 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 Fund may decline below the repurchase price
of those securities. While a mortgage dollar roll may be considered a form of
leveraging and may, therefore, increase fluctuations in a Fund's net asset value
per share, each Fund will cover the transaction as described above.
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 Fund 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 Fund 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 Fund 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 Fund 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
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not be readily foreseen by the purchaser, such as economic and political events,
the supply and demand for the Underlying Assets and interest rate movements. In
recent years, various Benchmarks and prices for Underlying Assets have been
highly volatile, and such volatility may be expected in the future. Reference is
also made to the discussion below of futures, options, and forward contracts for
a description of certain risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments
are often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Fund 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 Fund 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 Fund.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
A discussion of Hedging and Other Strategic Transactions follows. With
the exception of the International Equity Fund,which may use certain Strategic
Transactions for both hedging and non-hedging purposes, 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
Fund. No Fund which is authorized to use any of these investment strategies will
be obligated, however, to pursue any of such strategies and no Fund makes any
representation as to the availability of these techniques at this time or at any
time in the future. In addition, a Fund's ability to pursue certain of these
strategies may be limited by the Commodity Exchange Act, as amended, applicable
rules and regulations of the CFTC thereunder and the federal income tax
requirements applicable to regulated investment companies which are not operated
as commodity pools.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging and Other Strategic Transactions
involving options require segregation of Fund assets in 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 Fund'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 Fund 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 Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund 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
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obligations of the parties to the options. The discussion below uses the OCC as
an example, but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Index options and
Eurodollar instruments (which are described below under "Eurodollar
Instruments") are cash settled for the net amount, if any, by which the option
is "in-the-money" (that is, the amount by which the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option.
A Fund'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 Fund
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 Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Subadvisor 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 Fund
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 Subadvisor. 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 Fund and the amount of the Fund's
obligation pursuant to an OTC option sold by the Fund (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 Fund 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 Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
If and to the extent authorized to do so, a Fund 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 Fund must be
"covered," that is, the Fund 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 Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose the Fund 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 Fund to hold a
security or instrument that it might otherwise have sold.
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Each Fund 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 Fund's investment objective and the restrictions set forth
herein.
If and to the extent authorized to do so, a Fund 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 Fund
will not sell put options if, as a result, more than 50% of the Fund'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 Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.
General Characteristics of Futures Contracts and Options on Futures Contracts
If and to the extent authorized to do so, a Fund 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 Fund, 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 Fund'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 Fund 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 Fund. If a Fund exercises
an option on a futures contract it will be obligated to post initial margin (and
potentially variation margin) for the resulting futures position just as it
would for any futures position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction, but no assurance
can be given that a position can be offset prior to settlement or that delivery
will occur.
All of the Funds intend to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" adopted by
the CFTC and the National Futures Association, which regulate trading in the
futures markets. A Fund will use futures contracts and related options, to the
extent otherwise permitted, primarily for bona fide hedging purposes within the
meaning of CFTC regulations. To the extent that a Fund holds positions in
futures contracts and related options that do not fall within the definition of
bona fide hedging transactions, the aggregate initial margins and premiums
required to establish such positions will not exceed 5% of the fair market value
of the Fund's net assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into.
The value of all futures contracts sold by a Fund (adjusted for the
historical volatility relationship between such Fund and the contracts) will not
exceed the total market value of the Fund's securities.
Options on Securities Indices and Other Financial Indices
If and to the extent authorized to do so, a Fund may purchase and sell
call and put options on securities indices and other financial indices. In so
doing, the Fund can achieve many of the same objectives it would achieve through
the sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
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Currency Transactions
If and to the extent authorized to do so, a Fund 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 Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Subadvisor.
A Fund's dealings in forward currency contracts and other currency
transactions such as futures contracts, options, options on futures contracts
and swaps will be limited to hedging and other non-speculative purposes,
including transaction hedging and position hedging. Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Fund, which will generally arise in connection with the
purchase or sale of the Fund'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 Fund 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 Fund that are
denominated or generally quoted in or currently convertible into the currency,
other than with respect to proxy hedging as described below.
A Fund 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 Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, a Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a Fund'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 Fund'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 Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other
portfolio transactions, as discussed below under "Risk Factors."
Combined Transactions
If and to the extent authorized to do so, a Fund 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 Subadvisor, it is in the best interests of the Fund 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 Fund based on the Subadvisor'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 Fund 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 Fund 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 Fund
anticipates purchasing at a later date. A Fund 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 Fund may
be obligated to pay. Interest rate swaps involve the exchange by a Fund 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
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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 Fund 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 Fund 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 Fund's
borrowing restrictions. A Fund will not enter into any swap, cap, floor, collar
or other derivative transaction unless the Counterparty is deemed creditworthy
by the Subadvisor. If a Counterparty defaults, a Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by a Subadvisor
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 Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed to be within each Fund's restriction on investments in securities that
are not readily marketable.
Each Fund will maintain cash and appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. If a Fund 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
Fund's accrued obligations under the swap agreement over the accrued amount the
Fund is entitled to receive under the agreement. If a Fund 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 Fund'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 Fund 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 Fund 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.
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 Subadvisor'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 Fund, 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 Fund 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
Fund could create the possibility that losses on the derivative instrument are
greater than gains in the value of the Fund'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 Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund'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 Fund that might result from an increase in value of
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the position. Finally, the daily variation margin requirements for futures
contracts create a greater ongoing potential financial risk than would purchases
of options, in which case the exposure is limited to the cost of the initial
premium.
Currency transactions involve some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can result
in losses to a Fund if the underlying currency 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 Fund 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 Fund 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 Fund'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 Fund'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 Fund will
require, among other things, that the Fund segregate cash or other liquid assets
with its custodian, or a designated sub-custodian, to the extent the Fund'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 Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
other liquid assets equal to the current amount of the obligation must be
segregated with the custodian or sub-custodian. The segregated assets cannot be
sold or transferred unless equivalent assets are substituted in their place or
it is no longer necessary to segregate them. A call option on securities written
by a Fund, for example, will require the Fund to hold the securities subject to
the call (or securities convertible into the needed securities without
additional consideration) or to segregate liquid assets sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by a
Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid assets equal to the excess of
the index value over the exercise price on a current basis. A put option on
securities written by a Fund will require the Fund to segregate liquid assets
equal to the exercise price. Except when a Fund 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 Fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency, liquid securities
denominated in that currency equal to a Fund's obligations or to segregate
liquid assets equal to the amount of the Fund's obligations.
OTC options entered into by a Fund, 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 Fund will
not be required to do so. As a result, when a Fund 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 Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or
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with an election of either physical delivery or cash settlement will be treated
the same as other options settling with physical delivery.
In the case of a futures contract or an option on a futures contract, a
Fund 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 Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap on
a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid assets having an aggregate value
equal to at least the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Fund'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 Fund 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
Fund 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
Fund. Moreover, instead of segregating assets if it holds a futures contracts or
forward contract, a Fund 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 Fund 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 Fund and the contracts (e.g., the Beta
volatility factor). For purposes of the limitation stated in the immediately
preceding sentence, to the extent the Fund 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 Fund 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.
International Equity Fund
The International Equity Fund may use certain Strategic Transactions
and instruments for both hedging and non-hedging purposes. Circumstances under
which such techniques might be used to further the Fund's investment objective
include, but are not limited to, the purchase or sale of stock and stock index
futures contracts: to gain exposure to a market in response to changes in the
Fund's investment strategy; upon the inflow of investable cash; when the
instrument provides greater liquidity than the underlying market; when the Fund
is restricted from directly owning a security or currency; or when these
strategies and instruments provide a pricing advantage or lower transaction
costs. The Fund also may purchase combinations of instruments in order to gain
exposure to an investment instead of actually purchasing such investment. For
example, the Fund may purchase and sell forward foreign currency exchange
contracts in combination with other transactions (such as the purchase and sale
of stock and stock index futures contracts). The Fund will not use derivatives
in a manner that creates leverage.
Warrant Transactions and Risks
Each of the Funds (other than the Money Market Fund) may purchase
warrants, including warrants traded independently of the underlying securities.
Such transactions entail certain risks. A warrant is a security, usually issued
together with a bond or preferred stock, that entitles the holder to buy a
proportionate amount of common stock at a specified price, usually higher than
the market price at the time of issuance, for a period of years or to
perpetuity. In contrast, rights, which also represent the right to buy common
shares, normally have a subscription price lower than the current market value
of the common stock and a life of two to four weeks. A warrant is usually issued
as a sweetener, to enhance the marketability of the accompanying fixed income
securities. Warrants may be considered more speculative than certain other types
of investments in that prior to their exercise they do not entitle a holder to
dividends and voting rights with respect to the securities which may be
purchased by the exercise thereof, nor do they represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change
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with the value of the underlying security. If a warrant expires unexercised, the
Fund will lose the amount paid for the warrant and any transaction costs.
INVESTMENT RESTRICTIONS
There are two classes of investment restrictions to which the Trust is
subject in implementing the investment policies of the Funds: fundamental and
nonfundamental. Nonfundamental restrictions are subject to change by the
Trustees of a Fund without shareholder approval. Fundamental restrictions may
only be changed by the affirmative vote of a majority of the outstanding voting
securities of a Fund, which means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of a Fund, or (2) 67% or more of the shares
of a Fund present at a meeting if more than 50% of the outstanding shares of the
Fund are represented at the meeting in person or by proxy.
The Trust 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 Fund is specifically excepted by
the terms of a restriction, each of the Small Cap Growth Fund, the International
Small Cap Fund, the Mid Cap Growth Fund, the Global Equity Fund, the Large Cap
Growth Fund, the International Equity Fund, the Growth and Income Fund, the
Balanced Fund, the Strategic Income Fund, the Core Bond Fund, the Municipal Bond
Fund, the U.S. Government Securities Fund, and the Money Market Fund will not:
Fundamental
(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 Municipal
Bond Fund, obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities or by any state, territory or any possession of the United
States, the District of Columbia, or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations. For purposes of this
restriction (except with regard to the Small Cap Growth Fund), supranational
issuers will be considered to comprise an industry as will each foreign
government that issues securities purchased by a Fund.
(2) Purchase the securities of any issuer if the purchase would cause
more than 5% of the value of the Fund'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 Fund,
except that up to 25% of the value of each Fund's total assets may be invested
without regard to these restrictions. This restriction does not apply to the
Small Cap Growth Fund as a non-diversified portfolio.
(3) Borrow money except that each Fund may borrow (i) for temporary or
emergency purposes (not for leveraging) up to 33 1/3% of the value of the Fund'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 Fund may invest in
securities issued by companies which invest in real estate or interests therein
and each of the Funds 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 Fund other than the Core Bond and Money Market Funds may purchase and sell
futures contracts on financial instruments and indices and options on such
futures contracts. The Small Cap Growth, Equity-Income, Mid Cap Growth,
International Small Cap, Large Cap Growth, Global Equity, Strategic Income and
International Equity 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 Fund 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.
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(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 Small Cap Growth Fund may so invest up to 15% its
net assets, and that each of the Strategic Income Fund, Core Bond Fund,
Municipal Bond Fund, U.S. Government Securities Fund, and Money Market Fund may
so invest up to 15% of its total assets.
(10) Purchase securities for the purpose of exercising control or
management.
(11) Purchase securities of foreign issuers, except that (A) the
International Small Cap, Global Equity, International Equity 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 Fund and Large Cap Growth Fund may each invest up to 30% of its
assets in such securities, (C) the Small Cap Growth 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 Municipal Bond Funds) may invest up to 20% of
its assets in securities issued by foreign entities and/or denominated in
foreign currencies. (In the case of the Small/Mid Cap, Growth Equity and
Balanced Funds, ADRs and U.S. dollar denominated securities are not included in
the percentage limitation.)
In addition to the above policies, the Money Market Fund is subject to
certain restrictions required by Rule 2a-7 under the 1940 Act.
For the purposes of the investment limitations applicable to the
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
Fund'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.
Investment restrictions for the Mid Cap Value Fund, Stock Index Fund,
Small Cap Index Fund, Socially Responsible Fund, High Yield Bond Fund,
Aggressive Growth Lifestyle Fund, Moderate Growth Lifestyle Fund, Conservative
Growth Lifestyle Fund, Municipal Money Market Fund, and Science & Technology
Fund are listed below. Note that the percentage limitations referenced in some
of the restrictions below are to be determined at the time of purchase. However,
percentage limitations for illiquid securities and borrowings apply at all
times. Calculation of each Fund's total assets for compliance with any of the
investment restrictions will not include cash collateral held in connection with
securities lending activities.
As a matter fundamental policy, the Mid Cap Value Fund may not:
(1) Borrow money, except that the Fund may (i) borrow money from banks
for temporary or emergency purposes and not for leveraging or investment and
(ii) enter into reverse repurchase agreements and employ similar investment
techniques, and pledge its assets in connection therewith, for any purpose;
provided that (i) and (ii) in combination do not exceed 33 1/3% of the value of
its total assets (including the amount borrowed) less liabilities (other than
borrowings). If borrowings exceed 33 1/3% of the value of the Fund's total
assets, the Fund will reduce its borrowings within three days (excluding Sundays
and holidays) to the extent necessary to comply with the 33 1/3% limitation.
(2) Purchase physical commodities or contracts thereon, unless acquired
as a result of the ownership of securities or instruments, but this restriction
shall not prohibit the Fund from purchasing futures contracts or options
(including options on futures contracts, but excluding options or futures
contracts on physical commodities) or from investing in securities of any kind.
For purposes of the limitations on commodities, the Fund does not consider
foreign currencies or forward contracts to be physical commodities.
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(3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities) if, as a result, (i)
more than 5% of the value of the Fund's total assets would be invested in the
securities of that issuer or (ii) the Fund would hold more than 10% of the
outstanding voting securities of that issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Purchase any security if, as a result, 25% or more of its total
assets (taken at current value) would be invested in the securities of issuers
having their principal business activities in the same industry, provided,
however, that this limitation excludes shares of other open-end investment
companies owned by the Fund but includes the Fund's pro rata portion of the
securities and other assets owned by any such company. This limitation does not
apply to securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities.
(5) Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets (taken at current value) would be lent to other
parties, except, in accordance with its investment objective, policies, and
limitations, (i) through the purchase of a portion of an issue of debt
securities or (ii) by engaging in repurchase agreements.
(6) Purchase real estate unless acquired as a result of the ownership
of securities or instruments, but this restriction shall not prohibit the Fund
from purchasing securities issued by entities or investment vehicles that own or
deal in real estate or interests therein or instruments secured by real estate
or interests therein.
(7) Issue senior securities, except as permitted under the 1940 Act.
(8) Underwrite securities of other issuers, except to the extent that
the Fund, in disposing of portfolio securities, may be deemed to be an
underwriter within the meaning of the 1933 Act.
As a matter of non-fundamental policy, the Mid Cap Value Fund may not:
(1) Purchase securities if outstanding borrowings, including any
reverse repurchase agreements, exceed 5% of its total assets.
(2) Purchase securities on margin from brokers or other lenders, except
that the Fund may obtain such short-term credits as are necessary for the
clearance of securities transactions. Margin payments in connection with
transactions in futures contracts and options on futures contracts shall not
constitute the purchase of securities on margin and shall not be deemed to
violate the foregoing limitation.
(3) Invest more than 10% of the value of its total assets in securities
of foreign issuers, provided that the limitation shall not apply to foreign
securities denominated in U.S. dollars, including American Depositary Receipts
("ADRs").
(4) Invest more than 15% of the Fund's total assets in illiquid and
restricted securities.
(5) Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
As a matter of fundamental policy, the Stock Index Fund may not:
(1) Borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's total
assets, it may borrow money as a temporary measure for extraordinary or
emergency purposes and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate not more
than 1/3 of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate requests for
the withdrawal of beneficial interests (redemption of shares) while effecting an
orderly liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security transaction
or other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge of assets
for purposes of this restriction and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute. If borrowings exceed 5%
of the Fund's total assets the Fund will not purchase additional securities.
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(2) Underwrite securities issued by other persons except insofar as the
Trust (or the Fund) may technically be deemed an underwriter under the
Securities Act of 1933 ("1933 Act") in selling a portfolio security.
(3) Make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately.
(4) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (except
that the Fund) may hold and sell, for the Fund's portfolio, real estate acquired
as a result of the Fund's ownership of securities).
(5) Concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of the Fund's investment objective, up to 25% of its total assets may be
invested in any one industry. This limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by any such company.
(6) Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
As a matter of non-fundamental policy, the Stock Index Fund may not:
(1) Pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Fund total assets (taken at market value), provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction.
(2) Purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures.
(3) Sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale is made upon the same conditions.
(4) Invest for the purpose of exercising control or management.
(5) Invest more than 15% of the Fund's total assets (taken at the
greater of cost or market value) in securities that are illiquid or not readily
marketable not including (a) Rule 144A securities that have been determined to
be liquid by the Board of Trustees, and (b) commercial paper that is sold under
section 4(2) of the 1933 Act which: (i) is not traded flat or in default as to
interest or principal: and (ii) is rated in one of the two highest categories by
at least two nationally recognized statistical rating organizations and the
Trust's Board of Trustees have determined the commercial paper to be liquid: or
(iii) is rated in one of the two highest categories by one nationally recognized
statistical rating agency and the Board of Trustees has determined that the
commercial paper is equivalent quality and is liquid.
(6) Invest more than 10% of the Fund's total assets (taken at the
greater of cost or market value) in securities that are restricted as to resale
under the 1933 Act (other than Rule 144A securities deemed liquid by the Board
of Trustees.)
(7) Invest more than 5% of the Fund's total assets in securities issued
by issuers which (including predecessors) have been in operation less than three
years.
(8) With respect to 75% of the Fund's total assets, purchase securities
of any issuer if such purchase at the time thereof would cause the Fund to hold
more than 10% of any class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and all preferred stock
of an issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction. The Fund may purchase
securities of other investment companies without regard to such
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<PAGE>
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
(9) With respect to 75% of its assets, invest more than 5% of its total
assets in the securities (excluding U.S. government securities) of any one
issuer; except that the Fund may purchase securities of other investment
companies without regard to such limitation to the extent permitted by (i) the
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.
(10) Purchase or retain in the Fund's portfolio any securities issued
by an issuer any of whose officers, directors, trustees or security holders is
an officer or Trustee of the Trust, or is an officer or partner of AGAM or the
Subadvisor, if after the purchase of the securities of such issuer for the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the shares
or securities, or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.
(11) Invest more than 5% of the Fund's net assets in warrants (valued
at the lower of cost or market) (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase), but not more
than 2% of the Fund's net assets may be invested in warrants not listed on the
New York Stock Exchange Inc. (the "NYSE") or the American Stock Exchange.
(12) Make short sales of securities or maintain a short position,
unless at all times when a short position is open, it owns an equal amount of
such securities or securities convertible into or exchangeable without payment
of any further consideration, for securities of the same issue and equal in
amount to, the securities sold short and unless not more than 10% of the Fund's
net assets (taken at market value) is represented by such securities, or
securities convertible into or exchangeable for such securities, at any one
time. The Fund has no current intention to engage in short selling.
(13) Write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is within the
investment policies of the Fund and the option is issued by the Options Clearing
Corporation, except for put and call options issued by non-U.S. entities or
listed on non-U.S. securities or commodities exchanges: (b) the aggregate value
of the obligations underlying the puts determined as of the date the options are
sold shall not exceed 50% of the Fund's net assets; (c) the securities subject
to the exercise of the call written by the Fund must be owned by the Fund at the
time the call is sold and must continue to be owned by the Fund until the call
has been exercised, has lapsed, or the Fund has purchased a closing call, and
such purchase has been confirmed, thereby extinguishing the Fund's obligation to
deliver securities pursuant to the call it has sold: and (d) at the time a put
is written, the Fund establishes a segregated account with its custodian
consisting of cash or short-term U.S. government securities equal in value to
the amount the Fund will be obligated to pay upon exercise of the put (this
account must be maintained until the put is exercised, has expired, or the Fund
has purchased a closing put, which is a put of the same series as the one
previously written).
(14) Buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on financial
futures unless such options are written by other persons and: (a) the options or
futures are offered through the facilities of a national securities association
or are listed on a national securities or commodities exchange, except for put
and call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Fund's total net assets; and (c)
the aggregate margin deposits required on all such futures or options thereon
held at any time do not exceed 5% of the Fund's total assets.
(15) Invest in securities issued by other investment companies except
as part of a merger, reorganization or other acquisition and except to the
extent permitted (i) by the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
As a matter of fundamental policy, the Small Cap Index Fund may not:
(1) Borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's total
assets, it may borrow money as a temporary measure for extraordinary or
emergency purposes and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or hypothecate not more
than 1/3 of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate requests for
the withdrawal of beneficial interests (redemption of shares) while effecting an
orderly liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security transaction
or other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge of assets
for purposes of this restriction and except that assets may be
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<PAGE>
pledged to secure letters of credit solely for the purpose of participating in a
captive insurance company sponsored by the Investment Company Institute. If
borrowings exceed 5% of the Fund's total assets, the Fund will not purchase
additional securities.
(2) Underwrite securities issued by other persons except insofar as the
Trust (or the Fund) may technically be deemed an underwriter under the 1933 Act
in selling a portfolio security.
(3) Make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately.
(4) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (except
that the Trust may hold and sell, for the Fund's portfolio, real estate acquired
as a result of the Fund's ownership of securities). This limitation excludes
shares of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any such
company.
(5) Concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of a Fund's investment objective(s), up to 25% of its total assets may be
invested in any one industry, provided, however, that this limitation excludes
shares of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any such
company.
(6) Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
As a matter of non-fundamental policy, the Small Cap Index Fund may not:
(1) Pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Fund's total assets (taken at market value), provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, and reverse repurchase agreements are not
considered a pledge of assets for purposes of this restriction.
(2) Purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures.
(3) Sell securities it does not own such that the dollar amount of such
short sales at any one time exceeds 25% of the net equity of the Fund, and the
value of securities of any one issuer in which the Fund is short exceeds the
lesser of 2.0% of the value of the Fund's net assets or 2.0% of the securities
of any class of any U.S. issuer and, provided that short sales may be made only
in those securities which are fully listed on a national securities exchange or
a foreign exchange (This provision does not include the sale of securities of
the Fund contemporaneously owns or has the right to obtain securities equivalent
in kind and amount to those sold, i.e., short sales against the box.) (The Fund
has no current intention to engage in short selling).
(4) Invest for the purpose of exercising control or management; except
that the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (iii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.
(5) Invest more than 10% of the Fund's total assets (taken at the
greater of cost or market value) in securities that are restricted as to resale
under the 1933 Act (other than Rule 144A securities deemed liquid by the Fund's
Board of Trustees).
(6) Invest more than 15% of the Fund's total assets (taken at the
greater of cost or market value) in securities that are illiquid or not readily
marketable not including (a) Rule 144A securities that have been determined to
be liquid by the Board of Trustees; and (b) commercial paper that is sold under
section 4(2) of the 1933 Act which: (i) is not traded flat or in default as to
interest or principal; and (ii) is rated in one of the two highest categories by
at least two nationally recognized statistical rating organizations and the
Board of Trustees have determined the commercial paper to be liquid; or (iii) is
rated in one of the two highest categories by one nationally
26
<PAGE>
recognized statistical rating agency and the Board of Trustees have determined
that the commercial paper is equivalent quality and is liquid.
(7) Invest more than 5% of the Fund's total assets in securities issued
by issuers which (including predecessors) have been in operation less than three
years.
(8) With respect to 75% of the Fund's total assets, purchase securities
of any issuer if such purchase at the time thereof would cause the Fund to hold
more than 10% of any class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and all preferred stock
of an issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction. The Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(9) Invest more than 5% of its total assets in the securities
(excluding U.S. government securities) of any one issuer; except that the Fund
may purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
(10) Invest in securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Trust,
or is an officer or partner of AGAM or of the Subadvisor, if after the purchase
of the securities of such issuer for the Fund one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all taken
at market value, of such issuer, and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities, or both, all taken at market value.
(11) Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 5%
of the value of the Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants not listed on a recognized
United States or foreign stock exchange, to the extent permitted by applicable
state securities laws.
(12) Write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is within the
Investment Practices of the Fund and the option is issued by the Options
Clearing Corporation, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b) the
aggregate value of the obligations underlying the puts determined as of the date
the options are sold shall not exceed 5% of the Fund's net assets; (c) the
securities subject to the exercise of the call written by the Fund must be owned
by the Fund at the time the call is sold and must continue to be owned by the
Fund until the call has been exercised, has lapsed, or the Fund has purchased a
closing call, and such purchase has been confirmed, thereby extinguishing the
Fund's obligation to deliver securities pursuant to the call it has sold; and
(d) at the time a put is written, the Fund establishes a segregated account with
its custodian consisting of cash or short-term U.S. government securities equal
in value to the amount the Fund will be obligated to pay upon exercise of the
put (this account must be maintained until the put is exercised, has expired, or
the Fund has purchased a closing put, which is a put of the same series as the
one previously written).
(13) Buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on financial
futures unless such options are written by other persons and: (a) the options or
futures are offered through the facilities of a national securities association
or are listed on a national securities or commodities exchange, except for put
and call options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all, such options
which are held at any time do not exceed 20% of the Fund's total net assets; and
(c) the aggregate margin deposits required on all such or options thereon held
at any time do not exceed 5% of the Fund's total assets.
(14) Invest in securities issued by other investment companies except
as part of a merger, reorganization or other acquisition and except to the
extent permitted (i) by the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
As a matter of fundamental policy, the Socially Responsible Fund may not:
(1) Invest more than 5% of the value of its total assets in the
securities of any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer; except that the
Fund may purchase securities of other investment companies without regard to
such limitation to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii)
27
<PAGE>
the rules and regulations promulgated by the SEC under the 1940 Act, as amended
from time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act. For purposes of this restriction, all outstanding debt securities
of an issuer are considered as one class, and all preferred stock of an issuer
is considered as one class. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies, or instrumentalities.
As a matter of operating policy, the Trust will not consider repurchase
agreements subject to the 5% limitation if the collateral underlying the
repurchase agreements are U.S. Government securities.
(2) (a) Issue senior securities except in connection with investments
in options and futures contracts; or (b) borrow money, enter into reverse
repurchase agreements, or employ similar investment techniques, and pledge its
assets in connection therewith, except to the extent permitted by applicable
law, and provided that the Fund will not purchase additional securities if
borrowings exceed 5% of total assets.
(3) Acquire real estate or real estate contracts, although the Fund may
acquire obligations that are secured by real estate or securities issued by
companies investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of
restricted portfolio securities constitutes an underwriting under the federal
securities laws.
(5) Lend money, except by purchasing debt obligations in which a Fund
may invest consistent with its investment objective(s) and policies or by
purchasing securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This
restriction shall not prohibit the Fund, subject to restrictions described in
the Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or any
interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments, subject
to compliance with any applicable provisions of the federal securities or
commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's total
assets.
(8) Enter into financial futures contracts (by exercise of any option
or otherwise) or acquire any options thereon, if, immediately thereafter, the
total of the initial margin deposits required with respect to all open futures
positions at the time such positions were established plus the sum of the
premiums paid for all unexpired options on futures contracts would exceed 5% of
the value of its total assets.
(9) Invest more than 25% of the value of its total assets in the
securities of issuers primarily engaged in any one industry (excluding the U.S.
Government or any of its agencies or instrumentalities), provided, however, that
this limitation excludes shares of other open-end investment companies owned by
the Fund but includes the Fund's pro rata portion of the securities and other
assets owned by any such company.
As a matter of non-fundamental policy, the Socially Responsible Fund
may not:
(1) Invest more than 15% of the Fund's total assets in illiquid and
restricted securities.
(2) Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Acquire securities for the purpose of influencing the management
of, or exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Effect short sales of securities or purchase securities on margin,
except in connection with investment in options and futures contracts. The Fund
may use short-term credits when necessary to clear transactions.
As a matter of fundamental policy, the High Yield Bond Fund may not:
28
<PAGE>
(1) Invest more than 5% of the value of its total assets in the
securities of any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer; except that a
Fund may purchase securities of other investment companies without regard to
such limitation to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act. For purposes of this restriction, all
outstanding debt securities of an issuer are considered as one class, and all
preferred stock of an issuer is considered as one class. This restriction does
not apply to obligations issued or guaranteed by the U.S. Government, its
agencies, or instrumentalities or securities issued by state or municipal
governments and their political subdivisions. As a matter of operating policy,
the Trust will not consider repurchase agreements subject to the 5% limitation
if the collateral underlying the repurchase agreements are U.S. Government
securities.
(2) (a) Issue senior securities except in connection with investments
in options and futures contracts; or (b) borrow from banks or enter into reverse
repurchase agreements, or employ similar investment techniques, and pledge its
assets in connection therewith, unless immediately after each borrowing there is
asset coverage of 300%.
(3) Acquire real estate or real estate contracts, although a Fund may
acquire obligations that are secured by real estate or securities issued by
companies investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of
restricted portfolio securities constitutes an underwriting under the federal
securities laws.
(5) Lend money, except by purchasing debt obligations in which a Fund
may invest consistent with its investment objective(s) and policies or by
purchasing securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This
restriction shall not prohibit the Fund, subject to restrictions described in
the Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or any
interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments, subject
to compliance with any applicable provisions of the federal securities or
commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of a Fund's total
assets.
(8) Invest more than 25% of its total assets in issuers primarily
engaged in a single industry (excluding the U.S. Government or any of its
agencies or instrumentalities, provided, however, that this limitation excludes
shares of other open-end investment companies owned by a Fund but includes a
Fund's pro rata portion of the securities and other assets owned by any such
company.
As a matter of non-fundamental policy, the High Yield Bond Fund may not:
(1) Invest more than 15% of its total assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Acquire securities for the purpose of influencing the management
of, or exercising control over, the issuer; except that a Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
(4) Effect short sales of securities or purchase securities on margin,
except in connection with investment in options and futures contracts. A Fund
may use short-term credits when necessary to clear transactions.
As a matter of fundamental policy, the Conservative Growth Lifestyle Fund, the
Aggressive Growth Lifestyle Fund and the Moderate Growth Lifestyle Fund may not:
(1) Issue senior securities.
29
<PAGE>
(2) Borrow money, except to the extent permitted by applicable law, and
provided that the Fund may not purchase additional securities if borrowings
exceed 5% of total assets.
(3) Underwrite the securities of other issuers.
(4) Purchase real estate or real estate mortgage loans, although the
underlying mutual funds in which a Fund will invest may purchase marketable
securities of companies which deal in real estate, real estate mortgage loans or
interests therein.
(5) Purchase or sell commodities or commodity contracts.
(6) Make loans except by purchasing bonds, debentures or similar
obligations which are either publicly distributed or customarily purchased by
institutional investors.
(7) Invest more than 25% of its assets in any one industry, other than
Funds that are part of the Trust.
As a matter of non-fundamental policy, the Aggressive Growth Lifestyle
Fund, the Moderate Growth Lifestyle Fund and the Conservative Growth Lifestyle
Fund may not:
(1) Purchase any securities on margin, make short sales of securities
or purchase or sell puts and calls, or combinations thereof.
(2) Invest directly in oil, gas, or other mineral exploration or
development programs; provided, however, that the underlying mutual funds in
which the Fund will invest may purchase the securities of companies engaged in
such activities.
(3) Purchase or retain any security other than shares of the underlying
Trust Funds if (i) one or more officers or trustees of the Trust individually
own or would own, directly or beneficially, more than 1/2 of 1 percent of the
securities of such issuer and (ii) in the aggregate such persons own or would
own more than 5% of such securities.
(4) Invest in companies for the purpose of exercising control of
management.
As a matter of fundamental policy, the Municipal Money Market Fund may not:
(1) Purchase the securities of any issuer (except the U.S. Government,
its agencies or instrumentalities, or securities which are backed by the full
faith and credit of the U.S. or securities issued by state or municipal
governments and their political subdivisions) if, as a result, more than 5% of
its total assets would be invested in the securities of such issuer or more than
10% of the outstanding voting securities of any class of any issuer would be
held by the Fund. The Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.
(2) Borrow money, except from a bank for temporary or emergency
purposes and not for investment purposes, and then in an amount not exceeding
10% of the value of the Fund's total assets at the time of borrowing. (No new
investments will be made by the Fund while any outstanding borrowings exceed 5%
of its total assets.) Secured temporary borrowings may take the form of reverse
repurchase agreements, pursuant to which the Fund would sell portfolio
securities for cash and simultaneously agree to repurchase them at a specified
date for the same amount of cash plus an interest component.
(3) Underwrite any issue of securities, except to the extent that the
purchase of municipal obligations in accordance with the Fund's investment
objectives, policies, and restrictions, either directly from the issuer, or from
an underwriter for an issuer, may be deemed to be underwriting.
(4) Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal fixed income securities secured by real estate or
interests therein.
(5) Purchase or sell commodities or commodity contracts or invest in
oil, gas or other mineral exploration or development programs.
30
<PAGE>
(6) Make loans, except (i) by the purchase of a portion of an issue of
debt securities in accordance with its investment objectives, policies, and
restrictions, (ii) by engaging in repurchase transactions, and (iii) by making
loans of portfolio securities not in excess of 10% of the value of the Fund's
total assets.
(7) Write, purchase or sell puts, calls, or combinations thereof,
except that it may obtain rights to resell municipal bonds and notes.
(8) Purchase securities (other than municipal bonds, notes and other
fixed income securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) if, as a result, more than 25% of total Fund
assets would be invested in any one industry.
As a matter of non-fundamental policy, the Municipal Money Market Fund may not:
(1) Pledge, mortgage, or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (2) above, it may pledge securities having
a market value at the time of pledge not exceeding 10% of the value of the
Fund's total assets.
(2) Invest more than 15% of the Fund's total assets in illiquid or
restricted securities.
(3) Make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary for the clearance of
transactions.
(4) Purchase or retain the securities of any issuer other than the
securities of the Fund, if, to the Fund's knowledge, those Trustees and officers
of the Trust, or of the investment manager, who individually own beneficially
more than 1/2 of 1% of the outstanding securities of such issuer together own
beneficially more than 5% of such outstanding securities.
(5) Invest for the purpose of exercising control or management of
another company.
(6) Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the extent
permitted (i) by the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(7) Purchase an industrial revenue bond if, as a result of such
purchase, more than 5% of total Fund assets would be invested in industrial
revenue bonds where the payment of principal and interest are the responsibility
of companies with less than three years of operating history.
For the purposes of the investment limitations applicable to the
Municipal Money Market 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.
As a matter of fundamental policy, the Science & Technology Fund may not:
(1) Make any investment inconsistent with its classification as a
diversified investment company under the 1940 Act.
(2) Invest 25% or more of its total assets in the securities of one or
more issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or instrumentalities),
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by any such company.
(3) Issue senior securities or borrow money, except from banks or other
persons for non-leveraging, temporary or emergency purposes, and then only in an
amount up to 33 1/3% of the value of its total assets or as permitted by law and
except by engaging in reverse repurchase agreements, where allowed. In order to
secure any permitted borrowings and reverse repurchase agreements under this
section, the Fund may pledge, mortgage or hypothecate its assets.
31
<PAGE>
(4) Make loans, although the Fund may lend portfolio securities,
purchase of money market instruments and repurchase agreements or bonds,
debentures or other debt securities, or as permitted by law. The purchase of all
or a portion of an issue of publicly distributed or privately placed debt
obligations and purchase debt in accordance with the Fund's investment
objective, policies and restrictions, shall not constitute the making of a loan.
(5) Underwrite the securities of other issuers, except as allowed by
law or to the extent that the purchase of obligations in accordance with its
investment objective and policies, either directly from the issuer, or from an
underwriter for an issuer, may be deemed an underwriting.
(6) Invest directly in commodities or real estate, unless acquired as a
result of ownership of securities or other instruments, or as permitted by law.
However, the Fund may invest in securities which are secured by real estate or
real estate mortgages and securities of issuers which invest or deal in
commodities, commodity futures, real estate or real estate mortgages.
As a matter of non-fundamental policy, the Science & Technology Fund may not:
(1) Effect short sales of securities or purchase securities on margin,
except in connection with investments in options and futures contracts. Each
Fund may use short-term credits when necessary to clear transactions.
(2) Purchase illiquid securities if more than 15% of the value of its
total assets would be invested in such securities, or as permitted by the 1940
Act.
(3) Enter into reverse repurchase agreements if the aggregate proceeds
from outstanding reverse repurchase agreements, when added to other outstanding
borrowings permitted by the 1940 Act, would exceed 33 1/3% of its total assets.
The Fund does not intend to make any purchases of securities if borrowing
exceeds 5% of its total assets.
(4) Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
(5) Acquire securities for the purpose of influencing the management
of, or exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation to
the extent permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
TEMPORARY DEFENSIVE POSITIONS
The Funds may invest in the types of investments indicated below during
periods when the Funds are assuming a temporary defensive position.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Fund Investments
---- -----------
--------------------------------------------------------------------------------------------------------------------
<S> <C>
Small Cap Growth Fund Investment grade debt obligations, domestic and foreign money market
obligations, including repurchase agreements, and short-term money market
obligations.
--------------------------------------------------------------------------------------------------------------------
International Small Cap Cash, cash equivalents, U.S. government obligations, commercial paper, bank
Fund 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.
--------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund 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, 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.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
--------------------------------------------------------------------------------------------------------------------
<S> <C>
Global Equity Fund Cash or short-term and medium-term debt obligations consisting of (i)
obligations of U.S. or foreign governments, their respective agencies or
instrumentalities, (ii) money market instruments, and (iii) instruments
denominated in any currency issued by international development agencies.
--------------------------------------------------------------------------------------------------------------------
Large Cap Growth Fund 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.
--------------------------------------------------------------------------------------------------------------------
International Equity Fund Money market instruments, obligations of the U.S. Government and its agencies
and instrumentalities, other debt securities, commercial paper, bank obligations
and repurchase agreements.
--------------------------------------------------------------------------------------------------------------------
Growth and Income Fund All securities authorized for purchase by the Core Bond Fund and Money Market
Fund.
--------------------------------------------------------------------------------------------------------------------
Balanced Fund 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.
--------------------------------------------------------------------------------------------------------------------
Strategic Income Fund High Quality Bonds
--------------------------------------------------------------------------------------------------------------------
Core Bond Fund Securities authorized for purchase by the Money Market Fund.
--------------------------------------------------------------------------------------------------------------------
Municipal Bond Fund Taxable high-quality short-term money market instruments.
--------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Money Market Securities.
Fund
--------------------------------------------------------------------------------------------------------------------
Money Market Fund N/A
--------------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund 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.
--------------------------------------------------------------------------------------------------------------------
Stock Index Fund 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.
--------------------------------------------------------------------------------------------------------------------
Small Cap Index Fund 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.
--------------------------------------------------------------------------------------------------------------------
Socially Responsible Fund 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.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
--------------------------------------------------------------------------------------------------------------------
<S> <C>
High Yield Bond Fund 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.
--------------------------------------------------------------------------------------------------------------------
Aggressive Growth Lifestyle Cash, cash equivalents, U.S. government obligations, commercial paper, bank
Fund 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.
--------------------------------------------------------------------------------------------------------------------
Moderate Growth Lifestyle Cash, cash equivalents, U.S. government obligations, commercial paper, bank
Fund 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.
--------------------------------------------------------------------------------------------------------------------
Conservative Growth Lifestyle Cash, cash equivalents, U.S. government obligations, commercial paper, bank
Fund 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.
--------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund 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.
--------------------------------------------------------------------------------------------------------------------
Science & Technology Fund 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.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT OF THE FUND
The Trustees are responsible for generally overseeing the conduct of
the Trust's business.
The Trustees and officers of the Fund, together with information as to
their principal occupations during the past five years, are listed below:
34
<PAGE>
<TABLE>
<CAPTION>
Name,
----- Principal Occupation
Address and Age Position with the Fund During Past Five Years
--------------- ---------------------- ----------------------
<S> <C> <C>
Alice T. Kane Chairman of the Board, President of the American General
286 Congress Street Trustee & President Fund Group (1999-Present). Formerly,
Boston, MA 02210 Executive Vice President, American
Age: 52 General Investment Management, L.P.
(1998-1999); Formerly, Executive Vice
President (1994-1998) and General
Counsel (1986-1995) New York Life
Insurance Company; Chair, MainStay
Mutual Funds (1994-1998). President
of other investment companies advised
by the Variable Annuity Life Insurance
Company.
Dr. Judith L. Craven Trustee Retired Administrator; Formerly
286 Congress Street President, United Way of the Texas Gulf
Boston, MA 02210 Coast (1992-1998); Director, Houston
Age: 54 Branch, Federal Reserve Bank of Dallas
(1992-Present), Compaq Computer
Corporation (1998-Present), Luby's Inc.
(1998-Present), A.H. Belo Corporation
(journalism, TV and radio)
(1993-Present) and Sysco Corporation
(marketing and distribution of food)
(1996-Present). Formerly, Board
Member, Sisters of Charity of the
Incarnate Word (1996-1999).
William F. Devin Trustee Member of the Board of Governors of the
286 Congress Street Boston Stock Exchange. Retired
Boston, MA 02210 Executive Vice President of Fidelity
Age: 61 Capital Markets, a division of National
Financial Services Corporation in
Boston.
Dr. Timothy J. Ebner Trustee Professor and Head, Department of
286 Congress Street Neuroscience and Visscher Chair of
Boston, MA 02210 Physiology (1998-Present), Director,
Age: 50 Graduate Program in Neuroscience,
University of Minnesota (1991-1999).
Formerly, Consultant to EMPI, Inc.
(1994-1995) and Medtronic Inc.
(manufacturers of medical products)
(1997-1998).
Judge Gustavo E. Gonzales, Jr. Trustee Municipal Court Judge, Dallas, Texas
286 Congress Street (1995-Present); Director, Downtown
Boston, MA 02210 Dallas YMCA Board (1996-Present);
Age: 59 Director, Dallas Easter Seals Society
(1997-Present). Formerly, private
attorney (litigation) (1980-1995).
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C>
Kenneth J. Lavery Trustee Vice President of Massachusetts Capital
286 Congress Street Resource Company.
Boston, MA 02210
Age: 50
Ben H. Love Trustee Retired. Formerly, Director,
286 Congress Street Mid-American (waste products)
Boston, MA 02210 (1993-1997). Formerly, Chief
Age: 69 Executive, Boy Scouts of America
(1985-1993).
Dr. John E. Maupin, Jr. Trustee President, Meharry Medical College,
286 Congress Street Nashville, Tennessee (1994-Present);
Boston, MA 02210 Nashville Advisory Board Member, First
Age: 53 American National Bank (1996-Present);
Director, Monarch Dental Corporation
(1997-Present), LifePoint Hospitals,
Inc. (1998-Present).
Joseph T. Grause, Jr. Trustee and President, AGAM (March, 2000-Present);
286 Congress Street Vice President Executive Vice President of Cypress
Boston, MA 02210 Holding Company, Inc. (November, 1995
Age: 47 to March, 2000); Senior Vice President
of Sales and Marketing, The Shareholder
Services Group, a subsidiary of First
Data Corporation (May, 1993 to November,
1995).
John I. Fitzgerald Secretary and Counsel, AGAM (April, 1997-Present);
286 Congress Street Vice President Counsel, AGFD (April, 1997-Present);
Boston, MA 02210 Prior to April, 1997, Executive Vice
Age: 51 President--Legal Affairs and Government
Relations at the Boston Stock Exchange.
Thomas J. Brown Treasurer and Chief Financial Officer and Chief
286 Congress Street Vice President Administrative Officer, AGAM (March,
Boston, MA 02210 2000-Present); Principal of Cypress
Age: 53 Holding Company, Inc. (July, 1997 to
March, 2000); consultant to financial
services industry (October, 1995 to
June 1997); Executive Vice President,
Boston Company Advisors (August, 1994
to October, 1995).
John N. Packs Vice President Director of Research, AGAM (March
286 Congress Street 2000-Present); Vice President, Cypress
Boston, MA 02210 Holding Company (November 1995-March
Age: 44 2000); Prior to November 1995,
Investment Professional, Allmerica
Financial Services.
</TABLE>
*Trustee who is an "interested person", as defined in the 1940 Act.
Compensation of Trustees
36
<PAGE>
The Trust does not pay any remuneration to its Trustees who are
officers or employees of the Adviser or its affiliates. Trustees not so
affiliated receive a quarterly retainer of $750, a fee of $750 for each meeting
of the Trustees that they attend in person and a fee of $200.00 for each such
meeting conducted by telephone. No pension or retirement benefits are paid to
Trustees. Trustees are reimbursed for travel and other out-of-pocket expenses.
The officers listed above are furnished to the Trust pursuant to the Advisory
Agreement described below and receive no compensation from the Fund.
Trustee Compensation Table
The following table sets forth information regarding compensation received by
those Trustees who are not "interested persons" (as defined by the Investment
Company Act) of the Trust for the fiscal year ended October 31, 1999:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------
(1) (2) (3)
Name of Person, Position Aggregate Compensation From the Total Compensation From the Trust
Trust and Fund Complex Paid to the
Trustees1
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William F. Devin $6,200 $19,800
Trustee
-------------------------------------------------------------------------------------------------------------------
Kenneth J. Lavery $6,200 $19,800
Trustee
-------------------------------------------------------------------------------------------------------------------
Alice T. Kane2 N/A N/A
Trustee
-------------------------------------------------------------------------------------------------------------------
Dr. Judith L. Craven2 N/A N/A
Trustee
-------------------------------------------------------------------------------------------------------------------
Dr. Timothy J. Ebner2 N/A N/A
Trustee
-------------------------------------------------------------------------------------------------------------------
Judge Gustavo E. Gonzalez2 N/A N/A
Trustee
-------------------------------------------------------------------------------------------------------------------
Ben H. Love2 N/A N/A
Trustee
-------------------------------------------------------------------------------------------------------------------
Dr. John E. Maupin2 N/A N/A
Trustee
-------------------------------------------------------------------------------------------------------------------
Joseph T. Grause, Jr.2 N/A N/A
Trustee
-------------------------------------------------------------------------------------------------------------------
</TABLE>
1 The amounts listed in column (3) include total compensation paid to
the Trustees for their services as Trustees of the Trust and as Directors of the
CypressTree Senior Floating Rate Fund and the North American Senior Floating
Rate Fund. By virtue of having AGAM as investment adviser, the Trust and the
CypressTree Senior Floating Rate Fund and the North American Senior Floating
Rate Fund were considered to be part of the same "Fund Complex" for these
purposes.
2 Elected Trustee on June 1, 2000.
No front end sales charge or CDSC is applicable to any sale of Class A
shares to a Trustee or officer of the Trust, or to the immediate families (i.e.,
the spouse, children, mother or father) of such persons.
The Agreement and Declaration of Trust of the Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any
37
<PAGE>
officer or Trustee of any liability to the Trust or its shareholders by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
his or her duties. The Trust, at its expense, provides liability insurance for
the benefit of its Trustees and officers.
Codes of Ethics
The Trust, AGAM, and AGFD have adopted Codes of Ethics pursuant to Rule
17j-1 under the Investment Company Act of 1940. These Codes of Ethics permit
personnel subject to the Codes to invest in securities, including securities
that may be purchased or held by the Funds, subject to some restrictions.
Principal Holders of Securities
As of February 1, 2000, the following persons owned, of record or
beneficially, five percent or more of the outstanding securities of the
indicated Fund classes:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Fund Shareholder % of Fund Held
---- ----------- --------------
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bond Fund Mary W. Hamby 5%
Class A Shares 1686 Partridge Hill Road
Lancaster, SC 29720-8886
Doris McPherson & Alice McPherson 5%
JTWROS TOD University of WI Med School
Alice R. McPherson Retina Ins.
Dr. Dan Albert, Chairman of Ophthalm.
2909 Poplar Creek Lane
Pearland, TX 77584-2014
Dain Rauscher Incorporated FBO 8%
Elbert J. Scribner
20403 S. Hillcrest
Porter, TX 77365-3858
--------------------------------------------------------------------------------------------------------------------
Municipal Bond Fund Janet E. Brown 6%
Class A Shares Emmaus Court
3109 Fellowship Road
Basking Ridge, NJ 07920-3904
--------------------------------------------------------------------------------------------------------------------
Municipal Bond Fund Class B Southwest Securities Inc. FBO 7%
Shares Hellen Bebb Trust
P.O. Box 509002
Dallas, TX 75250-9002
William H. Elliot IV TTEE 5%
William H. Elliot IV
Family Ltd Partnership
1105 Crumbley Road
McDonough, GA 30252-4426
--------------------------------------------------------------------------------------------------------------------
Municipal Bond Fund Class C Herbert Hartman & Janet Hartman CO/TTEES 5%
Shares UA DTD 1-8-92
Janet Hartman Trust
12850 Oak Knoll Drive
Palm Beach Gardens, FL 33418-6989
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Fund Shareholder % of Fund Held
---- ----------- --------------
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mark A. Kielar & Tammy Kielar JT/WROS 6%
1655 SW 2nd Ave.
Boca Raton, FL 33432-7228
Claire Koh 20%
963C Heritage Hills Drive
Somers, NY 10589-1913
--------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund Paine Webber For the Benefit of 5%
Class A Shares First Federal Savings Bank
Attn: Walter Manijak
633 LaSalle Street
Ottawa, IL 61350-2931
--------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund Arlen J. DeYoung 6%
Class C Shares Eileen G. DeYoung JT TEN
8656 Vinup Road
Lynden, WA 98264-9332
--------------------------------------------------------------------------------------------------------------------
Core Bond Fund State Street Bank & Trust Co. 9%
Class C Shares FBO Shirley Einhorn R/O IRA
10662 SW 79 Terr
Miami, FL 33173-2912
--------------------------------------------------------------------------------------------------------------------
Core Bond Fund Analytical Pathology Services LTD 5%
Class C Shares PSP UA DTD 12-24-86
FBO Juan Kang
PMB 104
11220 W. Florissant Ave.
Florissant, MO 63033-6741
--------------------------------------------------------------------------------------------------------------------
Global Equity Fund North American Life Assurance Co. 20%
Class A Shares c/o Elliott & Page, Brett HYRB
393 University Ave., Suite 2100
Toronto, Ontario
Canada MSG 1E6
--------------------------------------------------------------------------------------------------------------------
International Small Cap Fund First Union Securities, Inc. 5%
Class A Shares A/C 7285-9625
Sitnasuak Native Corporation
111 East Kilbourn Avenue
Milwaukee, WI 53202-6611
National Investor Services FBO 6%
514-90284-16
55 Water Street, 32nd Floor
New York, NY 10041-3299
--------------------------------------------------------------------------------------------------------------------
International Small Cap Fund Wexford Clearing Services Corp. FBO 7%
Class B Shares Robert M. Freeman
14 Kanawha Road
Richmond, VA 23226-3308
--------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Fund Shareholder % of Fund Held
---- ----------- --------------
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Large Cap Growth Fund Farmers State Bank Employees Pension 8%
Class A Shares C/O Farmers State Bank Trustee U/A
Carolyn Dickerson Tr. Officer
Carolyn Bollman Asst. Tr. Officer
P.O. Box 538
108 E. Adams Street
Pittsfield, IL 62363-0538
--------------------------------------------------------------------------------------------------------------------
Balanced Fund Farmers State Bank Employees Pension 8%
Class A Shares C/O Farmers State Bank Trustee U/A
Carolyn Dickerson Tt. Officer
Carolyn Bollman Asst. Tr. Officer
P.O. Box 538
108 E. Adams Street
Pittsfield, IL 62363-0538
--------------------------------------------------------------------------------------------------------------------
Balanced Fund Lewco Securities Corp. 8%
Class A Shares FBO A/C #W36-900262-1-04
34 Exchange Place, 4th Floor
Jersey City, NJ 07302-3885
--------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund Phyllis Hilfiker 7%
Class A Shares 8 Hasler Lane
Little Silver, NJ 07739-1650
North Pinnellas Anesthesia Association PA 11%
William N. Hartenbach MD & Marvin Sponaugle MD, TTEES
1810 Alt 19 South, Suite N
Tarpon Springs, FL 34689-1954
State Street Bank & Trust Co. 5%
Custodian for the Rollover IRA of
Cathy Z. Angellis
109 Simonds Road
Lexington, MA 02420-1620
Wexford Clearing Services Corp. FBO 6%
Constance S. Brown
2800 Kellipe Road
Glen Allen, VA 23059-4712
--------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund Zorba Productions, Inc. 5%
Class C Shares Employees Pension Plan
John Faratzis Trustee
84 Southport CV
Bonita Springs, FL 34134-8542
First Union National Bank TTEE 13%
FBO Christian Barton PSP FBO JE Betts
P/S/P U/A/D 2/1/79 A/C #5041140787 Trust
Operations 1525 West WT Harris Blvd. NC 1151
Charlotte, NC 28262-8522
--------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
As of February 1, 2000, the officers and Trustees of the Trust as a group
owned less than 1% of the outstanding shares of each class of each Fund.
INVESTMENT MANAGEMENT ARRANGEMENTS
The following information supplements the material appearing in the
Prospectus.
Advisory Arrangements
American General Asset Management ("AGAM") and American General Funds
Distributors ("AGFD") are both wholly-owned subsidiaries of American General
Corporation. AGAM acts as the Trust's investment adviser (the "Adviser"), while
AGFD acts as the Trust's distributor (the "Distributor") and principal
underwriter. The American General Corporation group of companies operate in each
of the 50 states, and collectively engage in substantially all forms of
financial services.
Prior to March 10, 2000, CypressTree Asset Management Corporation, Inc.,
was the investment adviser to the Trust, and CypressTree Funds Distributors,
Inc. was the distributor to the Trust. Prior to October 1, 1997, NASL Financial
Services, Inc. was both the investment adviser and the distributor for the Trust
(in such capacity, the "Former Distributor").
Subject to the supervision of the Trustees, the Adviser oversees all
aspects of the Trust'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 Trust, without cost to the Trust.
The Adviser also provides certain services, and the personnel to perform such
services, to the Trust for which the Trust reimburses the Adviser's costs of
providing such services and personnel. Such services include maintaining certain
records of the Trust and performing all administrative, financial, accounting,
bookkeeping and recordkeeping functions of the Trust, except for any of those
functions performed by the Trust's custodian or transfer and shareholder
servicing agents. The reimbursement paid by the Trust 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.
As compensation for its services, the Adviser receives a fee from the Trust
computed separately for each Fund. The fee for each Fund is stated as an annual
percentage of the current value of the net assets of the Fund. 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 Fund, and multiplying this product by the value of
the net assets of the Fund at the close of business on the previous business day
of the Fund.
41
<PAGE>
The following is a schedule of the management fees each Fund currently is
obligated to pay AGAM under the Advisory Agreement:
<TABLE>
<CAPTION> Between Between
------- -------
$50,000,000 $200,000,000
----------- ------------
First and and Excess Over
----- --- --- -----------
$ 50,000,000 $200,000,000 $500,000,000 $500,000,000
------------ ------------ ------------ ------------
Funds
-----
<S> <C> <C> <C> <C>
Small Cap Growth Fund...................... .950% .950% .950% .950%
International Small Cap Fund............... 1.050% 1.000% .900% .800%
Mid Cap Growth Fund........................ .925% .900% .875% .850%
Global Equity Fund......................... .900% .900% .700% .700%
Large Cap Growth Fund...................... .900% .850% .825% .800%
International Equity Fund.................. .900% .850% .800% .750%
Growth and Income Fund..................... .725% .675% .625% .550%
Balanced Fund.............................. .775% .725% .675% .625%
Strategic Income Fund...................... .750% .700% .650% .600%
Core Bond Fund ............................ .600% .600% .525% .475%
Municipal Bond Fund........................ .600% .600% .600% .600%
U.S. Government Securities Fund............ .600% .600% .525% .475%
Money Market Fund.......................... .200% .200% .200% .145%
Mid Cap Value Fund......................... See Below.
Stock Index Fund........................... .270% .270% .270% .260%
Small Cap Index Fund....................... .280% .280% .280% .270%
Socially Responsible Fund.................. .650% .650% .650% .650%
High Yield Bond Fund....................... .825% .825% .725% .675%
Aggressive Growth Lifestyle Fund........... .100% .100% .100% .100%
Moderate Growth Lifestyle Fund............. .100% .100% .100% .100%
Conservative Growth Lifestyle Fund......... .100% .100% .100% .100%
Municipal Money Market Fund................ .350% .350% .350% .350%
Science & Technology Fund.................. .900% .900% .900% .900%
</TABLE>
--------------
The management fee schedule for the Mid Cap Value Fund follows: .900% on
the first $100,000,000; .875% between $100,000,000 and $250,000,000; .850%
between $250,000,000 and $500,000,000; .825% between $500,000,000 and
$750,000,000, and .800% on the excess over $750,000,000 of the average net
assets of the Fund.
Subadvisory Arrangements
Under the terms of each of the Subadvisory agreements between the
Adviser and a Subadvisor (the "Subadvisory Agreements"), the Subadvisor assigned
to a Fund manages the investment and reinvestment of the assets of such Fund,
subject to the supervision of the Trustees. The Subadvisor formulates a
continuous investment program for such Fund consistent with its investment
objectives and policies outlined in this Prospectus. The Subadvisor implements
such programs by purchases and sales of securities and regularly reports to the
Adviser and the Trustees with respect to their implementation.
As compensation for their services, the Subadvisors receive fees from
the Adviser computed separately for each Fund. The fee for each Fund is stated
as an annual percentage of the current value of the net assets of the Fund. 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 Fund, and multiplying this product by the
value of the net assets of the Fund at the close of business on the previous
business day of the Fund. Once the average net assets of a Fund 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 Subadvisors for each Fund under the Subadvisory Agreements.
THESE FEES ARE PAID BY THE ADVISER AND ARE NOT ADDITIONAL CHARGES TO THE FUNDS
OR THEIR SHAREHOLDERS.
42
<PAGE>
The following is a schedule of fees paid by the Adviser to the
Subadvisors.
<TABLE>
<CAPTION>
Between Between
------- -------
$50,000,000 $200,000,000
----------- ------------
First and and Excess Over
----- --- --- -----------
$ 50,000,000 $200,000,000 $500,000,000 $500,000,000
------------ ------------ ------------ ------------
Funds
-----
<S> <C> <C> <C> <C>
Small Cap Growth Fund...................... .550% .550% .550% .550%
International Small Cap Fund............... .650% .600% .500% .400%
Mid Cap Growth Fund........................ 525% .500% .475% .450%
Global Equity Fund......................... .500% .450% .375% .325%
Large Cap Growth Fund...................... .500% .450% .425% .400%
International Equity Fund.................. .500% .450% .400% .350%
Growth and Income Fund..................... .325% .275% .225% .150%
Balanced Fund.............................. .375% .325% .275% .225%
Strategic Income Fund...................... .350% .300% .250% .200%
Core Bond Fund............................. .225% .225% .150% .100%
Municipal Bond Fund........................ .250% .250% .250% .250%
U.S. Government Securities Fund............ .225% .225% .150% .100%
Money Market Fund.......................... .075% .075% .075% .020%
Mid Cap Value Fund......................... See below.
Stock Index Fund........................... See below.
Small Cap Index Fund....................... See below.
Socially Responsible Fund.................. .250% .250% .250% .250%
High Yield Bond Fund....................... .450% .450% .350% .300%
Aggressive Growth Lifestyle Fund........... .100% .100% .100% .100%
Moderate Growth Lifestyle Fund............. .100% .100% .100% .100%
Conservative Growth Lifestyle Fund......... .100% .100% .100% .100%
Municipal Money Market Fund................ .250% .250% .200% .150%
Science & Technology Fund.................. .600% .600% .600% .550%
</TABLE>
-----------
The Subadvisory fee schedules for the Mid Cap Value Fund, the Stock Index
Fund, and the Small Cap Index Fund follow: For the Mid Cap Value Fund, AGAM pays
the Subadvisor a fee at the rate of .500% on the first $100,000,000, .475%
between $100,000,000 and $250,000,000, .450% between $250,000,000 and
$500,000,000, .425% between $500,000,000 and $750,000,000, and .400% on the
excess over $750,000,000. For the Stock Index Fund, AGAM pays the Subadvisor a
fee at the rate of .020% of the first $2,000,000,000 and .010% on the excess
over $2,000,000,000. For the Small Cap Index Fund, AGAM pays the Subadvisor a
fee at the rate of .030% on the first $150,000,000 and .020% on the excess over
$150,000,000.
For the fiscal years ended October 31, 1997, 1998 and 1999, the Trust paid
total advisory fees to the Adviser of $6,327,793; 7,129,573, and $6,960,548
respectively. The dollar amounts represented by each of the Funds are as
follows:
<TABLE>
<CAPTION>
Fund 11/1/96 to 11/1/97 11/1/98 to
10/31/97 to 10/31/99
10/31/98
===============================================================================================
<S> <C> <C> <C>
Mid Cap Growth Fund 217,083 313,427 390,888
International Small Cap Fund 175,637 181,592 159,614
Large Cap Growth Fund 178,839 255,953 335,777
Global Equity Fund 1,106,316 1,164,468 951,657
Growth and Income Fund 1,112,269 1,527,239 1,912,464
International Equity Fund 280,663 257,885 230,737
Strategic Income Fund 561,512 619,206 498,515
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C> <C>
Core Bond Fund 113,993 102,778 94,898
U.S. Government Fund 567,391 479,512 411,390
Municipal Bond Fund 109,842 102,477 89,986
Money Market Fund 40,088 38,630 44,172
Balanced Fund 735,884 747,288 681,955
Small Cap Growth Fund N/A *3,034 9,513
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
Science & Technology Fund N/A N/A N/A
</TABLE>
*For the period January 6, 1998 (commencement of operations) to October 31,
1998.
For the same periods, the Adviser paid total Subadvisory fees of $2,949,885;
$3,386,336 and $3,299,474 respectively. The dollar amounts represented by each
of the Funds are as follows:
<TABLE>
<CAPTION>
Fund 11/1/96 to 11/1/97 to 11/1/98 to
10/31/97 10/31/98 10/31/99
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mid Cap Growth Fund 123,209 177,891 221,855
International Small Cap Fund 108,728 112,414 98,810
Large Cap Growth Fund 99,355 142,195 186,543
Global Equity Fund 578,158 607,233 500,828
Growth and Income Fund 467,961 629,517 768,487
International Equity Fund 155,924 143,270 128,186
Strategic Income Fund 254,934 279,664 227,935
Core Bond Fund 42,747 38,542 35,587
U.S. Government Fund 212,772 179,817 154,269
Municipal Bond Fund 45,768 42,359 37,494
Money Market Fund 15,033 14,486 16,565
Balanced Fund 339,031 348,785 319,497
Small Cap Growth Fund N/A *1,756 5,910
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
</TABLE>
44
<PAGE>
<TABLE>
<S> <C> <C> <C>
Science & Technology Fund N/A N/A N/A
</TABLE>
*For the period January 6, 1998 (commencement of operations) to
October 31, 1998.
For the year ended October 31, 1999 the net investment advisory fees
retained by the Adviser after payment of Subadvisory fees was $3,661,074,
allocated among the portfolios as follows:
<TABLE>
<CAPTION>
Dollar Amount Annual Percentage of
------------- --------------------
Fund Net Assets
---------------
<S> <C> <C>
Mid Cap Growth Fund $ 169,033 0.40%
International Small Cap Fund $ 60,804 0.40%
Large Cap Growth Fund $ 149,234 0.40%
Global Equity Fund $ 450,829 0.43%
International Equity Fund $ 102,551 0.40%
Growth and Income Fund $ 1,143,977 0.40%
Balanced Fund $ 362,458 0.40%
Strategic Income Fund $ 270,580 0.40%
Core Bond Fund $ 59,311 0.38%
Municipal Bond Fund $ 52,492 0.35%
U.S. Government Securities Fund $ 257,121 0.38%
Money Market Fund $ 27,607 0.13%
Small Cap Growth Fund $ 3,603 0.36%
Mid Cap Value Fund N/A N/A
Stock Index Fund N/A N/A
Small Cap Index Fund N/A N/A
Socially Responsible Fund N/A N/A
High Yield Bond Fund N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A
Moderate Growth Lifestyle Fund N/A N/A
Conservative Growth Lifestyle Fund N/A N/A
Municipal Money Market Fund N/A N/A
Science & Technology Fund N/A N/A
</TABLE>
The Advisory Agreement and each Subadvisory Agreement (collectively,
the "Agreements") will continue in effect as to a Fund 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 Fund 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 Funds 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 Fund if a majority
of the outstanding voting securities of the class of capital stock of that Fund
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.
The Agreements may be terminated at any time, without the payment of
penalty, by the Trustees or by the vote of a majority of the outstanding voting
securities of the applicable Fund of the Trust, with respect to any Fund by the
vote of a majority of the outstanding shares of such Fund, or by the Adviser or
applicable Subadvisor 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 Trust or applicable Fund(s), as the case may be, and by
the vote of a majority of the Trustees who are not interested persons of the
Trust, of the Adviser or of the applicable Subadvisor, 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
Fund if a majority of the outstanding voting securities of that Fund 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 Fund affected
by the amendment or (ii) all the Funds of the Trust.
45
<PAGE>
Each Subadvisory Agreement provides that the Subadvisor will not be
liable to the Trust or the Adviser for any losses resulting from any matters to
which the agreement relates other than losses resulting from the Subadvisor's
willful misfeasance, bad faith or gross negligence in the performance of, or
from reckless disregard of, its duties.
Fund Expenses
Subject to the expense waiver discussed above, the Trust 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 Trust, or (3) those expenses the
Subadvisors have agreed to pay pursuant to the Subadvisory Agreements. Among the
expenses to be borne by the Fund, in addition to certain expenses incurred by
the Adviser or Distributor, as described above, are the expense of the advisory
and distribution fees; all charges and expenses relating to the transfer,
safekeeping, servicing and accounting for the Trust's property, including
charges of depositories, custodians and other agents; all expenses of
maintaining and servicing shareholder accounts, including charges of the Trust'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 Trust's shareholders and the
solicitation of management proxies in connection therewith; all expenses of
preparing Trust Prospectuses and Statements of Additional Information; the
expenses of determining the Trusts' 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 Trust's legal counsel and independent auditors; all fees and expenses of
registering and qualifying, and maintaining the registration and qualification
of, the Trust and its shares under all federal and state laws applicable to the
Trust and its business activities; all expenses associated with the issue,
transfer and redemption of Trust shares; brokers' and other charges incident to
the purchase, sale or lending of the Trust's securities; taxes and other
governmental fees payable by the Fund; and any nonrecurring expenses including
litigation expenses and any expenses the Trust 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.
DISTRIBUTION PLANS
The Trust currently offers four classes of shares in each Fund: "Class
A" shares, "Class B" shares, "Class C" shares, and "Institutional Class I"
shares. In addition, the Core Bond Fund and the High Yield Bond Fund also offer
"Institutional Class II" shares. Class A, Class B and Class C shares of the
Trust are continuously offered through participating brokers which are members
of the NASD and which have dealer agreements with the Distributor.
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 Fund 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 Fund 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 Fund of the Trust, 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 Fund (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 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 Fund (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 Fund (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 Trust may reasonably request,
provision to the Trust of such information, analyses and opinions with respect
to marketing and promotional
46
<PAGE>
activities as the Trust 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 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 amounts payable by the Aggressive Growth LifeStyle Fund, the
Moderate Growth LifeStyle Fund and the Conservative Growth LifeStyle Fund (the
"LifeStyle Funds") under the Plans to the Distributor or any other party will be
reduced by any amounts paid with respect to the Institutional Class I Shares of
each Portfolio in which a LifeStyle Fund invests (each an "Underlying
Portfolio") pursuant to the Administrative and Shareholder Services Agreement
(the "Services Agreement") between the Fund and American General Asset
Management Corp. To the extent that any payments made by an Underlying Portfolio
pursuant the Services Agreement should be deemed to be indirect financing of any
activity primarily intended to result in the sale of shares of the Fund within
the meaning of the Rule, then such payments shall be deemed authorized by the
Plans.
The Distributor is authorized by each Plan to retain any excess of the
fees it receives thereunder over its payments to selected dealers and its
expenses incurred in connection with providing distribution services. Thus,
payments under a Plan may result in a profit to the Distributor.
The Distributor may 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 Funds of the Trust. The Distributor will also
provide additional promotional incentives to dealers in connection with sales of
shares of all classes of the Funds of the Trust. 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.
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 Funds
(except the 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 Funds (except the 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 Funds other than the Core
Bond, U.S. Government Securities, Municipal Bond and Money Market Funds and .90%
annually, for the Core Bond, U.S. Government Securities and 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 Core Bond,
U.S. Government Securities and 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.
47
<PAGE>
In adopting the Plans, the Trustees determined that the adoption of the
Plans is in the best interests of the Trust and its shareholders, that there is
a reasonable likelihood that the Plans will benefit the Trust and its
shareholders, and that the Plans are essential to, and an integral part of, the
Trust's program for financing the sale of shares of the various Funds of the
Trust 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 Trust.
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 Trust 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 Funds 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 Fund or Funds. If a Plan is
terminated by the Trustees or is otherwise discontinued with respect to one or
more Funds, no further payments would be made by the Trust in respect of the
Class A, Class B and Class C shares, as applicable, of such Fund or Funds under
that Plan. A Plan may remain in effect with respect to Class A, Class B, Class C
or shares, as applicable, of a Fund 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
Funds.
A Plan may not be amended with respect to any class of any Fund 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 Fund. 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, 1998 to October 31, 1999, the Fund paid
distribution and service fees pursuant to the Class A Plan to the Distributor of
$668,952 comprised of:
$ 20,192 from the Mid Cap Growth Fund,
$ 7,675 from the International Small Cap Fund,
$ 17,231 from the Large Cap Growth Fund,
$ 81,774 from the Global Equity Fund,
$158,039 from the Growth and Income Fund,
$ 42,157 from the Strategic Income Fund,
$ 41,514 from the Balanced Fund,
$ 19,724 from the Core Bond Fund,
$151,280 from the U.S. Government Securities Fund,
$ 13,640 from the International Equity Fund,
$ 8,045 from the Municipal Bond Fund, and
$ 687 from the Small Cap Growth Fund.
For the period November 1, 1998 to October 31, 1999, the Fund paid
distribution and service fees pursuant to the Class B Plan to the Distributor of
$2,842,892 comprised of:
$171,666 from the Mid Cap Growth Fund,
$ 71,002 from the International Small Cap Fund,
$149,211 from the Large Cap Growth Fund,
$288,848 from the Global Equity Fund,
$943,742 from the Growth and Income Fund,
$268,194 from the Strategic Income Fund,
$170,727 from the Balanced Fund,
$ 46,976 from the Core Bond Fund,
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<PAGE>
$131,921 from the U.S. Government Securities Fund,
$145,027 from the International Equity Fund,
$ 49,930 from the Municipal Bond Fund, and
$ 5,043 from the Small Cap Growth Fund.
For the period November 1, 1998 to October 31, 1999, the Fund paid
distribution and service fees pursuant to the Class C Plan to the Distributor of
$4,514,731, comprised of:
$ 193,223 from the Mid Cap Growth Fund,
$ 59,084 from the International Small Cap Fund,
$ 174,643 from the Large Cap Growth Fund,
$ 534,908 from the Global Equity Fund,
$1,464,659 from the Growth and Income Fund,
$ 287,809 from the Strategic Income Fund,
$ 616,807 from the Balanced Fund,
$ 54,899 from the Core Bond Fund,
$ 121,489 from the U.S. Government Securities Fund,
$ 72,373 from the International Equity Fund,
$ 46,413 from the Municipal Bond Fund, and
$ 3,007 from the Small Cap Growth Fund.
Underwriters
For the periods November 1, 1996 to October 31, 1997, November 1,
1997 to October 31, 1998 and November 1, 1998 to October 31, 1999, the
Distributor received underwriting commissions of $880,600; $720,619 and
$369,102, respectively. The dollar amounts were comprised as reflected below,
with respect to shares of the following Funds:
<TABLE>
<CAPTION>
Fund
11/1/96 to 11/1/97 to 11/1/98 to
10/31/97 10/31/98 10/31/99
<S> <C> <C> <C>
Mid Cap Growth Fund 49,974 37,678 29,267
International Small Cap Fund 33,696 7,460 2,890
Large Cap Growth Fund 36,270 35,566 26,686
Global Equity Fund 36,504 50,852 39,745
Growth and Income Fund 256,762 232,745 179,324
International Equity Fund 33,761 10,257 13,846
Strategic Income Fund 104,745 52,633 9,887
Core Bond Fund 16,552 18,138 5,727
U.S. Government Fund 120,538 58,690 19,362
Municipal Bond Fund 7,803 15,834 1,493
Balanced Fund 46,676 37,883 12,245
Small Cap Growth Fund N/A *2,821 1,949
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
</TABLE>
49
<PAGE>
Science & Technology Fund N/A N/A N/A
* For the period January 6, 1998 (commencement of operations) to October 31,
1998.
Of the total underwriting commissions received during the three fiscal
year periods, $0, $95,918 and $58,916, 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 Trust any compensation on the redemption or
repurchase of Trust shares, brokerage commissions or other underwriting
compensation.
Administrative and Shareholder Services
The Trust has adopted an Administrative and Shareholder Services
Agreement with American General Asset Management Corp. pursuant to which
Institutional Class I shares pay an administrative fee of 25 basis points for
administrative and shareholder services.
PORTFOLIO BROKERAGE
Pursuant to the Subadvisory Agreements, the Subadvisors are responsible
for placing all orders for the purchase and sale of portfolio securities of the
Funds, the portfolio transactions for which are the responsibility of the
Adviser. The Subadvisors have no formula for the distribution of the Funds'
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 Funds. The cost of securities transactions for each Fund
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 Subadvisors
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 Subadvisors consider various factors in selecting brokers through
which orders for client accounts are executed. The Subadvisors' 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 Subadvisors also take other factors into account.
In determining which brokers provide best execution, the Subadvisors
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 Subadvisor's
judgment as to the following factors may influence the selection of a broker for
a particular trade: the execution, clearance and settlement capabilities of the
brokers under consideration; the nature of the security being traded; the
difficulty of execution; the size of the transaction; the desired timing of the
trade; the activity existing and expected in the market for the particular
security; confidentiality; the financial stability of the brokers under
consideration; actual or apparent operational problems of any broker under
consideration; and the negotiated commission rates available at the time of the
trade. The Subadvisors may also consider the willingness of particular brokers
to sell shares of the Fund, subject to best execution and difficulty of
execution.
The Subadvisors may also consider the nature and extent of research
services provided when they select brokers. Assuming equal execution
capabilities as described above, the Subadvisors 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 Subadvisor's portfolio manager/analysts. The Subadvisors 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 Subadvisors' commission business on behalf
of clients.
In accordance with industry practice, commission rates are normally
determined through negotiations with brokers conducted by the Subadvisors'
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
Subadvisors 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.
50
<PAGE>
No precise monetary value can be assigned to research and special
execution services furnished to the Subadvisors by brokers. The Subadvisors 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 Subadvisors' overall responsibilities with respect to the accounts over
which they exercise investment discretion. Each Subadvisor 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 Subadvisor believes to be valuable.
Research services furnished by brokers may be used in servicing all of
the Funds of the Trust advised by a Subadvisor and any other accounts over which
that Subadvisor exercises investment discretion, although not all of such
services may be used in connection with any particular Fund that paid
commissions to the brokers providing such services.
The Subadvisors' practices in selecting brokers will be reviewed
periodically by the Trustees.
The Subadvisors and/or their affiliates currently manage portfolios and
accounts other than those of the Trust. Although investment recommendations or
determinations for the Trust's Funds will be made by the Subadvisors
independently from the investment recommendations and determinations made by
them for any other portfolio or account or by the Subadvisors' affiliates for
the portfolios or accounts they manage, investments deemed appropriate for the
Trust's Funds by the Subadvisors 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 Trust's Funds
and such other portfolios or accounts. In such circumstances, the Subadvisors
may determine that orders for the purchase or sale of the same security for the
Trust's Funds 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 Subadvisors to be equitable and in the best interests of the Trust's
Funds and such other portfolios or accounts. While in some instances combined
orders could adversely affect the price or volume of a security, the Subadvisors
and the Trust believe that its participation in such transactions on balance
will produce better overall results for the Trust.
For the fiscal years ended October 31, 1997, 1998 and 1999, the Funds
paid brokerage commissions in connection with portfolio transactions of
$1,102,121; $1,033,506 and $1,476,984, respectively. The dollar amounts
represented by each of the Funds are as follows:
<TABLE>
<CAPTION>
Fund
11/1/96 to 11/1/97 to 11/1/98 to
10/31/97 10/31/98 10/31/99
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mid Cap Growth Fund 70,946 123,987 142,896
International Small Cap Fund 64,279 37,107 164,253
Large Cap Growth Fund 62,974 59,360 74,175
Global Equity Fund 185,238 156,058 254,432
Growth and Income Fund 135,545 96,897 161,296
International Equity Fund 108,863 151,566 81,511
Balanced Fund 375,418 321,229 293,100
Small Cap Growth Fund N/A 1,195 1,405
</TABLE>
51
<PAGE>
From November 1, 1998 to October 31, 1999, brokerage commissions were paid to
Salomon Smith Barney as follows:
--------------------
<TABLE>
<CAPTION>
Fund
% of aggregate $
% of Trust's Brokerage amount of
11/0/98 to Commissions Represented transactions for the
10/31/99 for the period period
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap Fund 12 0.00% 0.00%
International Equity Fund 3,794 4.65% 3.52%
Global Equity Fund 13,375 5.25% 4.46%
Small Cap Growth Fund 13 0.93% 1.07%
Large Cap Growth Fund 2,773 3.74% 5.45%
Growth & Income Fund 5,316 3.30% 2.38%
Balanced Fund 3,232 1.10% 1.94%
</TABLE>
From November 1, 1998 to October 31, 1999, brokerage commissions were paid to
J.P. Morgan Securities as follows:
----------------------
<TABLE>
<CAPTION>
% of aggregate $
% of Trust's Brokerage amount of
11/0/98 to Commissions Represented transactions for the
Fund 10/31/99 or the period period
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap Fund 169 1.00% 0.11%
International Equity Fund 485 0.59% 0.34%
Global Equity Fund 10,986 4.32% 3.38%
Large Cap Growth Fund 2,341 3.16% 3.31%
Growth & Income Fund 3,306 2.05% 2.38%
Balanced Fund 9,958 3.40% 3.63%
</TABLE>
MULTIPLE PRICING SYSTEM
The Trust'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. 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 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.
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. 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
52
<PAGE>
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. 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.
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. 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.
Class C shares purchased on or after July 1, 1999 will not be converted to Class
A shares after ten years. Class C shares purchased before July 1, 1999 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.
Institutional Class I Shares. Institutional Class I shares are offered for sale
only through employer plans. Institutional Class I shares are available to any
qualifying employer plan once the plan establishes a minimum account balance of
$1 million with the Trust. Institutional Class I shares of each Fund are subject
to an administrative services fee of .25% of each Fund's respective average
annual net assets.
Institutional Class II Shares. Institutional Class II shares are offered for
sale only through employer plans, and are available for the Core Bond Fund and
High Yield Bond Fund only. Institutional Class II shares are available to any
qualifying employer plan once the plan establishes a minimum account balance of
$500 million with the Trust.
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 Fund. 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 Funds will be
subject to any applicable CDSC due at redemption.
Conversion Feature. Class B shares (purchased on or after October 1, 1997) and
Class C shares (purchased before July 1, 1999) of all Funds except the Money
Market Fund 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.) Class
B and Class C shares of the Money Market Fund do not convert to Class A shares
of the Money Market Fund at any time, as shares of all classes of the Money
Market Fund do not bear any distribution or service fees. In addition, because
Class B and Class C shares of the Money Market Fund are not subject to any
distribution or service fees, the applicable conversion period is tolled for any
period of time in which Class B or Class C shares are held in that Fund. For
example, if Class B shares of a Fund 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 Fund 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 purchased prior to July 1, 1999 through the reinvestment of
dividends or distributions paid on Class C shares, as the case may be, 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,
53
<PAGE>
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 Trust believes that the conversion of either Class B or Class C shares to
Class A shares does not constitute a taxable event under Federal income tax law.
If the Trust's view on this matter changes, it may suspend conversion of Class B
or Class C shares. In that event, which the Trust considers unlikely, no further
conversions of Class B or Class C shares would occur, and those shares might
continue to be subject to higher distribution and service fees for an indefinite
period that 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 Trust'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 Fund.
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. 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.
Dividends paid by a 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. Shares
of a Fund may be exchanged for shares of the same class of any other Fund, but
not for shares of other classes of any Fund.
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 individuals by mutual funds are currently
taxed at a federal income tax rate of 20%. 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.
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<PAGE>
CAPITAL STOCK
All shares of beneficial interest, $.001 par value per share, of each Fund 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 Trust's Declaration of Trust permits the issuance of multiple
classes of shares pursuant to the Multiple Pricing System. Shares of each class
of a Fund represent interests in that Fund in proportion to each share's net
asset value. The per share net asset value of each class of shares in a Fund 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 Trust have equal voting rights and will be voted in the
aggregate, and not by series (Fund) or class, except where voting by series or
class is required by law or where the matter involved affects only one series or
class (for example, matters pertaining to the plan of distribution relating to
Class A shares will only be voted on by Class A shares). Matters required by the
1940 Act to be voted upon by each affected series include changes to (i) the
Advisory Agreement, (ii) a Subadvisory Agreement and (iii) fundamental
investment objectives and policies.
The Trust 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 Trust (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 Trust 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
Trust. However, the Trust's Agreement and Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of each Fund
of the Trust and requires that notice of such disclaimer be given in each
instrument entered into or executed by the Trust. The Agreement and Declaration
of Trust also provides for indemnification out of a Fund's property for any
shareholder of such Fund held personally liable for any of the Fund's
obligations. Thus, the risk of a shareholder being personally liable as a
partner for obligations of a Fund is limited to the unlikely circumstance in
which the Fund itself would be unable to meet its obligations.
PURCHASE, REDEMPTION AND PRICING
Certain Qualified Purchasers. No front end sales charge or CDSC is applicable to
any sale of Class A shares to any current or retired Trustee or officer of the
Trust or of a Fund, or to the immediate families (i.e., the spouse, children,
mother or father) of such persons, or any director, officer, or full-time
employee or registered representative (and when permitted, the employees
thereof) 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 American General Corporation or any of its affiliates,
the Subadvisors, or to a director, officer, full-time employee or sales
representative of American General Corporation or any of its affiliates, the
Subadvisors or any of their affiliates, or to the immediate families of such
persons, or any trust, pension, profit-sharing or other benefit plan for the
benefit of such persons. Furthermore, no front end sales charge of CDSC is
applicable to any sale of Class A shares to: (1) financial institution trust
departments investing an aggregate of $1 million or more in the Funds; (2)
accounts for which broker/dealers, financial institutions, or financial planners
charge and account management fee (also called a "wrap" fee); (3) tax-qualified
plans with more than $1 million in plan assets; (4) tax-qualified plans
purchasing shares with loan repayments from participants; and (5) by a Fund in
connection with the acquisition of another investment company.
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.
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<PAGE>
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.
Shares may be sold at net asset value to certain categories of investors,
including to shareholders of other investment companies, who invest in North
American Funds in response to certain promotional activities.
Class A shares may be sold at net asset value without a front end sales charge
to all shareholders of any liquidating fund that is a series of American General
Series Portfolio Company 2, a Delaware business trust.
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.
Determination of Net Asset Value
The following supplements the discussion set forth in the Prospectus.
The assets belonging to each class of shares of a Fund 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 Trustees have authorized the Funds 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.
Securities held by each of the Funds 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 Funds.
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 Funds
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.
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.
Redemption in Kind
Although it is each of the Funds' 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 Fund subject to the limitation that each Fund
is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1%
of the
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<PAGE>
net asset value of the Fund 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. A Fund
will endeavor to only distribute securities for which there is an active trading
market.
Repurchase of Shares
The Distributor is authorized to repurchase Fund 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 Fund next computed after a
request is received in proper form at the Transfer Agent's office. 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).
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 Funds of the Trust. State Street may make arrangements to
perform certain of its functions through Boston Financial Data Services. 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.
PERFORMANCE INFORMATION
From time to time the Trust may advertise certain information about the
performance of all classes of one or more of the Funds. Such performance
information may include time periods prior to the establishment of the
multi-class distribution system. Information about performance of a class of
shares of a Fund is not intended to indicate future performance. The Trust's
annual report to shareholders, which is available without charge upon request,
contains further discussions of Fund performance.
The Funds may advertise the yield and/or total return performance for
all classes of one or more of the Funds in accordance with the rules of the
Commission. The Municipal Bond Fund may also present from time to time yield,
tax-equivalent yield and standardized and nonstandardized total return in
advertisements. When yield is used in sales literature, the total return figures
will also be included. The Commission has issued rules setting forth the uniform
calculation of both yield and total return, but shareholders' actual experience
may be more or less than the figures produced by these formulas.
Each Fund 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
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<PAGE>
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 Fund.
Each of the Funds 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 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 Fund 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, S&P 500, S&P
MidCap 400 Index, Value Line Composite, Lehman Brothers Bond, Government
Corporate, Municipal, Corporate and Aggregate Indices, Merrill Lynch Government
& Agency and Intermediate Agency Indices, the Salomon Brothers Non-Dollar WGBI
10 Index, Russell 2000 Growth Index, 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 Fund 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 Fund 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. A Fund will
include performance data for each class of a Fund in any advertisement or
information including performance data of such Fund. The Fund may also utilize
performance information in hypothetical illustrations provided in narrative
form.
A Fund may advertise its yield and/or total return performance for all
classes of shares of one or more of the Funds, 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 Funds 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
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<PAGE>
publication, and will cover one, five, and ten year periods (if available) plus
the time period since the effective date of the Fund's registration statement.
When the period since inception for a Fund 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 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 Trust.
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 Fund 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 Fund paid distribution and service fees
under the Prior Plan.
The following tables set forth the average annual total returns for each
class of shares of each Fund for certain periods of time ending October 31,
1999, 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
10/31/99 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Mid Cap Growth Fund 19.53% N/A 13.02% (03-04-96)
International Small Cap Fund 28.94% N/A 10.37% (01-04-96)
Large Cap Growth Fund 22.47% N/A 19.56% (03-04-96)
Global Equity Fund 0.58% 7.22% 8.94% (11-01-90)
Growth & Income Fund 17.26% 21.72% 16.59% (05-01-91)
International Equity Fund 15.56% N/A 7.17% (01-09-95)
Strategic Income Fund -2.75% 7.10% 5.20% (11-01-93)
Balanced Fund -3.61% 10.90% 8.25% (08-28-89)
Core Bond Fund -5.77% 5.93% 6.15% (05-01-91)
U.S. Government Securities Fund -4.29% 5.54% 6.30% (08-28-89)
Municipal Bond Fund -7.61% 5.50% 3.40% (07-06-93)
Small Cap Growth Fund 37.40% N/A 11.58% (01-06-98)
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
Science & Technology Fund N/A N/A N/A
<CAPTION>
Class B shares
Through
10/31/99 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Mid Cap Growth Fund 19.62% N/A 13.10% (03-04-96)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
International Small Cap Fund 29.63% N/A 10.43% (03-04-96)
Large Cap Growth Fund 22.77% N/A 19.90% (03-04-96)
Global Equity Fund 0.01% 7.35% 9.16% (11-01-90)
Growth & Income Fund 17.28% 22.03% 16.86% (05-01-91)
International Equity Fund 15.53% N/A 7.35% (01-09-95)
Strategic Income Fund -3.44% 7.18% 5.31% (11-01-93)
Balanced Fund -4.43% 11.03% 8.43% (08-28-89)
Core Bond Fund -6.48% 6.04% 6.37% (05-01-91)
U.S. Government Securities Fund -4.99% 5.58% 6.44% (08-28-89)
Municipal Bond Fund -8.58% 5.34% 3.45% (07-06-93)
Small Cap Growth Fund 37.36% N/A 10.91% (01-06-98)
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
Science & Technology Fund N/A N/A N/A
<CAPTION>
Class C shares
Through
10/31/99 One Year Five Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Mid Cap Growth Fund 23.65% N/A 13.74% (03-04-96)
International Small Cap Fund 33.48% N/A 11.09% (03-04-96)
Large Cap Growth Fund 26.75% N/A 20.38% (03-04-96)
Global Equity Fund 3.99% 7.65% 9.16% (11-01-90)
Growth & Income Fund 21.28% 22.17% 16.82% (05-01-91)
International Equity Fund 19.53% N/A 7.65% (01-09-95)
Strategic Income Fund 0.56% 7.48% 5.44% (11-01-93)
Balanced Fund -0.42% 11.27% 8.42% (08-28-89)
Core Bond Fund -2.54% 6.35% 6.37% (05-01-91)
U.S. Government Securities Fund -0.99% 5.90% 6.44% (08-28-89)
Municipal Bond Fund -4.73% 5.67% 3.45% (07-06-93)
Small Cap Growth Fund 41.19% N/A 13.42% (01-06-98)
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
Science & Technology Fund N/A N/A N/A
</TABLE>
60
<PAGE>
For periods ending 10/31/99, the Adviser waived certain fees in respect
of the Funds. Absent such waivers, 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 Fund's yield is a way of showing the rate of income the Fund earns on
its investments as a percentage of the Fund'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 Funds used in advertising are computed by dividing
the class of the Fund'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 Fund'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 Fund 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 Core Bond Fund for the thirty day period
ended October 31, 1999 were 6.18% and 5.97%, 6.00%, respectively. The yields for
Classes A, B and C of the U.S. Government Securities Fund for the thirty day
period ended October 31, 1999 were 5.28%, 4.95% and 4.95%, respectively. The
yields for Classes A, B and C of the Strategic Income Fund for the thirty day
period ended October 31, 1999 were 9.88%, 9.82% and 9.82%, respectively.
Yield quotations for the Core Bond and U.S. Government Securities and
Strategic Income Funds will reflect the fact that such Funds will have paid no
advisory fees during certain periods of their operations. Therefore, the yield
for those Funds encompassing the periods during which no advisory fees were paid
will be higher than the yields the Funds would have realized had the suspension
of advisory fees not been in effect.
61
<PAGE>
The yields for Classes A, B and C of the Municipal Bond Fund for the
thirty day period ended October 31, 1999 were 4.39%, 3.82% and 3.82%,
respectively. With respect to the 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, 1999, yields for Classes A,
B and C of the Money Market Fund were 4.72%, 4.72% and 4.72%, respectively. For
the seven-day period ended October 31, 1999, the effective yields for Classes A,
B and C of the Money Market Fund were 4.55%, 4.55% and 4.55%, respectively.
Yield and total return are calculated separately for each class of
shares of a Fund. 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 Fund for the periods presented.
The Trust may also from time to time include in advertising a total
aggregate return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare
performance more accurately with other measures of investment return. Each class
of a Fund 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 Fund 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 Trust 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 Trust 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 Trust may also advertise the performance
rankings assigned certain Funds (or classes thereof) or their investment
Subadvisors by various publications and statistical services, including but not
limited to SEI, Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, Intersec Research Survey of Non-U.S. Equity Fund Returns, Frank
Russell International Universe, and any other data which may be presented from
time to time by such analysis as Dow Jones, Morningstar, Chase Investment
Performance, Wilson Associates, Stanger, CDA Investment Technology, the Consumer
Price Index ("CPI"), The Bank Rate Monitor National Index, IBC/Donaghue's
Average/U.S. Government and Agency, or as they appear in various publications
including but not limited to The Wall Street Journal, Forbes, Barrons, Fortune,
Money Magazine, The New York Times, Financial World and Financial Services Week.
Calculated in the manner set forth immediately above, the average
annual total returns for each class of shares of each Fund for the one and five
year periods ended October 31, 1999 and since inception to October 31, 1999 are
as follows:
62
<PAGE>
<TABLE>
<CAPTION>
Class A shares
Through
10/31/99 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Mid Cap Growth Fund 25.50% N/A 14.53% (03-04-96)
International Small Cap Fund 35.37% N/A 11.84% (03-04-96)
Large Cap Growth Fund 28.57% N/A 21.17% (03-04-96)
Global Equity Fund 5.60% 8.27% 9.53% (11-01-90)
Growth & Income Fund 23.11% 22.91% 17.26% (05-01-91)
International Equity Fund 21.33% N/A 8.26% (01-09-95)
Strategic Income Fund 2.10% 8.15% 6.06% (11-01-93)
Balanced Fund 1.20% 11.98% 8.77% (08-28-89)
Core Bond Fund -1.08% 6.97% 6.76% (05-01-91)
U.S. Government Securities Fund 0.48% 6.57% 6.81% (08-28-89)
Municipal Bond Fund -2.95% 6.53% 4.20% (07-06-93)
Tax-Sensitive Equity Fund 4.63% N/A -2.84% (01-06-98)
Small Cap Growth Fund 44.26% N/A 14.61% (01-06-98)
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
Science & Technology Fund N/A N/A N/A
<CAPTION>
Class B shares
Through
10/31/99 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Mid Cap Growth Fund 24.62% N/A 13.69% (03-04-96)
International Small Cap Fund 34.33% N/A 11.06% (03-04-96)
Large Cap Growth Fund 27.77% N/A 20.41% (03-04-96)
Global Equity Fund 5.01% 7.65% 9.16% (11-01-90)
Growth & Income Fund 22.28% 22.21% 16.86% (05-01-91)
International Equity Fund 20.53% N/A 7.66% (01-09-95)
Strategic Income Fund 1.56% 7.48% 5.44% (11-01-93)
Balanced Fund 0.57% 11.29% 8.43% (08-28-89)
Core Bond Fund -1.56% 6.35% 6.37% (05-01-91)
U.S. Government Securities Fund 0.01% 5.90% 6.44% (08-28-89)
Municipal Bond Fund -3.77% 5.67% 3.45% (07-06-93)
Small Cap Growth Fund 42.36% N/A 13.42% (01-06-98)
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
</TABLE>
63
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
Science & Technology Fund N/A N/A N/A
<CAPTION>
Class C shares
Through
10/31/99 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Mid Cap Growth Fund 24.65% N/A 13.74% (03-04-96)
International Small Cap Fund 34.48% N/A 11.09% (03-04-96)
Large Cap Growth Fund 27.75% N/A 20.38% (03-04-96)
Global Equity Fund 4.99% 7.65% 9.16% (11-01-90)
Growth & Income Fund 22.28% 22.17% 16.82% (05-01-91)
International Equity Fund 20.53% N/A 7.65% (01-09-95)
Strategic Income Fund 1.56% 7.48% 5.44% (11-01-93)
Balanced Fund 0.58% 11.27% 8.42% (08-28-89)
Core Bond Fund -1.56% 6.35% 6.37% (05-01-91)
U.S. Government Securities Fund 0.01% 5.90% 6.44% (08-28-89)
Municipal Bond Fund -3.77% 5.67% 3.45% (01-06-98)
Small Cap Growth Fund 42.19% N/A 13.42% (01-06-98)
Mid Cap Value Fund N/A N/A N/A
Stock Index Fund N/A N/A N/A
Small Cap Index Fund N/A N/A N/A
Socially Responsible Fund N/A N/A N/A
High Yield Bond Fund N/A N/A N/A
Aggressive Growth Lifestyle Fund N/A N/A N/A
Moderate Growth Lifestyle Fund N/A N/A N/A
Conservative Growth Lifestyle Fund N/A N/A N/A
Municipal Money Market Fund N/A N/A N/A
Science & Technology Fund N/A N/A N/A
</TABLE>
The Funds have been and still are subject to certain fee
reimbursements. Absent such reimbursement, the returns shown above would be
lower.
The Trust may also from time to time include in advertising and sales
literature the following: 1) information regarding its Fund Subadvisors, such as
information regarding a Subadvisor's specific investment expertise, client base,
assets under management or other relevant information; 2) quotations about the
Trust, its portfolios or its investment Subadvisors 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 Trust will include performance data for each class of shares of
a Fund in any advertisement or information including performance data of such
Fund.
64
<PAGE>
Taxable Equivalent Yields
<TABLE>
<CAPTION>
=================================================================================================================
Single Joint Marginal A Tax-Exempt Yield of:
Federal
Income Tax 3% 4% 5% 6% 7% 8%
Rate
Taxable Income**
Is Equivalent to a Taxable Yield of:
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
under $25,350 under $42,350 15% 3.53, 4.71, 5.88, 7.06, 8.24, 9.41
-----------------------------------------------------------------------------------------------------------------
$25,350-$61,400 $42,350-$102,300 28% 4.17, 5.56, 6.94, 8.33, 9.72, 11.11
-----------------------------------------------------------------------------------------------------------------
$61,400-$128,100 $102,300-$155,950 31% 4.35, 5.80, 7.25, 8.70, 10.14, 11.59
-----------------------------------------------------------------------------------------------------------------
$128,100-$278,450 $155,950-$278,450 36% 4.69, 6.25, 7.81, 9.38, 10.94, 12.50
-----------------------------------------------------------------------------------------------------------------
over $278,450 over $278,450 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.
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 Fund 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 Fund: (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 but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stocks, securities or currencies; and (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 Fund'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 one
issuer, to an amount not greater than 5% of the total value of a Fund'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 or of two or more issuers which such Fund controls
and which are engaged in the same, similar or related trades or businesses.
As a RIC, a Fund will not be subject to federal income tax on 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 Fund'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 taxable 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 Fund expects to designate amounts
retained as undistributed net capital gains in a notice to its shareholders each
of whom (i) will be required to include in income for United States federal
income tax purposes, as long-term capital gains, its proportionate share of the
undistributed amount, (ii) will be entitled to credit its proportionate share of
the 35% tax paid by a Fund on the undistributed amount against its federal
income tax liability and to claim refunds to the extent such credits exceed such
tax liability and (iii) will be entitled to increase its tax basis, for federal
income tax purposes, in its shares by an amount equal to 65% of the amount of
undistributed net capital gains included in the shareholder's income.
65
<PAGE>
A Fund 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 Fund's ordinary income for such calendar year; (b) 98% of
its capital gain net income (the excess of capital gains over capital losses, in
each case both long- and short-term) for the one-year period ending on October
31 of such calendar year; and (c) 100% of the ordinary income and capital gain
net income from any prior calendar year to the extent that such amounts were not
previously distributed or subject to tax under Subchapter M of the Code. If a
Fund does not qualify for taxation as a RIC for any taxable year, such Fund's
taxable income will be subject to corporate income taxes, and all distributions
from earnings and profits, including distributions of net capital gain (if any),
will be taxable to shareholders as ordinary income. In addition, in order to
requalify for taxation as a RIC, such Fund may be required to recognize
unrealized gains, pay substantial taxes and interest, and make certain
distributions. Each Fund expects to make sufficient distributions such that it
will not be subject to the corporate income and excise taxes.
Certain investments, including investments in assets "marked to market"
for federal income tax purposes, debt obligations issued at a discount
(including, for example, zero coupon securities), as well as certain other
investments generally will, and debt obligations purchased at a discount may,
cause a Fund to realize income prior to the receipt of cash payments with
respect to these investments. In such cases a Fund may be required to borrow
money or sell assets (including when it is not advantageous to do so) to
generate the cash necessary to make sufficient distributions to its shareholders
necessary to avoid any Fund level tax liability.
In addition, investments in options, futures contracts, hedging
transactions, forward contracts and certain other transactions will be subject
to special tax rules (including mark-to-market, constructive sale, straddle,
wash sale, short sale and other rules), the effect of which may be to accelerate
income to a Fund, defer a Fund's losses, cause adjustments in the holding
periods of a Fund's securities, convert long term capital-gains into short term
capital-gains and convert short-term capital losses into long-term capital
losses. These transactions could therefore affect the amount, timing and
character of distributions to shareholders.
A Fund's transactions in foreign currencies, foreign
currency-denominated debt securities and certain foreign currency options,
futures contracts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value of
the foreign currency concerned.
Investment by a Fund in a "passive foreign investment company" ("PFIC")
could subject a Fund to a U.S. federal income tax (including interest charges)
on distributions received from such PFIC or on proceeds received from the
disposition of shares in the PFIC, which tax cannot be eliminated by making
distributions to Fund shareholders. However, such tax and interest charges may
be avoided in certain circumstances. First, a Fund may elect to treat a PFIC as
a "qualified electing fund," in which case such Fund will be required to include
its share of the PFIC's ordinary income and net capital gain annually,
regardless of whether it receives any distribution from the PFIC. Second, a Fund
also may make an election to mark the gains (and, to a limited extent, losses)
in the PFIC stock "to market" as though it had sold and repurchased its holdings
in the PFIC on the last day of the Fund'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 Fund to avoid Fund level taxation. Making either of these
elections therefore may require a Fund 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 Fund's total
return.
Certain dividends and interest received by a Fund may be subject to
foreign withholding taxes. If more than 50% of a Fund's assets at year end
consists of stock or securities in foreign corporations, such Fund may elect to
permit shareholders to claim a credit or deduction on their income tax returns
for their pro rata portion of qualified taxes paid by such Fund to foreign
countries. If eligible the Fund(s) intend to make this election. If the election
is made, shareholders will include in gross income from foreign sources their
pro rata share of such taxes. A shareholder's ability to claim a foreign tax
credit or deduction in respect of foreign taxes paid by a Fund may be subject to
certain limitations imposed by the Code (including a holding period requirement
applied at both the Fund and shareholder level), as a result of which a
shareholder may not get a full credit or deduction for the amount of such taxes.
Shareholders who do not itemize deductions on their federal income tax returns
may claim a credit (but no deduction) for such taxes. Each year that a Fund
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
and the portion of the dividend which represents income derived from sources
within each such foreign jurisdiction (including U.S. possessions).
If a shareholder sells or otherwise disposes of a share of a Fund before
holding it for more than six months, any loss on the sale of such share shall be
(i) treated (to the extent not disallowed as described in (ii) below) as a
long-term capital loss to the extent of any capital gain dividend received or
undistributed capital gain deemed received by the shareholder with respect to
such share or (ii) in the case of the Municipal Bond Fund and the Municipal
Money Market Fund, disallowed to the extent of any exempt-interest dividends
received with respect to such share. In addition, all or a portion of a loss
realized on a redemption or other disposition of Fund shares may be disallowed
to the extent the shareholder acquired other shares of the same Fund within a
61-day period beginning 30 days before and ending 30 days after the date on
which such shares are redeemed or otherwise disposed of. Any disallowed loss
will result in an adjustment to the shareholder's tax basis in some or all of
the other shares acquired.
A sales load incurred in connection with the purchase of Fund shares
will not be taken into account in determining the gain or loss on the sale or
exchange of shares within 91 days of such purchase, where the proceeds are
reinvested in another Fund of the Trust, at a reduced (or eliminated) load. The
disregarded load will be added to the tax basis of the newly acquired shares.
Distributions of taxable income and proceeds from the sale of
investments held by a Fund for one year or less are taxable to Fund shareholders
as ordinary income. Distributions of the excess of net long-term capital gain
over net short-term capital loss (including any capital losses carried forward
from prior years) earned by the Fund are taxable to shareholders of the Fund as
long-term capital gains (generally at a 20% rate for noncorporate shareholders),
whether received in cash or in additional shares and regardless of the length of
time their shares have been held. Certain distributions declared in October,
November or December and paid the following January will be taxed to
shareholders as if received on December 31 of the year in which they are
declared.
Dividends and distributions on a Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed such
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when a Fund's net asset value also reflects unrealized losses.
Redemptions and exchanges of a Fund's shares are taxable events and,
accordingly, shareholders may realize gain or loss on these transactions. In
general, any gain realized upon a taxable disposition of shares will be treated
as long-term capital gain if the shares have been held for more than one year.
Otherwise, the gain on the sale, exchange or redemption of Fund shares will be
treated as short-term capital gain.
Generally, unless a shareholder of a Fund 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 taxable dividends and other reportable payments (including proceeds of
redemption transactions) to the shareholder. Backup withholding may also be
required in certain other cases.
Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding taxes.
Some states do not permit RICs to pass through to their shareholders the state
and local income tax exemptions available to direct owners of certain types of
securities unless the RIC owns a required amount of those securities. The
exemption from state and local income taxes does not preclude states from
asserting other taxes on the ownership of Fund shares or securities held by a
Fund. To the extent that a Fund invests to a substantial degree in U.S.
government securities that are subject to favorable state and local tax
treatment, shareholders of such a Fund will be notified as to the extent to
which distributions from the Fund are attributable to interest on such
securities.
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Municipal Bond Fund and Municipal Money Market Fund
Each of the Municipal Bond Fund and the Municipal Money Market Fund
(each a "Municipal 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 each
Municipal Fund will primarily invest in municipal obligations, dividends from
the Fund 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 each Municipal 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 each Municipal Fund to declare exempt-interest
dividends frequently. 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 a Municipal Fund) received or accrued
during the year.
Federal tax law imposes an alternative minimum tax ("AMT") with respect
to both corporations and individuals based on certain items of tax preference.
Interest on certain municipal obligations is treated as a tax preference item
for purposes of the AMT. In addition, corporate shareholders must include the
full amount of exempt-interest dividends in computing the preference items for
purposes of the AMT on corporations. The Fund will annually supply shareholders
with a report indicating the percentage of portfolio income attributable to
municipal obligations subject to the alternative minimum tax.
Taxpayers that may be subject to the alternative minimum tax should
consult their tax advisers before investing in the Fund. Tax-exempt
distributions received from each Municipal Fund are taken into account in
determining, and may increase, the portion of social security and certain
railroad retirement benefits that may be subject to federal income tax.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of a Municipal Fund is not deductible if such Fund
distributes exempt-interest dividends to the shareholder during the taxable
year.
Any recognized gain or income attributable to market discount on
long-term (i.e., obligations with a term of more than one year) tax-exempt
obligations purchased after April 30, 1993 is taxable as ordinary income (except
to the extent of a portion of the discount attributable to original issue
discount). This rule may increase the amount of ordinary income dividends
received by shareholders.
Shares of each Municipal Fund are not 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 a Municipal Fund. Moreover, subsequent
distributions of such dividends to the beneficiaries will be taxable.
In addition, exempt-interest dividends, if any, attributable to
interest received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users. "Substantial user" includes
a "non-exempt person" who regularly uses in his trade or business a part of a
facility financed from the proceeds of industrial development bonds, and the
same definition should apply in the case of private activity bonds. "Related
persons" include, among others, 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 (especially those who are "substantial
users" or "related persons") should consult their tax advisers before investing
in a Municipal Fund.
In the course of managing its investments, each Municipal Fund may
realize some capital gains (and/or losses) and other taxable income. Any
distributions by such Fund of its share of such gains or other taxable income
would be taxable to the shareholders. However, it is expected that such amounts
would normally be insubstantial in relation to the tax-exempt interest earned by
each Municipal Fund.
In addition, the receipt of exempt-interest dividends from each of the
Funds affect the federal tax liability of certain foreign corporations, S
corporations and insurance companies.
A notice detailing the tax status of dividends and distibutions paid by
each Municipal Fund will be mailed annually to its shareholders. As part of this
notice, the Fund will report to its shareholders the percentage of interest
income earned by the Fund during the preceding year on tax-exempt obligations
indicating, on a state-by- state basis, the source of such income.
Description of Tax Consequences
Descriptions of tax consequences set forth in this Statement of
Additional Information and the Prospectus are intended to be a general guide.
Investors should consult their tax advisers with respect to the specific tax
consequences of an investment in a Fund, 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.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serve as the Trust's independent accountants.
Their address is 160 Federal Street, Boston, Massachusetts 02110.
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FINANCIAL STATEMENTS
The Independent Auditor's Report, financial highlights and financial
statements in respect of the Trust included in the Annual Report of the Trust
for the fiscal year ended October 31, 1999 of the Trust to shareholders filed on
Form N-30D under the Investment Company Act of 1940, as amended, filed
electronically on January 5, 2000 (File No. 811-05797 Accession No.
0000950109-00-000037), are incorporated by reference into this Statement of
Additional Information.
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APPENDIX A
RATINGS OF CORPORATE DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
FIXED-INCOME SECURITY RATINGS
"Aaa" Fixed-income securities which are rated "Aaa" 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" Fixed-income securities which are rated "Aa" are judged to be of high
quality by all standards. Together with the "Aaa" group they comprise what are
generally known as high grade fixed-income securities. They are rated lower than
the best fixed-income securities 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" Fixed-income securities which are rated "A" 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" Fixed-income securities which are rated "Baa" are considered as medium
grade obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such fixed-income securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Fixed-income securities rated "Aaa", "Aa", "A" and "Baa" are considered
investment grade.
"Ba" Fixed-income securities 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
therefore not well safeguarded during both good and bad times in the future.
Uncertainty of position characterizes bonds in this class.
"B" Fixed-income securities which are rated "B" generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
"Caa" Fixed-income securities 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" Fixed-income securities which are rated "Ca" present obligations which
are speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
"C" Fixed-income securities which are rated "C" are the lowest rated class of
fixed-income securities, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Rating Refinements: Moody's may apply numerical modifiers, "1", "2", and
"3" in each generic rating classification from "Aa" through "B" in its municipal
fixed-income security rating system. 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 a modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. The ratings apply to Municipal Commercial Paper as well as taxable
Commercial Paper. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: "Prime-1", "Prime-2", "Prime-3".
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Issuers rated "Prime-1" have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" have a strong
capacity for repayment of short-term promissory obligations; and Issuers rated
"Prime-3" have an acceptable capacity for repayment of short-term promissory
obligations. Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
FIXED-INCOME SECURITY RATINGS
A Standard & Poor's fixed-income security rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. The ratings are
based, in varying degrees, on the following considerations: (1) likelihood of
default-capacity and willingness of the obligor as to the timely payment of
interest and repayment of principal in accordance with the terms of the
obligation; (2) nature of and provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
"AAA" Fixed-income securities rated "AAA" have the highest rating assigned
by Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.
"AA" Fixed-income securities rated "AA" have a very strong capacity to pay
interest and repay principal and differs from the highest-rated issues only in
small degree.
"A" Fixed-income securities rated "A" have a strong capacity to pay
interest and repay principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
fixed-income securities in higher-rated categories.
"BBB" Fixed-income securities rated "BBB" are 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 fixed-income securities in this category than for
fixed-income securities in higher-rated categories.
Fixed-income securities rated "AAA", "AA", "A" and "BBB" are considered
investment grade.
"BB" Fixed-income securities rated "BB" have less near-term vulnerability to
default than other speculative grade fixed-income securities. However, it faces
major ongoing uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity or willingness to
pay interest and repay principal.
"B" Fixed-income securities rated "B" have a greater vulnerability to
default but presently have the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions would likely
impair capacity or willingness to pay interest and repay principal.
"CCC" Fixed-income securities rated "CCC" have a current identifiable
vulnerability to default, and the obligor is dependent upon favorable business,
financial and economic conditions to meet timely payments of interest and
repayments of principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and repay
principal.
"CC" The rating "CC" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or implied "CCC" rating.
"C" The rating "C" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or implied "CCC-"
rating.
"CI" The rating "CI" is reserved for fixed-income securities on which no
interest is being paid.
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"NR" Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fixed-income securities rated "BB", "B", "CCC", "CC" and "C" are regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest degree of speculation. While such fixed-income securities will
likely have some quality and protective characteristics, these are out-weighed
by large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The rating from "AA" TO "CCC" may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
COMMERCIAL PAPER RATINGS
Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based upon current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. Ratings are graded into group
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Ratings are applicable to both taxable and tax-exempt commercial paper.
Issues assigned "A" ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
"1", "2", and "3" to indicate the relative degree of safety.
"A-1" Indicates that the degree of safety regarding timely payment is very
strong.
"A-2" Indicates capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".
"A-3" Indicates a satisfactory capacity for timely payment. Obligations carrying
this designation are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
"B" Issues rated B are regarded as having only speculative capacity for timely
payment.
"C" This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
"D" Debt rated D is in payment default. The D rating 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, unless Standard & Poor's believes
that such payments will be made during such grace period.
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