Bailard, Biehl & Kaiser International Fund Group, Inc.
BAILARD, BIEHL & KAISER INTERNATIONAL BOND FUND
BAILARD, BIEHL & KAISER INTERNATIONAL EQUITY FUND
PROSPECTUS
JANUARY 27, 2000
950 Tower Lane, Suite 1900
Foster City, CA 94404
(800) 882-8383
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities, nor has it passed on the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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TABLE OF CONTENTS
Information on the Bond Fund................................................ 3
Information on the Equity Fund.............................................. 7
Additional Information on Strategies and Risks.............................. 10
Management of the Funds..................................................... 13
Pricing of Fund Shares...................................................... 14
Purchasing Shares........................................................... 15
Selling Shares.............................................................. 16
Exchanging Shares........................................................... 18
Distributions............................................................... 18
Taxes....................................................................... 19
Financial Highlights........................................................ 20
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BAILARD, BIEHL & KAISER INTERNATIONAL BOND FUND ("BOND FUND")
OBJECTIVE: The Bond Fund seeks total return, from income and from long-term
growth of capital, on its investments in international bonds.
PRINCIPAL STRATEGIES
The Bond Fund invests primarily in the debt securities of issuers based in
developed countries around the world, including Europe, the United Kingdom, the
Far East, Canada and Australia. It also invests, to a lesser extent, in the debt
securities of issuers based in emerging market countries.
The Adviser, Bailard, Biehl & Kaiser, Inc., employs a disciplined top-down
approach that focuses first on country selection and then on bond selection
within individual countries. It uses a real yield, value-based model that
factors in currency forecasts. All investment decisions are made relative to a
50% hedged benchmark that is based on widely recognized international bond
indices. The Adviser will generally overweight bond markets with high real
yields whose currencies are expected to appreciate and underweight bond markets
with low real yields whose currencies are expected to weaken. The Adviser seeks
to control risk by diversifying across countries, by investing in higher quality
bonds and by closely monitoring the interest rate sensitivity of the Fund's
investments. The Adviser may also hedge the Fund's foreign currency exposure to
help manage the risk of currency fluctuations.
The Bond Fund invests in:
* FIXED-INCOME SECURITIES, such as bonds, notes and other debt securities or
obligations, of foreign governments, supra-national entities and foreign
companies, in both developed and emerging market countries. The Fund may also
invest in the debt securities and obligations of U.S. issuers whose:
* Assets or operations are primarily based outside of the U.S.
* Securities are denominated in foreign currencies. Ordinarily, the Fund will
invest at least 65% of its assets in at least three foreign countries.
However, the Fund may invest in the debt of U.S. issuers for defensive
purposes. The average maturity of the debt securities in the Fund's portfolio
will vary depending on the Adviser's interest rate forecasts.
* CASH EQUIVALENTS, such as short-term U.S. and foreign government securities,
bank debt, and commercial paper, which mature in one year or less. The Fund
typically holds cash equivalents for the payment of expenses and redemptions,
pending investment or for protection against market declines.
* HEDGING INSTRUMENTS, such as foreign currency forward contracts, options,
futures and certain other derivative instruments, to manage investment risk
or to serve as a substitute for underlying securities or currency positions.
For more information about the Bond Fund's investment practices, please see the
section titled, "Additional Information about the Funds' Investment Strategies
and Risks."
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DETERMINING IF THE BOND FUND IS RIGHT FOR YOU
An investment in the Bond Fund provides a specialized vehicle for longer-term
investors seeking to add international bonds to their investment portfolio. It
is not a balanced investment program. International bonds typically offer more
opportunities and more risks than U.S. bonds. They can provide important
diversification benefits to U.S. investors. We strongly discourage short-term
traders and market timers from investing in the Bond Fund.
PRINCIPAL RISKS
All Bond Fund investments are subject to some degree of risk that will affect
the value of the Fund's assets and may result in a loss of your money. The Bond
Fund's principal risks are:
* MARKET RISK, the risk that the market value of the Fund's investments will
fluctuate as the global bond markets fluctuate.
* INTEREST RATE RISK, the risk that changes in interest rates will affect bond
prices. Generally, an increase in interest rates will cause the value of
fixed-rate securities to fall, while a decline in interest rates will cause
an increase in the value of these securities.
* FOREIGN COUNTRY AND CURRENCY RISKS, the risks that accompany investing in
foreign securities, including the risk that a decline in the value of foreign
currencies relative to the U.S. dollar will reduce the value of securities
denominated in those currencies.
* CREDIT RISK, the risk that the issuer of a security will default on its
financial obligations.
* NON-DIVERSIFICATION RISK, the risk that the Fund may hold more concentrated
positions in certain investments than more diversified mutual funds.
* VOLATILITY OF ASSET SIZE RISK, the risk that, since substantially all of the
Fund's shareholders are clients of the Adviser, the total assets of the Fund
may fluctuate significantly whenever the Adviser increases or decreases its
clients' allocation to international bonds.
PAST PERFORMANCE
The following Annual Total Returns bar chart shows some of the risk of investing
in the Bond Fund by illustrating how returns have varied from year to year since
the Bond Fund's inception on October 1, 1990.
ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31ST
TOTAL RETURN (%)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
2.53% 12.83% 5.91% 13.94% -19.20% 20.61% 8.45% 2.60% 11.53% -4.70%
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Note: The 2.53% return for 1990 represents the three-month return from inception
(10/1/90) to December 31, 1990. Performance numbers from October 1, 1990 through
September 30, 1993 reflect the deduction of an assumed 1% investment management
fee (0.25% quarterly). Actual fees varied during that period.
Quarter Ended Total Return
------------- ------------
Best Quarter, Inception-1999 3/31/95 9.73%
Worst Quarter, Inception-1999 6/30/94 -9.84%
The following Average Annual Total Returns table compares the Bond Fund's
performance to three international bond indices
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 12/31/99
1-Year 5-Year Since Inception
------ ------ ---------------
Bailard, Biehl & Kaiser International Bond Fund -4.70% 7.36% 5.28%
Salomon Brothers World Government 10-country
(ex-U.S.) bond index (fully hedged): 3.97% 11.18% 9.65%
Salomon Brothers World Government (ex-U.S.)
bond index (50% hedged): -1.12% 8.48% 9.18%
Salomon Brothers World Government Bond Index
($) "SBWGB" -4.27% 6.42% 8.20%
The Salomon Brothers World Government 10-country (ex-U.S.) bond index is a
commonly used index that measures the performance of government bonds in ten
countries, given on a fully hedged basis. To more fully reflect the Bond Fund's
hedging strategy, we have also calculated a 50%-hedged return for the Salomon
Brothers World Government (ex-U.S.) bond index, a commonly used index that
measures the performance of government bonds in seventeen developed countries.
The last index, the Salomon Brothers World Government Bond Index, measures the
U.S. dollar performance of government bonds in the U.S. and seventeen other
developed countries. These indices do not measure the performance of the bond
markets in developing countries.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
FEES AND EXPENSES
The tables below describe the fees and expenses that you may pay if you buy and
hold shares of the Bond Fund:
Shareholder Fees (paid directly from your investment)
Maximum Sales Load Imposed on Purchases................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(and other Distributions)............................................... None
Maximum Deferred Sales Load............................................... None
Redemption Fees........................................................... None
Exchange Fees............................................................. None
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ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM THE FUND'S ASSETS)
Management Fees........................................................... 0.75%
12b-1 Fees................................................................ None
Other Expenses............................................................ 0.51%
Total Fund Operating Expenses............................................. 1.26%
EXAMPLE
The example below is intended to help you compare the cost of investing in the
Bond Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Bond Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Bond Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on the above assumptions, your costs
would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
$128 $ 400 $ 692 $1,523
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BAILARD, BIEHL & KAISER INTERNATIONAL EQUITY FUND ("EQUITY FUND")
OBJECTIVE: The Equity Fund seeks long-term growth of capital through investments
in international stocks. Although income is a factor in portfolio selection, the
Equity Fund will seek income only when consistent with its primary objective of
capital appreciation.
PRINCIPAL STRATEGIES
The Equity Fund invests primarily in the equity securities of issuers located in
developed and, to a lesser extent, emerging market countries around the world.
It will normally invest in established companies in Europe, the United Kingdom,
Japan, Asia, Australia and Canada, among other areas. The Fund's holdings are
diversified across multiple industries and geographic regions.
The Adviser employs a disciplined, quantitative approach that focuses first on
country selection and then on sector and stock selection within individual
countries. The Adviser considers such factors as relative valuations,
fundamental economic conditions, risk and the global investing environment.
These factors are dynamically weighted to ascertain the relative attractiveness
of different countries, sectors and companies. The Adviser will generally
overweight those countries, sectors and companies that appear to be the most
attractive and underweight those countries, sectors and companies that appear to
be the least attractive.
The Equity Fund invests in:
* EQUITY SECURITIES, such as common and preferred stocks of foreign issuers.
The Fund may also invest in the equity securities of U.S. companies whose
assets or operations are primarily located outside of the U.S. Ordinarily,
the Fund will invest at least 65% of its assets in the equity securities of
at least three countries other than the U.S.
* CASH EQUIVALENTS, such as short-term U.S. and foreign government securities,
bank debt, and commercial paper, which mature in one year or less. The Fund
typically holds cash equivalents for payment of expenses and redemptions,
pending investment or for protection against market declines.
* HEDGING INSTRUMENTS, such as foreign currency forward contracts, options,
futures and certain other derivative instruments to manage investment risks
or to serve as a substitute for underlying securities or currency positions.
For more information about the Equity Fund's investment practices, please see
the section titled, "Additional Information about the Funds' Investment
Strategies and Risks."
DETERMINING IF THE EQUITY FUND IS RIGHT FOR YOU
An investment in the Equity Fund provides a specialized vehicle for longer-term
investors seeking to add international stocks to their investment portfolio. It
is not a balanced investment program. International stocks typically offer more
opportunities and more risks than U.S. stocks. They allow investors to
participate in any future growth and development of the world's foreign equity
markets. They can also provide important diversification benefits for U.S.
investors. We strongly discourage short-term traders and market timers from
investing in the Equity Fund.
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PRINCIPAL RISKS:
All Equity Fund investments are subject to some degree of risk that will affect
the value of the Fund's assets and may result in a loss of your money. The
Fund's principal risks are:
* MARKET RISK, the risk that the market value of the Fund's investments will
fluctuate as the global stock markets fluctuate.
* FOREIGN COUNTRY AND CURRENCY RISKS, the risks that accompany investing in
foreign securities, including the risk that a decline in the value of foreign
currencies relative to the U.S. dollar will reduce the value of securities
denominated in those currencies.
* EMERGING MARKET RISK, the risks that accompany investing in securities of
issuers located in emerging market countries.
* NON-DIVERSIFICATION RISK, the risk that the Fund may hold more concentrated
positions in certain investments than diversified mutual funds.
* VOLATILITY OF ASSET SIZE RISK, the risk that, since substantially all of the
Fund's shareholders are clients of Bailard, Biehl & Kaiser, the total assets
of the Fund may fluctuate significantly whenever Bailard, Biehl & Kaiser
increases or decreases its clients' allocation to international stocks.
PAST PERFORMANCE
The following Annual Total Returns bar chart shows some of the risk of investing
in the Equity Fund by illustrating how Fund returns have varied from year to
year over the past ten years.
ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31ST
TOTAL RETURN (%)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
- -19.98% 0.79% -12.28% 36.81% -12.58% 12.46% 9.59% 9.96% 12.01% 32.41%
Note: Performance numbers from January 1, 1990 through September 30, 1993
reflect the deduction of an assumed 1% investment management fee (0.25%
quarterly). Actual fees varied during this period.
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Quarter Ended Total Return
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Best Quarter, 1990-1999 12/31/99 24.34%
Worst Quarter, 1990-1999 9/30/90 -20.14%
The following Average Annual Total Returns table compares the Equity Fund's
performance to three international stock indices.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 12/31/99
1-Year 5-Year 10-Year
------ ------ -------
Bailard, Biehl & Kaiser International Equity Fund 32.41% 12.31% 5.31%
MSCI EAFE (Local Currency) 33.46% 15.70% 6.50%
MSCI EAFE (U.S. $) 26.96% 12.83% 7.01%
MSCI All Country World Free(ex U.S.)($) 30.91% 12.39% 7.29%
The MSCI EAFE index is a commonly used index that measures the performance of
the international equity markets in eighteen countries in Europe, Australia, New
Zealand and the Far East. The index results are given in both local currency and
U.S. dollar terms, net of withholding taxes on foreign income. The MSCI All
Country World Free (ex-U.S.) is a commonly used index that measures the
performance of equities available to foreign investors in 47 developed and
emerging market countries outside of the United States. The returns for this
index are given in U.S. dollar terms, gross of withholding taxes on foreign
income.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
FEES AND EXPENSES
The tables below describe the fees and expenses that you may pay if you buy and
hold shares of the Equity Fund:
Shareholder Fees (paid directly from your investment)
Maximum Sales Load Imposed on Purchases.................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(and other Distributions).............................................. None
Maximum Deferred Sales Load.............................................. None
Redemption Fees.......................................................... None
Exchange Fees............................................................ None
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM THE FUND'S ASSETS)
Management Fees.......................................................... 0.95%
12b-1 Fees............................................................... None
Other Expenses........................................................... 0.54%
Total Fund Operating Expenses............................................ 1.49%
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EXAMPLE
The example below is intended to help you compare the cost of investing in the
Equity Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Equity Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Equity Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on the above assumptions, your costs
would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
$ 152 $ 471 $ 813 $1,779
ADDITIONAL INFORMATION ABOUT THE FUNDS' INVESTMENT STRATEGIES AND RISKS
OTHER INVESTMENTS: In addition to the types of investments listed under
Principal Strategies, the Bond Fund may invest in investment companies and
indexed securities The Equity Fund may invest in convertible securities,
American Depository Receipts (ADRs), Global Depository Receipts (GDRs),
International Depository Receipts (IDRs), and foreign investment companies. The
Equity Fund may also engage in currency hedging to help protect its
international stock investments from the risk of a strong dollar. However, the
Equity Fund has currently adopted a 0% hedged benchmark.
CREDIT QUALITY OF DEBT SECURITIES (BOND FUND ONLY): The Bond Fund may invest in
U.S. and international debt securities and obligations rated at least A by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"). However, up to 5% of the Fund's assets, and up to 50% of the Fund's
emerging market bonds, may be invested in medium grade securities rated Baa or
BBB, respectively, by these services. Although bonds with a Baa or BBB credit
rating are investment grade bonds, they are riskier than higher grade bonds. For
example, changing economic conditions are more likely to affect the ability of
these bonds to make principal and interest payments. If the credit rating of a
bond falls below Baa or BBB, the Adviser will decide whether to retain that bond
on a case by case basis. Since Moody's and S&P do not provide credit ratings for
many international bonds, the Bond Fund may invest in unrated bonds of
comparable quality to the rated bonds described above. For a more detailed
description of bond ratings, please see Appendix A of the Statement of
Additional Information.
U.S. AND INTERNATIONAL CASH EQUIVALENTS: Typically, the Funds will maintain a
low weighting in cash equivalents, unless a higher weighting is needed for
defensive purposes. The Bond Fund and the Equity Fund will invest in higher
quality cash equivalents, with a credit quality comparable to that indicated by
a commercial paper rating of at least Prime-3 by Moody's or at least A-3 by S&P.
If the Funds acquire securities that are not rated by Moody's or S&P, the
Adviser will determine if the securities are of comparable quality. For a
description of commercial paper ratings, see Appendix A of the Statement of
Additional information.
The Bond Fund and the Equity Fund may invest in U.S. and international
repurchase agreements.
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DEFENSIVE STRATEGY (BOND FUND ONLY): When the Adviser is concerned about the
outlook for the international bond markets, the Bond Fund may invest up to 100%
of its assets in the debt securities and obligations of U.S. issuers such as the
U.S. government, domestic corporations and domestic financial institutions. For
temporary defensive purposes, the Bond Fund may also invest up to 100% of its
assets in U.S. and international money market securities with short-term
maturities. The Bond Fund's investment objective may not be achieved when the
Fund is invested for temporary defensive purposes.
TAX-AWARE STRATEGY (BOND FUND ONLY): The Adviser seeks to follow a tax-aware
strategy in managing the Bond Fund's assets. For example, when selling a
security, the Adviser may select lots with capital losses to offset other
realized capital gains. However, this tax-aware strategy will be followed only
to the extent that it does not adversely affect the interests of the Fund's
tax-exempt investors.
HEDGING TRANSACTIONS: The Funds may use hedging transactions:
* to help protect the Bond Fund from adverse changes in currency exchange and
interest rates, and the Equity Fund from adverse changes in currency exchange
rates and market conditions, and
* as a substitute for an underlying securities or currency position.
The Funds may engage in the following types of hedging transactions:
Bond Equity
Fund Fund
---- ----
Forward foreign currency exchange contracts X X
Put and call options, futures contracts, and options on
futures contracts on foreign currencies and debt securities X
Put and call options, futures contracts, and options on futures
contracts on foreign currencies and stock indices X
Interest rate and foreign currency swaps and related caps,
floors and collars X
The Bond Fund and the Equity Fund may also conduct foreign currency exchange
transactions at the rate prevailing on the foreign currency exchange markets
(i.e., on a spot basis).
In a typical hedging transaction, the Bond Fund or the Equity Fund might hedge
the foreign currency risk associated with a particular investment with a forward
contract. The Bond Fund might use options, futures contracts or options on
futures contracts on debt securities to hedge the risk of interest rate
increases or to serve as a substitute for a debt position. The Equity Fund might
use stock index options, stock index futures contracts or options on a stock
index futures contract to hedge the risk of a stock market correction or to
serve as a substitute for an equity position.
The Bond Fund and the Equity Fund are not required to use hedging transactions
to seek their objectives. The Funds have placed certain limits on these hedging
transactions, which must not be used for speculative purposes.
All of the Bond Fund's and the Equity Fund's hedging transactions involve
special risks. If the Adviser uses a hedging instrument at the wrong time or
incorrectly judges market conditions, the hedging strategy may prevent the Funds
from realizing some potential gains. The Funds could also experience losses if,
among other things:
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* the prices of their forwards, futures and options positions are not
correlated with their other investments,
* the Adviser is unable to close out a position because of an illiquid market,
or
* the counterparty (the party on the other side of the transaction) fails to
complete a transaction.
(For more information on hedging transactions, please refer to the Funds'
Statement of Additional Information.)
FOREIGN SECURITIES: The Funds' international stock and bond investments are
subject to special risks. These include:
* Lack of accurate public information
* Different accounting standards
* Less governmental regulation and supervision of issuers, markets and brokers
* Higher transaction costs, less liquidity, and higher price volatility
* The possibility of expropriation, confiscatory taxation, exchange
restrictions, limitations on the removal of assets, and political or economic
instability.
EMERGING MARKETS: Securities issued in countries with developing or emerging
markets have greater risk. These countries tend to have less mature economies
and less stable political systems. They may have restrictions on foreign
ownership or the repatriation of assets. In addition, the securities markets of
emerging market countries tend to have more volatility, less liquidity, higher
transaction costs, less sophisticated settlement practices and less regulatory
protection for investors than their developed country counterparts.
DIVIDENDS: Dividends payable on the Funds' foreign investments may be subject to
foreign withholding taxes that reduce the net amount of income available for
distribution to the Funds' shareholders. The U.S. has signed tax treaties with
certain countries that lower the tax on U.S. taxpayers.
CURRENCY EXCHANGE RATES: Changes in currency exchange rates may increase or
decrease the value of the Funds' assets. An increase in the U.S. dollar relative
to a foreign currency could result in a substantial decline in the U.S. dollar
value of the Funds' investments denominated in that currency. The Adviser can
use certain hedging techniques to a limited extent to minimize this risk.
However, there is no guarantee that the Adviser will use these techniques or
that they will fully protect the Funds against adverse changes in exchange
rates. Moreover, to the extent hedging transactions are used to reduce currency
risks, the Funds will not benefit from increases in the value of the currencies
of the countries in which the Fund invests.
The Funds may incur costs in connection with conversions between various
currencies, since foreign exchange dealers will typically offer to buy and sell
a foreign currency at different rates. Fluctuations in exchange rates may also
affect the Funds' income distributions. For example, if foreign exchange losses
exceed other investment company taxable income during a taxable year, the Funds
might not be able to or might determine not to make any further ordinary income
distributions. The Funds might also recharacterize ordinary income distributions
made before the losses were realized as a return of capital to shareholders.
This would reduce each shareholder's cost basis in his Funds' shares for U.S.
tax purposes.
NON-DIVERSIFICATION: The Bond Fund and the Equity Fund are non-diversified funds
under the Investment Company Act of 1940. This means the Funds can invest more
than 25% of their assets in issuers in which the Funds hold individual positions
that are greater than 5% of the Funds' assets. Concentrated positions in the
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securities of a single issuer expose the Funds to a greater risk of loss from
declines in the prices of these securities
VOLATILITY OF ASSET SIZE: The Adviser's clients currently hold substantially all
of the Funds' shares. As a result, the Funds' assets may increase or decrease by
a significant amount whenever the Adviser decides to buy or sell Fund shares on
behalf of its clients. However, the fact that substantially all of the Funds'
shareholders are clients of the Funds' Adviser may make it easier for the
Adviser to manage the Funds' cash flow. Any significant decline in the Funds'
assets will likely increase the Funds' expenses as a percentage of their net
assets. Moreover, to meet the redemption requests of the Adviser's clients, the
Funds may need to liquidate portfolio positions and realize gains and losses at
inopportune times for non-redeeming shareholders. Higher portfolio turnover also
results in greater brokerage and other transaction costs. The Funds will not
notify shareholders of any changes in the Funds' net assets, regardless of what
caused the changes.
PORTFOLIO TURNOVER: The Bond Fund's portfolio turnover rate has been less than
70% for each of the past four fiscal years. The Equity Fund's portfolio turnover
rate has been 85% or less for each of the past three fiscal years. However, both
Funds may engage in short-term trading if the Adviser believes the sale of
securities held for a short period is advisable. Higher portfolio turnover
results in increased brokerage costs and may generate short-term capital gains
that could be subject to ordinary income tax.
INVESTMENT OBJECTIVES AND POLICIES: The Funds' investment objectives and
non-fundamental policies may be changed by the Board of Directors without
shareholder approval. Please see the Statement of Additional Information for a
list of fundamental policy restrictions that may be changed only with the
approval of a majority of shareholders.
YEAR 2000: Due to programming difficulties, some computer systems may not be
able to properly recognize dates after December 31, 1999. This is an issue,
which affects nearly all companies and organizations throughout the world. The
Adviser believes it has taken appropriate steps to identify and resolve any
potential problems with the computers it uses. The Adviser has also investigated
the level of Year 2000 readiness of each vendor that provides external service
to the Funds and to the Adviser. As of this date, the Funds have not been
adversely affected by any Year 2000 related issues. In addition, the Funds
cannot predict whether the Year 2000 issue will have an adverse impact on the
Funds' investments, the global markets or the world's economies in general.
A FINAL NOTE ON RISK: Since the Funds' assets will fluctuate in value, you can
lose money by investing in the Funds. When you redeem shares of the Funds, they
may be worth more or less than your original investment. Moreover, there is no
guarantee that the Funds will achieve their investment objectives. You should
consult with your financial and other advisers regarding the suitability of
these investments for your own particular circumstances.
FUND MANAGEMENT
THE ADVISER: Bailard, Biehl & Kaiser, Inc., located at 950 Tower Lane, Suite
1900, Foster City, California 94404 is the investment adviser (the "Adviser")
for the Funds. The Adviser actively manages the Funds' investments and handles
the day-to-day operations of the Funds, subject to policies established by the
Board of Directors.
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The Adviser has been managing money for institutions and wealthy families since
1971. The Adviser currently has over $1.4 billion in assets under management and
offers individually managed accounts and commingled fund strategies to qualified
investors. In addition to its international funds, Bailard, Biehl & Kaiser
offers cash management, domestic bond and domestic stock strategies on a
separate account basis, often in tailored combinations. Other funds managed by
the Adviser include the Bailard, Biehl & Kaiser Diversa Fund and the Bailard,
Biehl & Kaiser Real Estate Investment Trust, Inc.
Bailard, Biehl & Kaiser is committed to providing innovative and enduring
investment solutions to discerning investors. The Funds are just one example of
such innovation. Bailard, Biehl & Kaiser's clients were rewarded by the firm's
early entry into international investing in 1979. They continue to benefit from
Bailard, Biehl & Kaiser's diligence in maintaining cutting edge global
investment practices. Balancing the forces of dynamic financial markets with
changing investor needs requires knowledgeable investment professionals,
sophisticated portfolio engineering, disciplined processes and judgment only
attained over time. Bailard, Biehl & Kaiser has always been willing to ask "Is
this the right thing to do?" -- a philosophy that has served its clients well
for 30 years.
PORTFOLIO MANAGERS: Rosemary Macedo has been primarily responsible for the
day-to-day management of the Equity Fund since November 1995. Ms. Macedo joined
the Adviser in 1992 with responsibility for quantitative research. She became a
Senior Vice President of the Adviser in 1995.
Arthur A. Micheletti has been the senior investment strategist and lead
portfolio manager for the Bond Fund since June 1992. Mr. Micheletti has been
with the Adviser and has managed international and domestic debt portfolios
since 1981. Mr. Micheletti has been a Senior Vice President and the Chief
Economist of the Adviser since 1992. Eric Leve joined the international bond
team in October 1997. Mr. Leve is a Vice President of the Adviser and has been
with the Adviser since June 1987.
ADVISORY FEES: For the fiscal year ended September 30, 1999, the Equity Fund
paid the Adviser an advisory fee of 0.95% of its net assets. For that same time
period, the Bond Fund paid the Adviser an advisory fee of 0.75% of its net
assets. The advisory fee rates are set forth in the Investment Management
Agreements between the Funds and the Adviser.
PRICING OF FUND SHARES
The Funds' net asset value per share, also referred to as the NAV per share, is
the price of a single share of the Fund. Purchases, redemptions and exchanges of
shares are made at the next NAV calculated after the Funds' transfer agent, or
an authorized broker or its designee, has received your stockholder purchase or
redemption request in good order.
The Funds value securities for which market quotations are readily available at
their current market value. If market quotations are not readily available,
securities will be valued by, or under the direction of, the Board of Directors
in such a manner as the Board deems, in good faith, reflects the fair value of
the securities.
The NAV per share is determined by dividing the total market value of the Funds'
assets, less its liabilities, by the number of shares outstanding. The NAV is
calculated as of the regular closing of the New York Stock Exchange ("NYSE")
14
<PAGE>
(generally 4:00 p.m. Eastern Time) on each day the NYSE is open for trading. The
NAV is not calculated on days when the NYSE is closed.
The Funds hold securities that trade on foreign markets that may be open when
the NYSE is closed. As a result, the Funds' asset value may fluctuate
significantly on days when you will not be able to purchase or redeem shares.
HOW TO PURCHASE SHARES
You may purchase shares of the Funds on any day that the NYSE is open. There is
no fee charged when you purchase shares directly from the Funds. However, if you
use a broker/dealer to purchase your shares, the broker/dealer may impose a fee.
Certain Funds services may not be available to shares held in the name of a
broker/dealer or other nominee.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities to any person in any jurisdiction where it is
unlawful to make such an offer.
NEW ACCOUNTS: The minimum initial investment in the Funds is $5,000. The minimum
initial investment for employees and officers of the Adviser and their
relatives, and Directors of the Funds, is $2,000. The Funds reserves the right
to waive, reduce or increase the minimum investment for initial and subsequent
investments.
You may open your account by sending your initial purchase by mail or by wire as
referenced below.
BY MAIL: Please complete the Shareholder Application found in the back of this
prospectus and send it by regular mail to the Fund's transfer agent
at:
Chase Global Funds Services Co.
P.O. Box 2798
Boston, MA 02208
or
by express, registered or certified mail to:
Chase Global Funds Services Co.
73 Tremont Street
Boston, MA 02108
Please also include a check for your initial purchase made payable to
the Fund in which you will be investing:
BAILARD, BIEHL & KAISER INTERNATIONAL EQUITY FUND, OR
BAILARD, BIEHL & KAISER INTERNATIONAL BOND FUND
BY WIRE: Please contact the Fund's transfer agent directly at 800-541-4366 for
instructions on how to wire your initial purchase. Please note that,
before wiring your investment, a completed Shareholder Application
must be received by the Fund's transfer agent at one of the addresses
above.
15
<PAGE>
The wiring instructions for Fund purchases are:
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733160
Attn: [Name of the Bailard, Biehl & Kaiser Fund
in which you will be investing]
Shareholder's Name: ______________________
Account Number: _________________________
RETIREMENT ACCOUNTS: If you wish to establish a retirement account, please
contact BB&K Fund Services at 800-882-8383 to discuss your options and to
request the appropriate paperwork. Please note that the minimum initial
investment amount for retirement accounts is also $5,000.
If a purchase is cancelled because your check or wire transfer does not clear,
you will be responsible for any loss the Funds or the Adviser incurs. In
addition, you may be prohibited or restricted from making future purchases in
the Funds.
Because of the additional cost to the Funds caused by investors who are trying
to time the market with short-term purchases and redemptions, the Funds
discourage "market timers" from investing in the Funds. The Funds reserve the
right to refuse any purchases.
ADDITIONAL PURCHASES
The minimum amount for subsequent purchases is $100. You may make additional
purchases by mail or by wire by using the addresses and wiring instructions
listed in the previous section entitled NEW ACCOUNTS. Please be sure to include
your account number on your check or wire whenever making additional purchases.
HOW TO SELL SHARES
You may sell all or a portion of your shares, at no charge, on any day the NYSE
is open. If you use a broker/dealer to sell your shares, the broker/dealer may
impose a fee for this service. The Funds' transfer agent will normally send the
sale proceeds to you within seven days.
Below are your options for redeeming shares. Please note that the Funds'
transfer agent must receive any redemption request before 4:00 p.m. Eastern Time
in order for the request to be processed that day. Any request received after
that time will be processed on the next business day.
BY MAIL: You may redeem shares from your account by mailing your written
request directly to the Fund's transfer agent at one of the
addresses listed under How to Purchase Shares. Please reference
your account number and be sure to have all required signers on
the account sign the request. Please note that any written
redemption request for an amount exceeding $50,000 requires a
signature guarantee. A signature guarantee is also required if
you request that the proceeds of your redemption be sent anywhere
other than your address or bank of record. For more information
on how to obtain a signature guarantee, please refer to the
Fund's Statement of Additional Information or contact the Fund's
transfer agent at 800-541-4366.
16
<PAGE>
BY If you have elected Telephone Redemption Privileges for your
TELEPHONE: account either by checking the appropriate box on your
Shareholder Application or by subsequently adding the service to
your account, you may call the Fund's transfer agent directly at
800-541-4366 to request a redemption and have the proceeds sent
to your address or bank of record. Redemption requests by
telephone must be for at least $1,000 and not exceed $150,000.
Neither the Fund nor its transfer agent will be liable for
following telephone instructions that the Fund's transfer agent
reasonably believes to be genuine.
If you wish to add Telephone Redemption Privileges to your
existing account, please contact the Fund's transfer agent for
the appropriate form. Please note that shares held in individual
retirement plans or issued in certificate form are not eligible
for telephone exchange or redemption privileges.
SYSTEMATIC The Systematic Withdrawal Plan lets you withdraw a minimum of
WITHDRAWAL $100 on a periodic basis. To request this feature, please check
PLAN: the appropriate box on your Shareholder Application or contact
the Fund's transfer agent at the telephone number above for the
appropriate form. Please note that there is a $2 fee for each
withdrawal under this plan. You must have a minimum account size
of $10,000 to participate.
Your options for receiving your redemption proceeds are:
BY CHECK: A check will be sent to your address of record unless you
indicate otherwise on your request.
BY WIRE: You may request to have your redemption proceeds wired directly
to your bank account. Please note that there is a $10 fee for
each wire.
If you are requesting a redemption shortly after a purchase by check was made in
your account, the transfer agent may wait until the check clears before
processing your request.
If the market value of your account should fall under $1,000, the Funds reserve
the right to liquidate your account after providing you with a 30-day written
notice.
If the amount you are redeeming exceeds 1% of the Funds' net assets or $250,000
during any 90-day period, the Funds reserves the right to honor your redemption
request by distributing to you readily marketable securities to you instead of
cash. You may incur brokerage and other costs in converting to cash any
securities distributed.
17
<PAGE>
EXCHANGING SHARES TO ANOTHER BAILARD, BIEHL & KAISER FUND
You can exchange your Fund shares for shares in any mutual fund offered by
Bailard, Biehl & Kaiser at no charge. You may make your exchange request in
writing directly to the Funds' transfer agent at either of the addresses listed
under HOW TO PURCHASE SHARES. You may also make your request over the telephone
by following the procedures described above regarding telephone redemptions.
Exchanges may only be made between accounts with identical account
registrations.
Exchanges can only be made in states where shares of the fund being purchased
are qualified for sale, and the dollar amount of an exchange must meet the
initial or subsequent minimum investment requirements of the fund being
purchased. The Funds reserve the right to reject any exchange request and to
modify or terminate the exchange privilege at any time.
Before making your exchange, please read carefully the prospectus carefully for
the fund in which you will invest. You may request the prospectus by contacting
BB&K Fund Services at 800-882-8383.
STATEMENTS
You will receive a confirmation statement after your initial purchase and after
each subsequent purchase or sale in your account. You will also receive a
statement after each dividend and capital gain distribution.
DISTRIBUTIONS
The Funds intend to distribute any net investment income and net realized
capital gains to its stockholders. Any net investment income earned by the Funds
is distributed as dividends on a quarterly basis for the Bond Fund and on an
annual basis (generally in December) for the Equity Fund. Short-term and
long-term capital gains realized from the sale of securities from the Funds'
portfolios are distributed annually, generally in December. Gains from
investments held by the Funds for one year or less are short-term gains, and if
held for over one year are long-term gains.
The amount of net investment income distributed and the characterization of
Funds distributions for tax purposes may be affected, among other factors, by
foreign currency exchange losses.
You have the choice of receiving your distributions from the Funds in cash or
having your distributions reinvested in additional shares in your account. If
you decide to have your distributions paid to you in cash, you may choose to
have the proceeds sent to you by check or wired directly to your bank account.
Unless you note otherwise on your Stockholder Application, your distributions
will automatically be reinvested in additional shares of the Funds.
You may change your distribution option at any time by sending your written
request directly to the Funds' transfer agent. Please allow sufficient time for
your request to be processed. The transfer agent must receive your request at
least five days before the next distribution record date for it to be effective.
18
<PAGE>
TAXES
For income tax purposes, net investment income dividends are generally taxed at
your ordinary income rate. In addition, any net realized short-term capital
gains are also taxable at your ordinary income rate. Net realized long-term
capital gains distributed to you by the Funds are taxed at the long-term capital
gain rate regardless of how long you held your shares. All dividends and
distributions are taxable to stockholders whether the proceeds are received in
cash or reinvested in additional shares. The Funds will inform you of the source
and nature of the distributions at the time they are paid.
If you purchase shares shortly before the Funds make a distribution, the
distribution may return some of your initial capital to you in a taxable event.
As a result, the Funds do not recommend you make purchases shortly before a
distribution.
When you sell your shares or exchange your Fund shares for shares in another
fund, you may trigger a taxable event depending on the amount of your sale
proceeds relative to your initial investment, and how long you held your shares.
Any loss recognized upon the sale of shares held for twelve months or less will
be treated as a long-term capital loss to the extent of any distributions of
long-term capital gains during the period the shares were held. Dividends and
distributions payable to stockholders of record as of a date in October,
November or December of any year will be deemed to have been paid by the Fund
and received by stockholders on December 31 if the dividends are paid by the
Funds at any time during the following January.
Investors are urged to consult their own tax advisers to determine the effect of
an investment in the Funds upon their individual tax situations.
19
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the Funds'
financial performance for the past 5 fiscal years. Certain information reflects
financial results for a single Fund share. The total returns in these tables
represent the rate that an investor would have earned (or lost) on an investment
in each Fund (assuming reinvestment of all dividends and distributions).
This information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Funds' financial statements, are included in the Annual Reports
for each Fund, which are available upon request.
BAILARD, BIEHL & KAISER INTERNATIONAL BOND FUND
For a share outstanding throughout the period:
<TABLE>
<CAPTION>
For the Years Ended September 30,
-------------------------------------------------------
1999(1) 1998(1) 1997(1) 1996 1995(1)
------- ------- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.99 $ 8.20 $ 8.38 $ 8.78 $ 8.02
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.34 0.25 0.42 0.59 0.47
Net Realized/ Unrealized Gain (Loss)
on Securities and Foreign Currency (0.39) 0.40 0.04 0.16 0.86
------- ------- ------- ------- -------
Total from Investment Operations (0.05) 0.65 0.46 0.75 1.33
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net Investment Income (0.09) (0.86) (0.17) (0.45) (0.45)
For Tax Purposes in Excess of Book
Net Investment Income -- -- (0.47) (0.70) (0.12)
Capital Gains -- -- -- -- --
Return of Capital -- -- -- -- --
------- ------- ------- ------- -------
Total Distributions (0.09) (0.86) (0.64) (1.15) (0.57)
------- ------- ------- ------- -------
Net Asset Value, End of Period $ 7.85 $ 7.99 $ 8.20 $ 8.38 $ 8.78
======= ======= ======= ======= =======
TOTAL RETURN (0.65%) 8.75% 5.75% 9.32% 17.33%
RATIOS/ SUPPLEMENTAL DATA:
Net Assets, End of Year (000's) $79,191 $55,028 $51,903 $65,381 $64,640
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Before Expenses Paid Indirectly 1.26% 1.33% 1.35% 1.22% 1.16%
After Expenses Paid Indirectly 1.26% 1.26%(2) 1.35% 1.22% 1.16%
Ratio of Net Investment Income to
Average Net Assets 4.03% 4.63% 4.72% 5.41% 5.66%
Portfolio Turnover Rate 31% 40% 33% 61% 179%
</TABLE>
- ----------
1. Net investment income per share has been computed before adjustments for
book/ tax differences.
2. The Fund had entered into an agreement with the Custodian where the daily
interest earned from the Fund's cash balance would be applied as a credit
to the custody fees for the Fund. For the year ended 9/ 30/ 98, the Fund
earned $39,730 in such credits.
20
<PAGE>
BAILARD, BIEHL & KAISER INTERNATIONAL EQUITY FUND:
For a share outstanding throughout the period:
<TABLE>
<CAPTION>
For the years ended September 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 5.92 $ 6.91 $ 6.05 $ 6.00 $ 6.10
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.02(3) 0.09(3) 0.04(3) 0.05 0.06(1)
Net Realized/ Unrealized Gain (Loss)
on Securities and Foreign Currency 1.47 (0.81) 1.23 0.37 0.06(2)
-------- -------- -------- -------- --------
Total from Investment Operations 1.49 (0.72) 1.27 0.42 0.12
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net Investment Income (0.06) (0.13) (0.05) (0.06) --
Capital Gains (0.46) (0.14) (0.36) (0.31) (0.22)
-------- -------- -------- -------- --------
Total Distributions (0.52) (0.27) (0.41) (0.37) (0.22)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ 6.89 $ 5.92 $ 6.91 $ 6.05 $ 6.00
======== ======== ======== ======== ========
TOTAL RETURN 26.13% (10.61)% 22.22% 7.33% 2.13%
RATIOS/ SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $139,472 $108,297 $139,220 $100,382 $108,210
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Before Expenses Paid Indirectly 1.49% 1.44% 1.44% 1.54% 1.53%
After Expenses Paid Indirectly 1.49% 1.41%(4) 1.44% 1.54% 1.53%
Ratio of Net Investment Income to
Average Net Assets 0.37% 0.49% 0.79% 0.78% 0.97%
Portfolio Turnover Rate 85% 78% 67% 103% 174%
</TABLE>
- ----------
1. Calculated based on the average shares outstanding during the period.
2. The amount shown for each share outstanding may not accord with the change
in the aggregate gains and losses in the portfolio securities during the
period because of the timing of purchases and redemptions of shares in
relation to the fluctuating market value of the portfolio.
3. Net investment income per share has been computed before adjustments for
book/ tax differences.
4. The Fund had entered into an agreement with the Custodian where the daily
interest earned from the Fund's cash balance would be applied as a credit
to the custody fees for the Fund. For the year ended 9/ 30/ 98, the Fund
earned $39,091 in such credits.
21
<PAGE>
The following information is available by request at no charge:
STOCKHOLDER REPORTS
Additional information about the Funds' investments and performance is available
in each Funds' Semi-Annual, and Annual Reports to Stockholders. The Annual
Report discusses the market conditions and investment strategies that
significantly affected the Funds' performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides further detail about the Funds' investment policies, risks and
operations. It is incorporated by reference into this Prospectus and is legally
a part of this prospectus.
To request this information or make any additional inquiries please contact us
at:
BB&K Fund Services, Inc.
950 Tower Lane, Suite 1900
Foster City, CA 94404-2131
Toll free (800) 882-8383
[email protected]
Information about the Funds may be reviewed and copied at the Securities and
Exchange Commission's (SEC) Public Reference Room in Washington, DC. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-202-942-8090, or sending an email to: [email protected]. Reports
and other information about the Funds are also available at the SEC's Internet
site at http://www.sec.gov. Copies of this information may also be obtained by
writing and paying a duplicating fee to: Public Reference Room, Securities and
Exchange Commission, Washington, DC 20549-0102.
SEC File Number: 811-06146
Bailard, Biehl & Kaiser International Equity Fund
Ticker: BBIEX
Bailard, Biehl & Kaiser International Bond Fund
Ticker: BBIFX
<PAGE>
BAILARD, BIEHL & KAISER INTERNATIONAL BOND FUND
BAILARD, BIEHL & KAISER INTERNATIONAL EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 27, 2000
This Statement of Additional Information is not a Prospectus, but contains
information in addition to that contained in the Prospectus, which may be of
interest to some investors. This Statement of Additional Information should be
read in conjunction with the Prospectus dated January 27, 2000. You can request
the Prospectus by writing directly to us at the address above or by calling us
at (800) 882-8383.
TABLE OF CONTENTS
Page
----
Investment Objectives, Policies and Restrictions.......................... B-2
Net Asset Value........................................................... B-10
Purchases, Exchanges Redemptions.......................................... B-11
Distributions and Taxes................................................... B-12
Directors and Officers.................................................... B-15
Investment Advisory and Other Services.................................... B-17
Portfolio Transactions and Brokerage Commissions.......................... B-19
Stockholder Information................................................... B-20
Performance Data.......................................................... B-21
Financial Statements...................................................... B-21
Appendix A (Bond and Commercial Paper Ratings)............................ B-22
Appendix B (Hedging and Other Transactions)............................... B-24
This Statement of Additional Information Does Not
Constitute an Offer to Sell Securities.
<PAGE>
THE FUNDS: The Bailard, Biehl & Kaiser International Bond Fund (the "Bond Fund")
and the Bailard, Biehl & Kaiser International Equity Fund (the "Equity Fund")
are non-diversified series of the Bailard, Biehl & Kaiser International Fund
Group (the "Company"), a Maryland corporation and an open-end management
investment company.
The Company was organized as a Maryland corporation on June 12, 1990. Prior to
January 1996, the name of the Bond Fund was the Bailard, Biehl & Kaiser
International Fixed-Income Fund. The Equity Fund is the successor to the
Bailard, Biehl & Kaiser International Fund, Inc., a Delaware corporation that
was organized on March 12, 1979.
The Company's fiscal year ends on September 30 of each year.
INVESTMENT POLICIES AND RESTRICTIONS
BOND FUND
DEBT SECURITIES OF FOREIGN GOVERNMENTS AND SUPRA-NATIONAL ENTITIES: The Bond
Fund may invest in debt securities issued or guaranteed as to payment of
principal and interest by governments, semi-governmental entities and
governmental agencies of countries throughout the world denominated in the
currencies of such countries or other currencies. The Fund may also invest in
debt securities of supra-national entities, which may be denominated in dollars
or other currencies. A supra-national entity is an entity designated or
supported by a national government or governments to promote economic
reconstruction or development. Examples of supra-national entities in which the
Fund may invest include the World Bank (International Bank for Reconstruction
and Development), the European Investment Bank, the Asian Development Bank and
the European Coal and Steel Community. These supra-national entities do not have
taxing authority and therefore depend upon their members' continued support to
meet interest and principal payments.
FOREIGN CORPORATE DEBT SECURITIES: The Bond Fund may invest in debt securities
of foreign companies and U.S. companies whose assets are primarily located or
whose operations are primarily conducted outside of the United States or whose
securities are denominated in foreign currencies. These securities will consist
of all types of long or short-term debt obligations, such as bonds, debentures,
notes, mortgage and asset-backed obligations, equipment lease certificates,
equipment trust certificates, conditional sales contracts and commercial paper.
See "Domestic Debt Securities" for information concerning mortgage-backed
securities.
FOREIGN BANK OBLIGATIONS: The Bond Fund may invest in obligations of foreign
banks, bank holding companies and other financial institutions (consisting of
certificates of deposit, bankers' acceptances and other short-term debt
obligations) that, at the date of investment, have total assets in excess of $1
billion. Under normal circumstances, the Fund would not expect to invest a
substantial portion of its assets in such obligations. However, if short-term
interest rates exceed long-term interest rates, the Fund may hold a greater
proportion of its assets in these instruments.
INDEXED SECURITIES: The Bond Fund may invest in indexed securities, the value of
which is linked to interest rates, currencies, commodities, indices or other
financial indicators ("reference instruments"). Typically, the reference
instruments will be debt securities of foreign issuers, while the issuer of the
indexed security may be a domestic or foreign entity. Indexed securities may
provide for periodic interest payments to holders, or they may be structured as
"zero coupon" instruments with no payments prior to maturity. They may be
subject to a "cap" on the maximum principal amount, or a "floor" on the minimum
principal amount, to be repaid on maturity. Indexed securities may be traded on
an exchange or over-the-counter. Unlike other debt securities, the interest rate
or the principal amount payable at maturity of an indexed security may vary
based on changes in one or more reference instruments, such as a change in the
interest rate of the reference instrument compared with a fixed interest rate.
The reference instrument need not be related to the terms of the debt security.
B-2
<PAGE>
For example, the interest rate or the principal amount of a U.S. dollar
denominated indexed security may vary based on a change in a foreign security or
basket of foreign securities. An indexed security may also be positively or
negatively indexed, so that its value may increase or decrease as the value of
the reference instrument increases or decreases. Further, the change in the
interest rate or the principal amount payable of an indexed security may be some
multiple of the change (positive or negative) in the value of the reference
instrument.
Investment in indexed securities involves certain risks. In addition to the
credit risk of the security's issuer and the normal risks of price fluctuations
in response to changes in interest rates, the interest rate or principal amount
of indexed securities may decrease, sometimes substantially, as a result of
changes in the value of the reference instruments. Further, indexed securities
may be more volatile than the reference instruments, particularly those that are
negatively indexed to the reference instrument and those that are based on a
multiple of the change in the value of the reference instrument. Because it is
common for indexed securities to be individually negotiated with the issuer,
such securities also tend to be less liquid than other debt securities and may
be more difficult to value.
DOMESTIC DEBT SECURITIES: When the Adviser is concerned about the outlook for
international bond markets, the Bond Fund may invest up to 100% of its assets in
debt securities of U.S. issuers. Such securities will consist of U.S. Government
securities, domestic corporate debt securities and obligations of domestic
banks, bank holding companies and other financial institutions, all of a nature
and quality similar to the Fund's investments in foreign securities.
The Bond Fund's investments in U.S. Government securities will consist of: (i)
U.S. Treasury obligations, which differ only in their interest rates, maturities
and times of issuance, U.S. Treasury bills (maturities of one year or less),
U.S. Treasury notes (maturities of one to ten years), and U.S. Treasury bonds
(generally maturities of greater than ten years), all of which are backed by the
full faith and credit of the United States; and (ii) obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, some of which are
backed by the full faith and credit of the United States (e.g., direct
pass-through certificates of the Government National Mortgage Association
("GNMA"), some of which are supported by the right of the issuer to borrow from
the U.S. Government (e.g., obligations of Federal Home Loan Banks) and some of
which are backed only by the credit of the issuer itself. Mortgage-backed
securities such as GNMAs are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying mortgage obligations. Thus, GNMAs may
be less effective than other types of securities as a means of "locking in"
attractive long-term interest rates. Also, GNMAs may have less potential for
capital appreciation during periods of declining interest rates than other debt
securities of comparable maturities because of the prepayment feature, although
such obligations may have a comparable risk of decline in market value during
periods of rising interest rates. U.S. Government securities generally do not
involve the credit risks associated with U.S. corporate debt securities and, as
a result, the yields available from U.S. Government securities are generally
lower than the yields available from U.S. corporate debt securities. Like other
debt securities, however, the values of U.S. Government securities change as
interest rates fluctuate.
TEMPORARY INVESTMENTS: When the Adviser believes that investing for temporary
defensive purposes is appropriate (such as during periods of unusual market
conditions or when it is anticipated that interest rates will rise), the Bond
Fund may invest up to 100% of its total assets in money market securities,
denominated in dollars or in the currency of any foreign country, issued by
entities organized in the United States or any foreign country, consisting of:
short-term (less than twelve months to maturity) obligations issued or
guaranteed by the United States government or the government of a foreign
country or their agencies or instrumentalities; finance company and corporate
commercial paper, and other short-term corporate obligations; and obligations of
banks (including certificates of deposit, time deposits and bankers'
acceptances). Within certain limitations, the Bond Fund can also invest in U.S.
and foreign repurchase agreements. The Fund's investment objective may not be
achieved when the Fund is invested for temporary defensive purposes.
B-3
<PAGE>
EQUITY FUND
EQUITY INVESTMENTS: The Equity Fund will invest in the equity securities of
foreign issuers, including U.S. companies whose assets or operations are
primarily located overseas. For this purpose, equity securities are common
stocks, preferred stocks and convertible securities (such as convertible debt
securities and warrants). Warrants do not entitle the holder to voting,
liquidation or dividend rights with respect to the issuer of the underlying
securities. The Equity Fund may also invest in American Depository Receipts
(ADRs), Global Depository Receipts (GDRs), and International Depository Receipts
(IDRs). A purchaser of an unsponsored ADR, GDR or IDR may have limited voting
rights and may receive less information about the issuer of the underlying
security than with a sponsored ADR, GDR or IDR.
CASH EQUIVALENTS: The Equity Fund may invest in the short-term obligations of
U.S. and foreign companies and governments pending investment or for protection
against market declines. Short-term obligations will consist of short-term
notes, commercial paper, certificates of deposit, and, within certain
limitations, repurchase agreements.
BOND FUND AND EQUITY FUND
TYPES OF INVESTMENTS: As a general rule, the Bond Fund and the Equity Fund will
purchase securities that are traded on exchanges or over-the-counter markets
which are often based in the respective countries in which the various issuers
of such securities are principally based. There is no limitation on the
percentage of the Funds' assets that may be invested in securities of issuers
located within any one country, other than restrictions that may be imposed from
time to time by the Company's Board of Directors, nor is there any minimum asset
or net worth requirement with respect to issuers in which the Funds' assets may
be invested.
INVESTMENT COMPANIES: The Bond Fund and the Equity Fund may invest in domestic
and foreign investment companies whose portfolios are invested primarily in the
securities of foreign issuers. Either Fund's purchase of securities of another
investment company results in the layering of expenses, so that a shareholder
will directly bear the expenses of the Fund and indirectly bear a proportionate
share of the expenses of the other investment company. Except as permitted under
the 1940 Act, the Funds will not invest their assets in more than 3% of the
outstanding voting stock of any other investment company. In addition, they not
invest more than 5% of their total assets in any other investment company or
more than 10% of its total assets in investment companies as a group. The Funds,
together with other investment companies having the same investment adviser,
will not invest in more than 10% of the outstanding voting stock of any
closed-end investment company, unless the security is acquired pursuant to a
plan of reorganization or a Securities and Exchange Commission approved offer of
exchange. Finally, the Funds will not purchase the securities of any investment
company that is sponsored or managed by the Adviser.
REPURCHASE AGREEMENTS: Repurchase agreements represent agreements in which the
Bond Fund or the Equity Fund buys securities from a seller who agrees to
repurchase such securities at a later date at a specified time and price. When
the Funds invest in U.S. repurchase agreements, the securities acquired by the
Funds will be U.S. Treasury securities, and the Funds will enter into repurchase
agreements only with registered broker-dealers and with domestic banks or other
financial institutions regulated by the FDIC and having total assets in excess
of $10 billion. The seller's obligation to repurchase is fully collateralized
with other securities in which the Funds can invest, although the Funds may
experience delays in acquiring control of the collateral upon a default by the
seller. The value of the collateral, including accrued interest, will be marked
to market daily. The Funds' right to liquidate its collateral in the event of a
default by the seller could involve certain costs, losses on delays, and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase are less than the repurchase price, the Funds could suffer a loss. If
the value of the collateral should decrease below the resale price of the
securities acquired, including accrued interest, additional collateral is
required to be deposited.
The Bond Fund and the Equity Fund may also invest in international repurchase
agreements involving foreign instruments that are subject to similar
restrictions and risks.
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EURO: On January 1, 1999, eleven major European countries participating in the
Economic and Monetary Union (the "EMU") adopted a new single currency, the Euro,
which will replace the national currencies of the participating countries. Most
of the affected securities have already been redenominated in Euros. However, no
one knows how smooth the conversion to the Euro will actually be. The monetary
conversion affects clearing and payment systems, as well as financial
institutions' operating systems. These and other factors, including political
and economic risk, could cause market disruptions after the introduction of the
Euro. Although it is not possible to fully predict the impact of the Euro on the
Fund, the Adviser is taking steps to make the transition as smooth as possible
HEDGING TRANSACTIONS
HEDGING TRANSACTIONS INVOLVING FOREIGN CURRENCIES: The Bond Fund and the Equity
Fund may hedge foreign currency risk through the use of direct hedges, indirect
hedges and cross hedges. The Funds may directly hedge a currency risk when they
believe that the currency in which a particular portfolio security is
denominated may suffer a substantial adverse movement against the U.S. dollar.
For example, to directly hedge a position, the Funds could sell an amount of
such foreign currency, or buy an amount of the U.S. dollar, approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
Indirect hedges are similar to direct hedges, except that in an indirect hedge,
the Funds hedge a portfolio security's currency risk with a different, or proxy,
currency that is expected to trade closely to the portfolio security's
underlying currency. Indirect hedges may used when the Funds believe that the
currency risk associated with a portfolio position can be hedged more
effectively through the purchase or sale of the proxy currency due to better
liquidity, lower transaction costs and/or relative currency expectations.
The Funds may enter into a cross-hedge when they believe that the currency in
which a particular portfolio security is denominated may suffer a substantial
adverse movement against a currency other than the U.S. dollar. If one currency
is expected to decrease against another currency, the Funds may sell the
currency expected to weaken and buy the currency expected to strengthen. The
Funds may also initiate a foreign currency position that increases the exposure
of the Funds to that currency. Typically, this would be done when the Funds like
the currency of a country but not the stocks or bonds of that country. To offset
an underweight (or no) securities position in that country, the Funds may add a
foreign currency position that is larger than the securities position. Under
such circumstances, the Bond Fund's or the Equity Fund's foreign currency
position in a country will not exceed that of its neutral weighting for the
country.
HEDGING A RISK ASSOCIATED WITH OR AS A SUBSTITUTE FOR A MARKET, ECONOMIC SECTOR
OR INDUSTRY: Generally, to hedge a risk associated with or as a substitute for a
market, economic sector or industry, the Equity Fund may enter into a
transaction involving a stock index Option, a stock index Futures Contract or
Option on a stock index Futures Contract. A stock index is a composite of the
market prices of the stocks that make up the index. An index may be broad based
(comprised of many stocks and designed to be representative of an overall
market, e.g., the CAC-40 Index of French securities) or narrow based (designed
to be representative of a particular industry or market sector, e.g., the Morgan
Stanley Global Utilities Index). An index may also be composed of U.S. stocks
(e.g., the S&P 500 Stock Index) or foreign stocks (e.g., the International
Market Index) or a combination of both (e.g., the Morgan Stanley World Index).
Stock indices are used as the underlying value of stock index Options, stock
index Futures Contracts and Options on stock index Futures.
HEDGING A RISK ASSOCIATED WITH ADVERSE CHANGES IN INTEREST RATES ORDEBT
SECURITIES: Generally, to hedge a risk associated with changes in interest rates
or as to serve as a substitute for an underlying securities position, the Bond
Fund may enter into a transaction involving an Option, a Futures Contract or an
Option on a Futures Contract based on debt securities. The debt security is
typically a representative government bond, such as the ten-year Japanese
government bond. It may be a U.S. or foreign debt security. These debt
securities are used as the underlying value of the associated Options, Futures
Contracts and Options on Futures.
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The Bond Fund and the Equity Fund will not engage in a transaction involving
Forward Contracts or Futures Contracts, and will not write Options or Options on
Futures Contracts unless their positions are "covered" by an offsetting position
or transaction, or liquid assets equal to the amount of the Funds' contingent
obligations are held by the Funds' custodian in a segregated account. For a more
detailed description of cover transactions, see Appendix B.
FORWARD CONTRACTS. A Forward Contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date and is individually
negotiated and privately traded by currency traders and their customers. The
precise matching of the Forward Contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the Forward Contract
is entered into and the date it matures. Forward Contracts may limit potential
gain from a positive change in the relationship between currencies, and
unanticipated changes in currency prices may result in poorer overall
performance for the Bond Fund or the Equity Fund than if it had not engaged in
such contracts.
OPTIONS. The Bond Fund may purchase and write call and put Options on debt
securities and foreign currencies. The Equity Fund may purchase and write call
and put Options on stock indices and foreign currencies. Call Options on debt
securities and foreign currencies give the holder the right, in exchange for a
premium, to buy the underlying security or currency at a stated price while the
counterparty is obligated, upon exercise, to sell such security or currency. Put
Options on debt securities and foreign currencies give the holder the right, in
exchange for a premium, to sell the underlying security or currency at a stated
price while the counterparty is obligated, upon exercise, to buy such security
or currency. An Option on a stock index is similar to an Option on a security or
foreign currency, except that exercise of the Option results in the payment of a
cash settlement instead of the purchase or sale of securities that underlie the
index. The amount of the cash settlement depends on the change in the value of
the index underlying the Option.
The purchase of an Option may constitute an effective hedge against fluctuations
in currency exchange or interest rates, or changes in market conditions,
although, in the event of movements adverse to the Bond Fund's or Equity Fund's
positions, the Funds may forfeit the entire amount of the premium plus related
transaction costs. The writing of Options constitutes only a partial hedge, up
to the amount of the premium received, and the Funds could be required to
purchase or sell debt securities, foreign currencies, or other assets at
disadvantageous rates, thereby incurring losses.
Options written or purchased by the Bond Fund and the Equity Fund will be traded
on U.S. and foreign exchanges or, provided a sufficiently liquid secondary
market exists, over-the-counter markets. Over-the-counter Options purchased by
the Funds and the value of securities used to cover over-the-counter Options
written by the Funds will be deemed to be illiquid subject to the Fund's policy
limits on investments in illiquid securities.
FUTURES CONTRACTS. Generally, a Futures Contract is an exchange traded contract
for the purchase or sale for future delivery of the underlying asset. A sale of
a Futures Contract on a debt security or foreign currency is the acquisition of
a contractual obligation to deliver the security or currency called for by the
contract at a specified price in a fixed delivery month. A purchase of a Futures
Contract on a debt security or foreign currency means the acquisition of a
contractual obligation to acquire the security or currency called for by the
contract at a specified price in a fixed delivery month. A Futures Contract on a
stock index, like an Option on a stock index, results in the payment of a cash
settlement instead of the delivery of the securities that underlie the index.
The amount of the cash settlement depends on the change in the value of the
index underlying the Futures Contract. The successful use of Futures Contracts
will usually depend on the Bond Fund's and the Equity Fund's ability to
correctly predict currency exchange and interest rate movements and market
conditions. Should rates or markets move in an unexpected manner, the Funds may
not achieve the anticipated benefits of Futures Contracts or may realize losses.
Losses from Futures Contracts are potentially unlimited.
OPTIONS ON FUTURES CONTRACTS. The Bond Fund and the Equity Fund may purchase and
write call and put options on Futures Contracts. Call Options on Futures
Contracts give the holder the right, in exchange for a premium, to take the
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<PAGE>
position of a buyer in a specified Futures Contract while the counterparty is
obligated, upon exercise, to take the position of a seller in that Futures
Contract. Put Options on Futures Contracts give the holder the right, in
exchange for a premium, to take the position of a seller in a specified Futures
Contract while the counterparty is obligated, upon exercise, to take the
position of a buyer in that Futures Contract. An Option on a Futures Contract
may entail more or less risk than ownership of the Futures Contract upon which
it is based or the underlying asset. Options on Futures Contracts hedge
positions and transactions in a manner similar to Options. For more information
on the uses and limits of Options on Futures Contracts, see "Options."
SWAPS: The Bond Fund may engage in swap transactions, which are individually
negotiated agreements to exchange the right to receive payment on a particular
type of obligation for a different type of payment. In a typical interest rate
Swap, one party agrees to pay a fixed rate of interest while the counterparty
agrees to pay a floating rate. Interest rate Swaps also permit counterparties to
exchange a floating rate obligation (based on one or more reference rates, such
as the London Interbank Offered Rate ("LIBOR"), a specified bank's prime rate or
U.S. Treasury Bill rates), for a floating rate obligation based on a different
reference rate. A currency Swap allows the parties to exchange fixed or floating
rate obligations (and, in some cases, principal obligations) denominated in
different currencies.
Caps, floors and collars are forms of Swap transactions that have additional
features. The purchase of a cap permits the purchaser, to the extent that a
specified index exceeds a predetermined rate, to receive payments from the
seller. The purchase of a floor entitles the purchaser, to the extent that a
specified index falls below a predetermined rate, to receive payments from the
seller. A collar combines the elements of purchasing a cap and selling a floor
protecting against rate fluctuation above the maximum amount or to the minimum
amount. The Bond Fund will deem the obligations owed to it under a Swap to be
illiquid for purposes of the restrictions on investments in illiquid securities,
except to the extent that a third party (such as a large commercial bank) has
guaranteed the Bond Fund's ability to offset the Swap at any time.
SPOT TRANSACTIONS. The Bond Fund and the Equity Fund also engage in foreign
currency exchange transactions on a spot (i.e., current) basis in connection
with the investment of cash balances held by the Funds outside of the United
States. The purpose of these cash balances is to provide liquidity for
operations. The Funds expect to invest their cash balances primarily in bank
accounts or similar investments denominated in foreign currencies in lieu of
dollar-denominated bank accounts or investments. This should permit the Funds to
profit from declines in the value of the dollar during periods when the dollar
is declining relative to the foreign currencies in which its cash balances are
invested. There is, however, no guarantee that the Adviser will correctly
anticipate currency fluctuations. Accordingly, if the Bond Fund's and the Equity
Fund's cash balances are maintained in investments denominated in foreign
currencies during periods when the value of the dollar is appreciating relative
to those foreign currencies, the Funds will experience losses. The Funds will
also incur service charges in connection with each currency conversion.
RISKS OF HEDGING TRANSACTIONS: Hedging Transactions cannot eliminate all risks
of loss to the Bond Fund and the Equity Fund and may prevent the Funds from
realizing some potential gains. The projection of short-term currency exchange
and interest rates and other market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain. Among
the risks of Hedging Transactions are: incorrect prediction of the movement of
currency exchange and interest rates and other market conditions; imperfect
correlation of currency movements in cross-hedges and indirect hedges; imperfect
correlation in the price movements of Futures Contracts and Options on Futures
Contracts with the assets on which they are based; lack of liquid secondary
markets and the inability to effect closing transactions; costs associated with
effecting such transactions; inadequate disclosure and/or regulatory controls in
certain markets; counterparty default with respect to transactions not executed
on an exchange; trading restrictions imposed by governments, or securities and
commodities exchanges; and governmental actions affecting the value or liquidity
of currencies, securities and indices. Hedging Transactions may be effected in
foreign markets or on foreign exchanges and are subject to the same types of
risks that affect foreign securities.
B-7
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Indirect hedges and cross-hedges are more speculative than other hedges because
they are not directly related to the position or transaction being hedged. With
respect to indirect hedges, movements in the proxy currency may not precisely
mirror movements in the currency in which portfolio securities are denominated.
Accordingly, the potential gain or loss on an indirect hedge may be more or less
than if the Bond Fund or the Equity Fund had directly hedged a currency risk.
Similar risks are associated with foreign currency cross-hedge transactions. In
a cross-hedge, the foreign currency in which a portfolio security is denominated
is hedged against another foreign currency, rather than the U.S. Dollar.
Cross-hedges may also create a greater risk of loss than other Hedging
Transactions because they may involve hedging a currency risk through the U.S.
Dollar rather than directly to the U.S. Dollar or another currency. Moreover, in
some cases, the Funds' exposure to a foreign currency will be greater than its
exposure to the securities of that country.
In order to help reduce certain risks associated with Hedging Transactions, the
Board of Directors has adopted the requirement that Forward Contracts, Options,
Futures Contracts and Options on Futures Contracts be used as a hedge or as a
substitute for an underlying securities or currency position and not for
speculation. In addition to this requirement, the Board of Trustees has adopted
the following percentage restrictions on the use of Options, Futures Contracts
and Options on Futures Contracts:
(i) The Bond Fund and the Equity Fund will not write a put or call Option
if, as a result thereof, the aggregate value of the assets underlying
all such Options (determined as of the date such Options are written)
would exceed 25% of a Fund's net assets.
(ii) The Bond Fund and the Equity Fund will not purchase a put or call Option
or Option on a Futures Contract if, as a result thereof, the aggregate
premiums paid on all Options or Options on Futures Contracts held by a
Fund would exceed 20% of a Fund's net assets.
(iii) The Bond Fund and the Equity Fund will not enter into any Futures
Contract or Option on a Futures Contract if, as a result thereof, the
aggregate margin deposits and premiums required on all such instruments
held by a Fund would exceed 5% of a Fund's net assets.
In order to help reduce the risk of counterparty default in Forward Contracts
and Options traded over-the-counter, the Equity Fund and the Bond Fund will only
enter into such transactions with registered broker-dealers, or with banks or
other financial institutions regulated by the FDIC or having assets in excess of
$1 billion, in each case having a net worth of at least $20 million. For a more
detailed discussion of the uses, risks and costs of Hedging Transactions, see
Appendix B.
FUNDAMENTAL POLICIES: The Bond Fund and the Equity Fund seek to limit the risk
of investment losses by adhering to the following "fundamental policies." These
investment restrictions can be changed only with the approval of a vote of a
"majority of the outstanding voting securities" of each Fund as defined in the
Investment Company Act of 1940 (the "1940 Act"). This requires a vote of (a) 67%
or more of the shares of the Fund represented at a meeting where more than 50%
of the Fund's shares are represented, or (b) more than 50% of the outstanding
shares of the Fund, whichever is less. The fundamental policies provide that
each Fund will not:
1. Invest more than 25% of its total assets in the securities of companies
primarily engaged in any one industry (other than the United States Government
and its agencies and instrumentalities).
For the purposes of this restriction, water, communications, electric and gas
utilities shall each be considered a separate industry. Furthermore, neither all
national, regional or local governments (United States or foreign), as a group,
nor all international organizations (government or private), as a group, nor all
finance companies (as a group) shall be considered within a single industry.
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For the purposes of this restriction, each Fund currently deems each national
government and such government's agencies and instrumentalities to be a single
industry. Similarly, each Fund deems a particular regional government or local
government (including the agencies and instrumentalities of such government) to
be a separate industry so long as securities issued by such government are
backed by the assets and revenues of such government. Each Fund treats all
international organizations (government or private) that have been assigned the
same Standard Industrial Classification Code as a single industry.
In determining the issuer of a foreign security, each national government and
each political subdivision, agency and instrumentality of each nation and each
supra-national entity of which such nation is a member is considered a separate
issuer. Issuers representing more than one nation will be excluded in
determining the percentage of any individual nation. Where foreign securities
are backed only by assets and revenues of a particular political subdivision,
agency or instrumentality, only that entity is considered to be the issuer.
2. Acquire more than 10% of the outstanding voting securities of any one issuer
or invest for the purpose of exercising control.
3. Invest in companies for the purpose of exercising control or management.
4. Purchase or sell real estate; provided that the Funds may invest in
securities secured by real estate or interests therein or issued by companies,
which invest in real estate or interests therein.
5. Purchase or sell commodities or commodity contracts or invest in put, call,
straddle or spread options or in interests in oil, gas or other mineral
exploration or development programs; provided, however, that this policy will
not prevent the purchase, ownership or sale of warrants or other rights where
the grantor of the warrants is the issuer of the underlying securities ("grantor
warrants"); provided that each Fund will not purchase a grantor warrant if, as a
result thereof, the aggregate market value of all purchased grantor warrants
then owned exceed 10% of the total assets of the Fund taken at market value at
the time of the purchase of such grantor warrant. (Accordingly, this 10%
limitation will not apply to the acquisition or ownership of grantor warrants
other than as a result of a purchase.) Moreover, and notwithstanding the
restriction, the Bond Fund may purchase and sell foreign currencies on a current
basis, and may engage in interest rate, and foreign currency hedging
transactions, including investing in, writing and purchasing forward contracts,
options, future contracts and options on futures contracts, swaps and related
caps, floors and collars, and similar instruments involving debt securities and
foreign currencies. Similarly, the Equity Fund may purchase and sell foreign
currencies on a current basis, and may engage in foreign currency and market
hedging transactions, including investing in, writing and purchasing forward
contracts on foreign currencies, and options, futures contracts and options on
futures contracts on foreign currencies and stock indices.
6. Issue senior securities, borrow money, or pledge its assets, except that the
Funds may borrow from a bank as a temporary measure for extraordinary or
emergency purposes in amounts not exceeding 5% of its total assets and except
that the Funds may obtain such credit as may be necessary for the clearance of
purchases or sales of securities. For the purposes of this restriction, margin
or collateral arrangements with respect to forward contracts, options, futures
contracts or options on futures contracts and (for the Bond Fund only) swaps are
not deemed to be a pledge of assets and neither such arrangements nor the
purchase or sale of forward contracts, options, futures contracts or options on
futures contracts or (for the Bond Fund only) swaps, are deemed to be the
issuance of a senior security or borrowing.
7. Purchase any securities on margin or effect short sales, except that the
Funds may obtain such credit as may be necessary for the clearance of purchases
or sales of securities. The deposit by the Funds of initial or variation margin
in connection with forward contracts, options, futures contracts and options on
future contracts will not be considered the purchase of a security on margin.
8. Engage in the business of underwriting securities issued by others, or
knowingly purchase securities subject to contractual restrictions on disposition
or legal restrictions on disposition in all of the principal markets where
traded, if such purchase will result in more than 10% of the value of its assets
B-9
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(taken at market value) then being invested in such securities. This restriction
also applies to repurchase agreements maturing in over seven days. This
restriction will not, however, preclude the Funds from buying securities which
are not registered for sale with the Securities and Exchange Commission or
otherwise marketable in the United States, if marketable elsewhere.
If through (i) the appreciation of portfolio securities which are not readily
marketable, (ii) the depreciation of other investments of the Funds, or (iii)
the sale of assets to meet redemptions, the Funds should be in a position in
which more than 10% of the value of their assets are invested in securities
which are not readily marketable, the Funds will consider what steps, if any, to
take to protect against the resulting liquidity.
9. Invest in securities of an issuer, which, together with any predecessor, has
been in operation for less than 3 years if, as a result, more than 5% of each
Fund's total assets would then be invested in such securities.
10. Participate on a joint or a joint and several basis in any trading account
in securities. (The "bunching" or combining of orders for the sale or purchase
of marketable securities with other accounts under the management of the Adviser
to save brokerage costs or achieve an average price among them is not deemed to
result in a securities trading account.)
11. Make loans of money or securities to any person or firm, except through the
purchase of debt securities in accordance with each Fund's investment objectives
and policies.
12. Purchase securities from or sell securities to its officers or directors or
other "interested persons" of the Fund as defined in the 1940 Act.
13. Purchase or retain the securities of an issuer if, a Fund has knowledge
that, one or more of the officers or directors of the Company, or one or more of
the officers or directors of the Adviser, individually own beneficially more
than 1/2 of 1% of the securities of such issuer or together own beneficially
more than 5% of such securities.
Unless otherwise specified, if a percentage restriction on an investment or
utilization of assets set forth above is adhered to at the time an investment is
made, a later change in percentage resulting from changing values or a similar
event (such as a reduction in the size of the Funds occasioned by the redemption
of shares) will not be considered a violation of the Funds' investment
restrictions.
NET ASSET VALUE
The net asset value per share, on which purchase, exchange and redemption prices
are based, is calculated in accordance with the formula and at the times set
forth in the Prospectus. As of the date of this Statement of Additional
Information, the Funds understand that the New York Stock Exchange will be
closed (and, thus, no net asset value will be calculated) on the following U.S.
holidays: New Year's Day, Martin Luther King, Jr.'s Birthday, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Equity securities traded on an exchange or on the NASDAQ National Market System
are valued at the closing price. If there has been no sale on such date or if
the closing price is not the last sale price, then the security is valued at the
mean of the closing bid and asked prices on such day. Equity securities that are
not traded on an exchange or on the NASDAQ National Market System are valued at
the mean of the closing bid and asked prices.
Short-term debt obligations with a remaining maturity of 60 days or less are
valued at amortized cost. Other debt securities are valued at prices provided by
one or more bona fide market-makers as of the closing of the relevant market.
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<PAGE>
Options on futures contracts, and exchange-traded options other than index
options, are valued at the last sale price listed on the exchange on which they
are traded, unless no sales of such options have taken place that day, in which
case they will be valued at the mean between their closing bid and asked prices.
Exchange-traded index options are valued at the last sale price only if that
price falls on or between the closing bid and asked prices on that day. If the
last sale price falls outside of the range of the closing bid and asked prices,
or if there has been no sale that day, then the index option will be valued
using the mean of the closing bid and asked prices. Options traded
over-the-counter are valued at the most recent bid quotation in the case of
purchased options and at the most recent asked quotation in the case of written
options. When the Funds write an option, an amount equal to the premium received
is included as an asset, and an equivalent deferred credit is included as a
liability and marked to market on a daily basis. If a call option written by the
Funds is exercised, the proceeds are increased by the premium received. If a
call option written by the Funds expires, the Funds have a gain in the amount of
the premium. If the Funds enter into a closing purchase transaction, the Funds
will have a gain or loss depending on whether the premium was more or less than
the cost of the closing transaction. If a put option held by the Funds is
exercised, the amount the Funds receive on sale of the underlying investment is
reduced by the amount of the premium paid by the Funds.
Futures contracts are valued at the last settlement price as of the close of the
commodity exchange on which they are traded. Forward currency contracts are
valued based on their amortized forward points and the closing spot price of
their underlying currencies as of 11:00 A.M. New York time. Foreign securities
and cash are converted into U.S. dollar values at the mean of the bid and asked
prices for the underlying currencies as of the same time.
All prices are taken from the primary market in which the portfolio security or
other asset is traded.
The Board of Directors has delegated to the Funds' Custodian and the Adviser the
authority to make valuations of marketable securities and rate of exchange
determinations in accordance with the standards described above. If market
quotations are not readily available for valuation purposes, portfolio
securities and other assets will be valued by, or under the direction of, the
Board of Directors in such manner as the Board of Directors deems, in good
faith, appropriate to reflect the fair value thereof.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
You may purchase, redeem or exchange shares on any day the NYSE is open as
provided in the Funds' prospectus.
GOOD ORDER. A purchase, redemption or exchange request is deemed to be received
in good order when all required paperwork, stock powers, monies, signatures and
signature guarantees are received by the transfer agent, or an authorized broker
or its designee.
AUTHORIZED BROKERS. The Funds have authorized one or more brokers to receive
purchase and redemption orders, and to designate other intermediaries to receive
such orders, on its behalf. The Funds will be deemed to have received a purchase
or redemption order when an authorized broker or designee receives the order.
Orders will be priced at the Funds' net asset value next determined after
receipt by an authorized broker or designee in good order.
CERTIFICATES AND STOCK POWERS. Because of the costs and risks involved to
stockholders of holding shares in certificate form, any shares purchased will be
held by the transfer agent and not issued in certificate form unless a
certificate is requested by the stockholder. In the case where a certificate is
issued and the stockholder requests a redemption, the certificate and a stock
power endorsed by the stockholder exactly as the shares are registered must be
returned to the Funds' transfer agent before the redemption request will be
processed.
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SIGNATURE GUARANTEE. Some redemption requests may require a signature guarantee
depending on the amount being requested and where the proceeds are to be sent. A
signature guarantee is a widely accepted way to protect stockholders and the
Funds by verifying the signature on the request. Signature guarantees should not
be qualified in any way, whether by date or otherwise. Signatures must be
guaranteed by an "Eligible Guarantor Institution" and not by a notary public or
any other person or entity. An "Eligible Guarantor Institution" means a bank,
trust company, broker, dealer, municipal or government securities broker or
dealer, credit union, national securities exchange, registered securities
association, clearing agency or savings association that is a participant in the
Securities Transfer Agents Medallion Program ("STAMP") endorsed by the
Securities Transfer Association. To find out if your redemption request requires
a signature guarantee please contact the Funds' transfer agent at 800-541-4366.
SYSTEMATIC WITHDRAWAL PLAN. You or the Funds may terminate the Systematic
Withdrawal Plan at any time upon written notice to the other. The Plan will also
be terminated by the Funds' transfer agent on receipt of satisfactory evidence
of your death or incapacity. Until it has received such notice, the Funds'
transfer agent will not be liable for any deductions or payments made in
accordance with the Plan.
TELEPHONE TRANSACTIONS. Interruptions in telephone service may mean that you
will be unable to effect a transaction by telephone when desired. When telephone
transactions are difficult to implement, you should mail or send by overnight
delivery a written request directly to the Funds' transfer agent. By making
telephone exchanges or redemptions you may be giving up a measure of security
that you may have had if such transactions had been in writing. The Funds and
its transfer agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Funds and its transfer
agent may be liable for any losses due to unauthorized or fraudulent
instructions if such procedures are not followed. For your protection, the
Funds' transfer agent records all telephone calls. Exchanges by telephone can
only be made between accounts with identical registrations and only if your
account registration has not changed within 30 days. Redemption proceeds are
sent only to a stockholder's registered address or to a bank account previously
designated by the stockholder. It is also the Funds' policy to mail a written
confirmation to you at your address of record within five business days after
any telephone transaction. The Funds or its transfer agent may refuse to honor
any telephone transaction request if the Funds or its transfer agent believes,
for any reason, that the request is unauthorized. You will be promptly notified
of any refused telephone transaction request. Neither the Funds nor its transfer
agent will be liable for following telephone instructions that the Funds'
transfer agent reasonably believes to be genuine. Since you may bear the risk of
loss in the event of an unauthorized telephone transaction, you should verify
the accuracy of telephone transactions immediately upon receipt of the written
confirmation.
Telephone transaction procedures may be modified or suspended without notice
during periods of drastic economic or market changes, and may be modified or
terminated on 60 days' notice to stockholders at any time. Shares held by a
Keogh plan or IRA and shares issued in certificate form are not eligible for
telephone exchange or redemption.
DISTRIBUTIONS AND TAXES
For the fiscal year ended September 30, 1999, the Funds believe that they have
qualified as a "regulated investment company" ("RIC") under Subchapter M of the
Internal Revenue Code of 1986 (the "Code") and intend to be able to continue to
so qualify in future years. Qualification as a RIC allows the Funds to qualify
for "pass-through" treatment under the federal income tax laws, which means the
Funds, subject to certain conditions and requirements, will not be subject to
U.S. federal income tax on amounts it distributes to stockholders.
To qualify as a RIC, the Funds must, among other things, (a) derive in each
taxable year at least 90% of their gross income from dividends, interest, gains
from the sale or other disposition of stocks, securities or foreign currencies,
or certain other sources, (b) diversify their holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of each
Funds' total assets is represented by cash and cash items, U.S. government
obligations and other securities limited in respect of any one issuer to an
amount not greater than 5% of each Fund's total assets and not more than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of each Fund's total assets is invested in the securities of any one
B-12
<PAGE>
issuer (other than U.S. government obligations, securities of other regulated
investment companies or the securities of other regulated investment companies),
and (c) distribute in each year at least 90% of its taxable and net tax-exempt
income to stockholders.
For any year in which they do not qualify as a RIC, (a) the Funds will be taxed
as an ordinary corporation, (b) distributions to stockholders will not be
deductible by the Funds in computing taxable income, and (c) the Funds'
distributions, to the extent made out of the Funds' current or accumulated
earnings and profits, will be taxable to stockholders as dividends (regardless
of whether they would otherwise have been considered long-term capital gains).
Should the Funds be deemed a personal holding company, its undistributed income
would be taxed at the highest marginal rate applicable to corporations and it
could be subject to an additional personal holding company tax generally equal
to 39.6% of its net undistributed dividend and interest income.
RICs are subject to a nondeductible 4% excise tax on the excess (if any) of the
"required distribution" for a calendar year over the "distributed amount" for
such year. To avoid imposition of such tax, a RIC generally will have to
distribute in each calendar year at least 98% of its ordinary income for such
calendar year and at least 98% of its capital gains for the 12-month period
ending on October 31 of such year. The Funds intend to make sufficient
distributions each year to avoid imposition of the excise tax.
Events subsequent to a dividend or distribution may cause the dividend or
distribution to be recharacterized, in whole or in part, for U.S. federal income
tax purposes. For example, if the Funds incurs foreign currency losses that
eliminate their tax-basis "earnings and profits," then distributions made during
the year may be recharacterized as return of capital distributions for U.S.
income tax purposes, rather than income distributions, thereby reducing each
stockholder's basis in his Fund shares.
HEDGING AND OTHER TRANSACTIONS. The Funds are currently authorized to engage in
Forward Contracts and to invest in or write Options, Futures Contracts and
Options on Futures Contracts to hedge against changes in interest and foreign
currency exchange rates and market movements and as a substitute for an
underlying investment ("Hedging Transactions"). Certain of these transactions
may be "Section 1256 contracts." Gains or losses on Section 1256 contracts
generally are treated as 60% long-term and 40% short-term ("60/40") capital
gains or losses. Also, any Section 1256 contracts that are held by the Funds at
the end of a taxable year (and, generally, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized and the resulting gain
or loss is generally treated as a 60/40 gain or loss.
Generally, any Hedging Transactions undertaken by the Funds may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains or losses realized by the Funds. For example, Hedging
Transactions may convert gains, which would otherwise be taxable as long-term
capital gain into short-term capital gain, which is taxed as ordinary income
when distributed to stockholders. In addition, any losses realized by the Funds
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Because the straddle
rules are complex and their interpretation unclear, the tax consequences to the
Funds of Hedging Transactions are uncertain.
The Funds may make one or more of the elections available under the Code that
are applicable to straddles. If the Funds make any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. The rules applicable under certain of the elections may operate
to accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
stockholders, and that will be taxed to stockholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in Hedging Transactions.
B-13
<PAGE>
In addition, under the "conversion transaction" provisions of the Code, certain
gains derived from the Funds' hedging or other activities may be recharacterized
as ordinary income for federal income tax purposes. While some regulations have
been issued under these provisions, the application of these provisions is
expected to be further defined by additional regulations to be issued by the
Treasury Department. The Adviser will take these provisions, regulations and any
subsequent regulations into account in assessing the hedging and other
strategies of the Funds.
The diversification and income requirements applicable to the Funds' assets and
other restrictions imposed on the Funds by the Code may limit the extent to
which the Funds will be able to engage in transactions in, Forward Contracts,
Options, Futures Contracts or Options on Futures Contracts.
CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR LOSSES. Under the Code, gains or
losses attributable to fluctuations in exchange rates that occur between the
time the Funds accrue interest or other receivables or accrue expenses or other
liabilities denominated in a foreign currency and the time the Funds actually
collect such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Gains or losses with respect to Forward
Contracts and certain Options, Futures Contracts and Options on Futures
Contracts are generally treated as ordinary income or loss, although an election
is available under certain circumstances that would result in capital gain or
loss treatment. In addition, gains or losses on the disposition of debt
securities denominated in a foreign currency attributable to fluctuations in the
value of the foreign currency between the date of acquisition of the security
and the date of disposition are generally treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "Section 988" gains or
losses, may increase or decrease the amount of the Funds' investment income to
be distributed to its stockholders as ordinary income, rather than increasing or
decreasing the amount of the Funds' capital gains or losses.
CERTAIN FOREIGN TAX CONSEQUENCES. Foreign securities, such as those to be
purchased by the Funds, may be subject to foreign taxes that could reduce the
yield on such securities, although a stockholder otherwise subject to United
States federal income taxes may be entitled to claim a credit or deduction for
such tax purposes, subject to certain limitations.
Dividends and interest received by the Funds in connection with foreign
securities investments may give rise to withholding and other taxes imposed by
foreign countries, generally at rates from 10% to 35%. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes.
Investors may be entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to the limitations of the Code. Foreign countries generally do
not impose taxes on capital gains in respect of investments by foreign
investors.
Some investments made by the Funds may be treated as "passive foreign investment
companies" ("PFICs") for U.S. income tax purposes. Investment by the Funds in
PFICs could accelerate the stockholders' taxation, alter the timing or
characterization of certain distributions to stockholders or subject the Funds
to federal income tax or other charges in certain circumstances
BACKUP TAX WITHHOLDING. Certain stockholders may be subject to backup tax
withholding at a 31% rate. Generally, a stockholder will be subject to backup
withholding if the stockholder fails to provide the Funds with its correct
taxpayer identification number, or if the IRS notifies the Funds that the
stockholder has underreported interest or dividends. In addition, stockholders
who fail to certify that they are not subject to backup withholding (on the
grounds only of underreporting and notice from the IRS) will be subject to
backup withholding. Accordingly, to avoid being subject to backup withholding,
investors who acquire shares in the Funds must certify that they have provided
their correct taxpayer identification numbers and that they are not subject to
backup withholding in the appropriate spaces on the application at the end of
the Prospectus.
The discussion in the Prospectus, together with the foregoing, is a general and
abbreviated summary of the tax consequences of investment in the Funds.
Investors are urged to consult their own tax advisors to determine the effect of
investment in the Funds upon their individual tax situations.
B-14
<PAGE>
DIRECTORS AND OFFICERS
The management of the Company, including the general overall supervision of the
Funds' portfolio transactions, is the responsibility of the Board of Directors.
The names and business addresses of the Directors and officers of the Company
and their principal occupations and other affiliations during the past five
years are set forth below:
<TABLE>
<CAPTION>
Principal Occupations
Position(s) Held and Other Affiliations
Name, Address and Age With the Fund During the Past 5 Years
- --------------------- ------------- -----------------------
<S> <C> <C>
Peter M. Hill(1) (49) Director and Chairman Director, officer and Chief Investment Officer of
950 Tower Lane, Suite 1900 Bailard, Biehl & Kaiser, Inc., the Funds' Investment
Foster City, CA 94404 Adviser (the "Adviser"). Director of BB&K Fund
Services, Inc., The Funds' Distributor (the
"Distributor") since June 1992.
Burnice E. Sparks, Jr.(1) (51) Director and President Director, officer and currently President of the
950 Tower Lane, Suite 1900 Adviser. Director and Chief Executive Officer of the
Foster City, CA 94404 Distributor since June 1992. President of the
Bailard, Biehl & Kaiser Fund Group, Inc.
(the "Fund Group").
Barbara V. Bailey(1) (41) Treasurer Treasurer of BB&K Holdings, Inc. and Senior Vice
950 Tower Lane, Suite 1900 President and Treasurer/Secretary of the Adviser
Foster City, CA 94404 since December 1995. Treasurer of the Fund Group
since September 1996. Secretary of the Distributor,
and Treasurer and Secretary of the REIT since
January 1996. Management consultant from
September 1995 to December 1995. Account
Manager/Consultant at Watson Wyatt Worldwide from
December 1994 to September 1995.
Janis M. Horne(1) (44) Secretary and Chief Senior Vice President, Investment Counselor and Chief
950 Tower Lane, Suite 1900 Compliance Officer Compliance Officer of the Adviser. Secretary and
Foster City, CA 94404 Chief Compliance Officer of the Fund Group.
Sofi Kyriakidis(1) (27) Assistant Treasurer and Employee of the Adviser since November 1995, most
950 Tower Lane, Suite 1900 Assistant Secretary recently as Vice President. Assistant Treasurer and
Foster City, CA 94404 Assistant Secretary of the Fund Group since September
1996. Assistant Treasurer of the REIT since June 1996.
Treasurer of the Distributor since January 1996.
Correspondence Specialist at Franklin Resources, Inc.
from July 1994 to May 1995.
Shirley L. Clayton(2) (62) Director President of Raven Biotechnologies, a biotechnology
122 Campo Bello Lane firm, since January 1999. Chief Financial Officer of
Menlo Park, CA 94025 Orquest, a biotechnology firm, from May 1998 to
January 1999. President and Chief Operating Officer
of TopoMetrix, a manufacturer of scanning probe
microscopes from June 1993 to 1998. Trustee of the
Fund Group.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Scott F. Wilson(2) (55) Director General Partner of Transcontinental Capital Partners,
Transcontinental Capital an investment banking firm, since 1991. Shareholder
Partners of Milbank Winthrop & Co., an investment adviser,
540 Cowper Street, Ste. 200 since 1981. Trustee of the Fund Group.
Palo Alto, CA 94301
James C. Van Horne(2) (64) Director A.P. Giannini Professor of Finance at Graduate School
Graduate School of Business of Business of Stanford University from September
Stanford University 1976 to the present. Director of Sanwa Bank
Stanford, CA 94305 California and Montgomery Street Income Securities,
Inc., a registered investment company. Trustee of
the Fund Group.
</TABLE>
- --------
(1) "Interested person" of the Company, as defined in the 1940 Act.
(2) Member of the Audit Committee.
The following table sets forth the compensation paid to the Company's Directors
during the fiscal year ended September 30, 1999.
COMPENSATION TABLE
Pension or Total
Retirement Estimated Compensation
Benefits Annual From Company and
Aggregate Accrued as Benefits Fund Complex (1)
Name of Person Compensation Part of Company Upon Paid to
and Position From Company Expenses Retirement Directors
------------ ---------- -------- ---------- ---------
Peter M. Hill
Director $ 0(2) $0 $0 $ 0
Shirley L. Clayton
Trustee $13,333(3) $0 $0 $20,000
Scott F. Wilson
Trustee $13,333(3) $0 $0 $20,000
James C. Van Horne
Trustee $13,333(3) $0 $0 $20,000
The Company and the Fund Group reimburse each Director and Trustee for travel
and other out-of-pocket disbursements incurred in connection with attending
Board meetings. The Company and the Fund Group also reimburse other travel
expenses of Directors, Trustees and officers, including international travel
expenses, incurred incident to the performance of duties as a Director, Trustee
or officer.
- ----------
(1) A Fund Complex consists of investment companies that hold themselves out to
investors as related companies for purposes of investment and investor
services, have a common investment adviser or have an investment adviser
that is an affiliated person of the investment adviser of any of the other
related investment companies. The Company and the Fund Group are considered
to be part of the same Fund Complex.
(2) Does not include fees paid to the Adviser pursuant to the Management
Agreement as described below under "INVESTMENT ADVISORY AND OTHER
SERVICES".
(3) Consists of a $8,000 annual Director fee plus $1,333 for each Board meeting
attended in person.
B-16
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT AGREEMENT
The Funds have entered into an Investment Management Agreement (the "Management
Agreement") with Bailard, Biehl & Kaiser, Inc., a California corporation (the
"Adviser" or "Bailard, Biehl & Kaiser"), for investment advisory and certain
portfolio transaction and administrative services dated October 1, 1993. The
Adviser, subject to the general supervision of the Company's Board of Directors,
is responsible for the overall management of the Funds' portfolio in accordance
with the Funds' investment objectives, policies and restrictions. The Adviser is
also responsible for making investment recommendations as to securities to be
acquired, purchased or sold, for reviewing and selecting firms to effect the
execution of portfolio transactions and for reviewing the execution of such
transactions to ensure their overall reasonableness. In addition, the Adviser
provides certain administrative services to the Funds, including the oversight
of the various agents, records and reports of the Funds.
Since October 1, 1993, the Adviser has been paid a monthly fee calculated at an
annual rate equal to 0.95% of the average daily net assets of the Equity Fund
and 0.75% of the average daily net assets of the Bond Fund. While these rates
are higher than the rates charged by most other advisers, the Funds believe that
they are justified by the complexity of investing in multiple international
markets and engaging in Hedging Transactions and by the administrative services
provided by the Adviser. Prior to October 1, 1993, the Equity Fund employed
other investment advisers and the Adviser received no fees from the Equity Fund.
However, investors in the Funds who were advisory clients of the Adviser paid
separate advisory fees directly to the Adviser. Since October 1, 1993, the
separate advisory fees payable to the Adviser by its advisory clients have been
reduced by an approximation of the amount of fees it receives from the Funds
attributable to the assets of its advisory clients.
The Management Agreement may be terminated at any time, without penalty upon 60
days' written notice, by majority vote of the Board of Directors of the Company
or by a vote of the holders of a majority of the outstanding voting securities
(as defined in the 1940 Act) of the Funds. The Management Agreement may also be
terminated by the Adviser upon not less than 180 days' written notice to the
Funds and terminates automatically upon its assignment (as defined in the 1940
Act).
The Adviser has granted the Funds the right to use the designation "Bailard,
Biehl & Kaiser" in its name and has reserved the right to withdraw its consent
to the use of such designation by the Funds under certain conditions, including
the condition that Bailard, Biehl & Kaiser ceases to act as the Funds'
investment adviser, and to grant the use of such name to others, including any
other investment company.
EXPENSES OF THE FUNDS
The Funds pay all of their own expenses (except for those expressly to be paid
by the Adviser), including without limitation the following: organization costs,
taxes, investment management fees, expenses for legal and auditing services,
costs of printing proxies, stock certificates, stockholder reports, prospectuses
and statements of additional information, charges of the Funds' custodian, any
sub-custodian and transfer and dividend disbursing agent, expenses of redemption
of the Funds' shares, Securities and Exchange Commission fees, expenses of
registering the Funds' shares under federal, state and foreign laws, fees and
actual out-of-pocket expenses of Directors, accounting and pricing costs
(including the daily calculation of the net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other similar expenses.
For the fiscal years ended September 30, 1997, 1998 and 1999 the Equity Fund
paid investment management fees of $1,176,349, $1,280,698 and $1,149,030to the
Adviser, respectively. For those same time periods, the Bond Fund paid fees of
$376,061, $391,334 and 450,467, respectively.
B-17
<PAGE>
The Adviser pays certain expenses incurred in the Funds' day-to-day management,
including the costs of office space and other facilities used by the Adviser,
and salaries and expenses of personnel of the Adviser. As an accommodation to
the Funds, from time to time, the Adviser directly pays certain expenses of the
Funds (such as insurance premiums, Directors' fees, and fees relating to state
securities law filings) for which the Adviser is later reimbursed by the Funds.
Disbursements by the Adviser on behalf of the Funds and their subsequent
reimbursement by the Funds are effected only upon the prior approval of an
officer of the Company. For the fiscal year ended September 30, 1999, the Equity
Fund reimbursed the Adviser approximately $37,064. For that same time period,
the Bond Fund reimbursed the Adviser approximately $31,962.
OTHER SERVICES
BB&K Fund Services, Inc., 950 Tower Lane, Suite 1900, Foster City, California
94404 (the "Distributor"), is a registered broker/dealer and serves as the sole
distributor for the Funds' shares pursuant to an agreement with the Funds. The
Distributor receives no commissions or other compensation from the Funds. The
Funds' shares may also be purchased directly from the Funds.
The Adviser and the Distributor are wholly owned subsidiaries of BB&K Holdings,
Inc. ("Holdings"), which may be deemed to be a controlling person of the Adviser
and the Distributor. In addition, Thomas E. Bailard and his spouse, Terri, may
be deemed to be controlling persons of the Adviser and the Distributor, by
virtue of their beneficial ownership of more than 25% of the securities of
Holdings, as individuals or Directors.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as Custodian of the Funds' assets and has been authorized to cause
securities and other assets of the Funds to be held in separate accounts with
various subcustodians in conformity with Section 17(f) of the 1940 Act and the
rules thereunder. As part of the Custodian Agreement, the Funds' Custodian has
agreed to act as the Funds' financial agent, and will maintain certain books and
records for the Funds, perform the calculations necessary to compute the value
of the Funds' investment securities and other assets and the net asset value of
the Funds' shares, confirm all share purchases and redemptions to the Funds'
Transfer Agent, provide financial reports to the Funds necessary to prepare its
financial statements, and provide additional services of a similar nature. For
services performed by the Custodian during the 1997, 1998 and 1999 fiscal years,
the Equity Fund paid the Custodian $424,690, $466,363 and $457,968 respectively.
For that same time period, the Bond Fund paid $109,974, $109,602 and $116,494,
respectively.
The Company, on behalf of the Funds, has entered into an Administration
Agreement dated as of October 1, 1991, as amended, with Investment Company
Administration LLC ("ICA"), 2020 E. Financial Way, Suite 200, Glendora,
California 91741. Pursuant to such agreement, ICA provides certain
administrative services in connection with the management of the Funds'
operations. Such services include: (i) assisting the Funds' accountants in
preparing financial reports, (ii) assisting the Funds' attorneys in preparing
amendments to the Funds' registration statement, any proxy materials and other
forms and reports to be filed with the SEC, (iii) preparing periodic reports to
stockholders, (iv) monitoring compliance with the Funds' investment policies and
restrictions, and (v) other administrative matters. As compensation for such
services, the Funds pays ICA an annual fee of $32,500 each.
Transfer agent and dividend paying agent services are provided by Chase Global
Funds Services Company ("CGFSC"), P.O. Box 2798, Boston, Massachusetts 02208, an
affiliate of The Chase Manhattan Bank, N.A. CGFSC also files applications under
state law to register the Funds' shares for sale, and to register the Company
and/or the Company's officers to sell the Funds' shares. For services performed
by CGFSC during the 1997, 1998 and 1999 fiscal years, the Equity Fund paid CGFSC
$36,958, $39,384 and $36,366 respectively. For that same time period, the Bond
Fund paid $41,497, $38,836 and $36,077, respectively.
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, California 94105,
serves as the Funds' independent accountants, providing audit services,
including review and consultation in connection with various filings by the
Funds with the Securities and Exchange Commission and tax authorities.
B-18
<PAGE>
PERSONAL SECURITIES TRANSACTIONS
Officers, Directors and employees of the Company, the Distributor and the
Adviser are permitted to invest in securities for their own account, including
securities that may be purchased or held by the Funds. To address potential
conflicts with the interests of the Funds that might arise from personal
securities transactions, the Company, the Distributor and the Adviser have
adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act. These codes
include certain preclearance and reporting procedures and certain restrictions
on contemporaneous and short-term trading and on purchases of securities in
private placements and initial public offerings.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for the allocation of brokerage and reviews the
efficiency of execution and reasonableness of the commissions charged. In
effecting portfolio transactions, the Adviser seeks to obtain the best net
results for the Funds, taking into account such factors as price, size of order,
difficulty of execution and operational facilities of the firm involved. The
Adviser generally seeks reasonably competitive commission rates in domestic and
foreign transactions. Ordinarily, the Adviser purchases securities from the
primary market, whether over-the-counter or listed, and listed securities may be
purchased in the over-the-counter market if, in the judgment of the Adviser, it
is the primary market.
Within the framework of the above policies, the Adviser may also consider
research, investment information and other related services, such as price
quotations, provided by brokers. In recognition of research services, the
Adviser has the authority to cause the Funds to pay brokerage commissions (which
are negotiated in the case of domestic stock exchange transactions, but which
are often fixed in the case of foreign stock exchange transactions) in excess of
that which other brokers might charge for effecting the same transaction. As a
consequence, the Funds could pay a broker that furnishes research services for
the Adviser a higher commission than that which might be paid to another broker
that does not furnish research services, or that furnishes research services
deemed to be of lesser value, if such commission is deemed reasonable in
relation to the value of the brokerage and research services provided by the
broker, viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser with respect to the Funds. Research services
that could be provided could include analyses of industries, statistical or
economic information or analyses of issuers. The Funds may also place orders for
securities transactions with its Custodian in return for a discount on the
Funds' custodial fees. This practice will have the effect of reducing the amount
of expenses reported in the Funds' financial statements. The Adviser will
review, from time to time, brokerage commissions paid on behalf of the Funds
with a view to determining their reasonableness in relation to brokerage
commissions paid by other similarly situated investors.
The extent to which commissions charged by brokers may reflect an element of
value for research services cannot be determined. To the extent that research
services of value are provided by brokers through whom the Funds places
portfolio transactions, the Adviser may be relieved of expenses that it might
otherwise bear. Research services furnished by brokers could be useful and of
value to the Adviser in serving its other clients as well as the Funds. On the
other hand, certain research services obtained by the Adviser as a result of the
placement of portfolio brokerage of other clients could be useful and of value
to it in serving the Funds. It is not the Funds' practice to allocate portfolio
securities business on the basis of sales of its shares. For the fiscal year
ended September 30, 1999, the Adviser estimates that the Equity Fund paid
$386,206 in brokerage commissions, involving $106,188,583 of portfolio
transactions, to brokers with whom the Adviser had an arrangement to receive
research or related services. The Bond Fund did not pay commissions to any such
brokers for the fiscal year ended September 30, 1999.
B-19
<PAGE>
There are occasions on which portfolio transactions for the Funds may be
executed as part of concurrent authorizations to purchase or sell the same
security for other accounts served by the Adviser, some of which accounts have
investment objectives similar to the Funds' investment objectives. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to the Funds, they will be effected only when the Adviser
believes that to do so will be in the best interest of the Funds. When such
concurrent authorizations occur, the objective will be to allocate the
executions in a manner that is deemed equitable by the Adviser to the accounts
involved, including the Funds. The Adviser has adopted a Trade Policy to ensure
that all clients will be treated fairly when trades are aggregated.
No brokerage commissions will be paid to any broker that was at the time of the
transaction an "affiliated person" of the Funds or indirectly affiliated with
the Funds through a common "affiliated person" as that term is defined in the
1940 Act. Neither the Adviser nor any of its affiliates receives any brokerage
commissions from portfolio transactions. During the Equity Fund's fiscal years
ended September 30, 1997, 1998 and 1999, the Fund paid brokerage commissions on
portfolio transactions of approximately $588,691, $732,427, and $762,793
respectively. The Bond Fund did not pay any brokerage commissions over those
time periods.
STOCKHOLDER INFORMATION
As of October 19, 1999 all officers and Directors of the Company as a group held
of record and beneficially less than 1% of the outstanding shares of each Fund.
No stockholders held of record or, to the Funds' knowledge, beneficially in
excess of 5% of the outstanding shares of either Fund on that date.
DESCRIPTION OF CAPITAL STOCK
The Funds are series within the Bailard, Biehl & Kaiser International Fund
Group, Inc., an open-end management investment company organized on June 12,
1990 as a Maryland corporation (the "Company"). Further series may be added
without stockholder approval, but the Company has no immediate plans to do so.
The Company has authorized the issuance of up to 1,000,000,000 shares of Common
Stock, par value $.0001, in one or more series. Currently, the Funds are each
authorized to issue 100,000,000 shares of Common Stock. When issued, shares in
the Funds will be fully paid and non-assessable and will have no preemptive,
conversion or exchange rights.
Shares of each series are entitled to one vote for all purposes. Shares of each
series vote as a single body with respect to matters, such as election of
Directors, that affect all series in substantially the same manner. As to
matters affecting each series separately, such as approval of agreements with
investment advisers, shares of each series vote as separate series. Shares of
each series are entitled to dividends as determined by the Board of Directors
and, upon liquidation, are entitled to receive the net assets of that series.
Stockholders are entitled to require the Funds to redeem their shares, and the
Funds may redeem shares under certain circumstances, as set forth under
"Redemption of Shares." The transfer of shares, other than by redemption, is
subject to restrictions in some jurisdictions.
The voting rights of the shares are non-cumulative, which means that the holders
of more than 50% of the shares voting for the election of Directors can elect
100% of the Directors if they choose to do so. In such event, the holders of the
remaining shares voting will not be able to elect any Director. The Company is
not required to hold annual meetings for the election of Directors or otherwise.
Special meetings may be called by the Chairman of the Board, the Board of
Directors, or the President or by stockholders entitled to cast at least 10% of
the shares entitled to vote. The Company will assist in stockholder
communications with respect to any meeting duly called by the holders of its
shares.
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A full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of each
series of stock that the Company is authorized to issue and the differences in
the relative rights and preferences between the shares of each series to the
extent that they have been set, and the authority of the Board of Directors to
set the relative rights and preferences of subsequent series, will be furnished
by the Company to any stockholder, without charge, upon request to the Secretary
of the Company at its principal office.
PERFORMANCE DATA
The Funds may compute their average annual compounded rate of total return
during specified periods that would equate a hypothetical initial investment of
$1,000 to the ending redeemable value of such investment by (a) adding one to
the computed average annual total return, (b) raising the sum to a power equal
to the number of years covered by the computation and (c) multiplying the result
by $1,000 (which represents the hypothetical initial investment). The ending
redeemable value is determined by assuming a complete redemption at the end of
the periods covered by the average annual total return computation.
The annual compounded rate of total return for the Equity Fund for the one year
period ended September 30, 1999 was 27.78%. The average annual compounded rate
of total return for the Equity Fund for the five year period from October 1,
1994 to September 30, 1999 was 8.88%. The average annual compounded rate of
total return for the Equity Fund for the ten year period from October 1, 1989 to
September 30, 1999 was 3.70%.
The annual compounded rate of total return for the Bond Fund for the one year
period ended September 30, 1999 was (0.52%)%. The average annual compounded rate
of total return for the Bond Fund for the five year period from October 1, 1994
to September 30, 1999 was 7.97%. The average annual compounded rate of total
return for the Bond Fund for the ten year period from October 1, 1989 to
September 30, 1999 was 5.61%.
The above figures assume that all dividends and distributions by the Funds were
reinvested at net asset value on the reinvestment dates. Periods prior to
October 1, 1993 include an assumed 1% annual advisory fee, payable quarterly,
charged by the Adviser to its clients.
These figures represent past performance and an investor should be aware that
past performance is no indication of future results, and that the investment
return and principal value of an investment in the Funds will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
FINANCIAL STATEMENTS
Incorporated by reference herein are portions of the Funds' annual reports to
stockholders for the fiscal year ended September 30, 1999 under the headings:
"SCHEDULE OF INVESTMENTS BY COUNTRY," "SCHEDULE OF INVESTMENTS BY INDUSTRY,"
"STATEMENT OF ASSETS AND LIABILITIES," "STATEMENT OF OPERATIONS," "STATEMENT OF
CHANGES IN NET ASSETS," "FINANCIAL HIGHLIGHTS," "NOTES TO FINANCIAL STATEMENTS,"
and "REPORT OF INDEPENDENT ACCOUNTANTS." Copies of the annual reports are
available upon request and without charge by contacting BB & K Fund Services,
Inc., 950 Tower Lane, Suite 1900, Foster City, California 94404, (800) 882-8383.
The Prospectus and this Statement of Additional Information, together, do not
contain all of the information set forth in our registration statement filed
with the Securities and Exchange Commission. Certain information is omitted in
accordance with rules and regulations of the Commission. The registration
statement may be inspected at the Public Reference Room of the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
copies thereof may be obtained from the Commission at prescribed rates.
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APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"): Bonds rated Aaa by Moody's are
judged by Moody's to be of the highest quality by all standards. Together with
bonds rated Aa, they comprise what are generally known as high-grade bonds. Aa
bonds are rated lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuations 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 those applicable to Aaa securities.
Bonds that are rated A by Moody's possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Moody's Baa rated bonds are 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 length of time. Such bonds lack
outstanding investment characteristics and may have speculative characteristics
as well. They are still considered investment grade bonds.
STANDARD & POOR'S CORPORATION ("S&P"): Bonds rated AAA are considered by S&P to
be the highest grade obligations, and the capacity to pay interest and principal
is extremely strong. Bonds rated AA by S&P are judged by S&P to have a very
strong capacity to pay interest and principal and differ only in a small degree
from issues rated AAA. Bonds rated A by S&P have a strong capacity to pay
principal and interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
S&P's BBB rated bonds, or medium-grade category bonds, are regarded as having
adequate capacity to pay principal and interest. Whereas BBB bonds normally
exhibit adequate protection parameters, adverse economic conditions or changes
in circumstances are more likely to lead to a weakened capacity to pay interest
and principal. They are still considered investment grade bonds.
COMMERCIAL PAPER
MOODY'S: The Prime rating is the highest commercial paper rating assigned by
Moody's. Issuers within this Prime category may be given ratings 1, 2 or 3,
depending on their capacity for repayment. Issuers rated Prime-1 (or supporting
institutions) have a superior ability for repayment of senior short-term debt
obligations. Prime 1 repayment ability will often be evidenced by the issuer's
leading market position in well-established industries, high rates of return on
funds employed, conservative capitalization structures with moderate reliance on
debt, and ample asset protection. Also, a Prime-1 issuer may have broad margins
in earnings coverage of fixed financial charges, high internal cash generation
and a well established access to a range of financial markets and assured
sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong capacity for
repayment of senior short-term debt obligations. Issuers rated Prime-2 will
evidence many of the characteristics of Prime-1 issuers, although to a lesser
degree. Earnings trends and coverage ratios are sound but more subject to
variation. Capital characteristics may be more affected by external conditions.
Ample alternative liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable capacity
for repayment. The effects of industry characteristics and market composition
may be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements. Adequate alternative
liquidity is maintained.
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S&P: Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Issues rated A are regarded as having
the greatest capacity for timely payment. Issues in this category are further
refined with the designations 1, 2, and 3 to indicate the relative degree of
safety. Issues rated A-1 have a very strong degree of safety regarding timely
payment. Issues rated A-2 have a strong capacity for timely payment. However,
the relative degree of safety is not as overwhelming as for issues designated
A-1. Issues rated A-3 have a satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B-23
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APPENDIX B
HEDGING AND OTHER TRANSACTIONS
FORWARD CONTRACTS. The Bond Fund and the Equity Fund may enter into forward
foreign currency exchange contracts to attempt to minimize the risk to the Funds
from adverse changes in currency exchange rates and as a substitute for an
underlying currency position ("Forward Contracts"). All Forward Contracts will
be covered. In the case of a Forward Contract obligating the Funds to purchase a
foreign currency (a "long position"), the Funds may establish a segregated
account containing liquid assets ("Liquid Assets") equal to the purchase price
of the Forward Contract due on the settlement date (less any margin on deposit).
Liquid Assets include cash, U.S. Government securities and other securities
determined by the Adviser to be liquid in accordance with guidelines adopted by
the Board of Trustees. Alternatively, the Funds may cover a long position by
purchasing a put option on the same Forward Contract with a strike price as high
or higher than the price of the Forward Contract held by the Funds (or, if lower
than the price of the Forward Contract held by the Funds, the Funds may
segregate Liquid Assets equal to the difference).
In the case of a Forward Contract obligating the Funds to sell a foreign
currency (a "short position"), the Funds may segregate Liquid Assets equal to
the market value of the currency underlying the Forward Contract (less any
margin on deposit, but not less than the market price at which the short
position was established). Alternatively, the Funds may cover the Forward
Contract by (i) entering into an offsetting position or transaction, (ii) owning
the currency underlying the Forward Contract or (iii) holding a call option
permitting the Funds to purchase the same Forward Contract at a price no higher
than the price at which the short position was established (or, if higher, the
Funds may segregate Liquid Assets equal to the difference).
OPTIONS ON DEBT SECURITIES AND FOREIGN CURRENCIES. The Bond Fund may write
covered call and put options and purchase call and put options ("Options") on
debt securities and foreign currencies that are traded on United States and
foreign exchanges and over-the-counter, to attempt to minimize the risks to the
Bond Fund from adverse changes in currency exchange and interest rates, and as a
substitute for an underlying securities or currency position. The Equity Fund
may write covered call and put options and purchase call and put options
("Options") on foreign currencies that are traded on United States and foreign
exchanges and over-the-counter, to attempt to minimize the risks to the Equity
Fund from adverse changes in currency exchange rates and as a substitute for an
underlying currency position
For example, a decline in the value of a foreign currency in which portfolio
securities are denominated will reduce the value of such securities in U.S.
Dollars, even if their value in the foreign currency remains constant. In order
to protect against such reductions in the value of portfolio securities, the
Bond Fund and the Equity Fund may purchase put Options on the foreign currency.
If the value of the foreign currency does decline, the Funds will have the right
to sell such currency for a fixed amount and will thereby offset, in whole or in
part, the adverse effect on their portfolios that otherwise would have resulted.
Conversely, when the Bond Fund or the Equity Fund predict an increase in the
value of a currency in which securities to be acquired are denominated, the
Funds may purchase call Options on the foreign currency. The purchase of such
Options could offset, at least partially, the effects of the adverse movements
in exchange rates. However, the benefit to the Funds derived from purchases of
Options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent predicted, the Funds could sustain losses that would require
them to forego a portion or all of the benefits of advantageous changes in such
rates.
The Bond Fund may also purchase Options on debt securities to hedge against
interest rate changes that adversely affect the value of a portfolio security.
For example, when the Bond Fund anticipates a decline in the market value of a
portfolio security due to rising interest rates, it may purchase put Options on
the security. If the value of the security does decline, the Bond Fund will have
the right to sell the security for a fixed amount and will thereby offset, in
whole or in part, the adverse effect that would otherwise have been caused by
rising interest rates.
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Where the Bond Fund predicts a change in the market value of a security to be
acquired that would increase the cost of such security, the Bond Fund may
purchase call Options thereon. The purchase of such Options could offset, at
least partially, the effect of declining interest rates. The use of Options to
hedge against adverse movements in interest rates is subject to the same
limitations and risks of loss as the use of Options to hedge against adverse
movements in exchange rates.
The Bond Fund and the Equity Fund may write put and call Options for the same
types of hedging purposes. For example, when the Funds anticipate a decline in
the value of foreign currency-denominated securities due to adverse fluctuations
in exchange rates they could, instead of purchasing a put Option, write a call
Option on the relevant currency. If the expected decline occurs, the Option will
most likely not be exercised and the diminution in value of portfolio securities
will be fully or partially offset by the amount of the premium received.
Similarly, instead of purchasing a call Option to hedge against an anticipated
increase in the cost of securities to be acquired, the Funds could write a put
Option on the relevant currency that, if rates move in the manner projected,
will expire unexercised and allow the Fund to hedge such increased cost up to
the amount of premium. The writing of an Option constitutes only a partial hedge
up to the amount of the premium, and only if interest or exchange rates move in
the expected direction. If this does not occur, the Option may not be offset by
the amount of the premium. Through the writing of Options, the Funds may also be
required to forego all or a portion of the benefits that might otherwise have
been obtained from favorable movements in interest or exchange rates.
All put and call Options written by the Bond Fund and the Equity Fund will be
covered. The Funds may cover a put Option by (i) establishing a segregated
account containing Liquid Assets equal to the strike price of the put Option
written by the Funds (less any margin on deposit), (ii) selling short the
security or currency underlying the put Option at the same or higher price than
the strike price of the put Option written by the Funds (or, if lower, the Funds
may segregate Liquid Assets equal to the difference), or (iii) purchasing a put
Option with a strike price the same as or higher than the strike price of the
put Option sold by the Funds (or, if lower, the Funds may segregate Liquid
Assets equal to the difference).
The Funds may cover a call Option by (i) segregating Liquid Assets equal to the
market value of the security or currency underlying the call Option (less any
margin on deposit) but not less than the strike price of the call Option, (ii)
owning the security or currency underlying the Option or (iii) purchasing a
separate call Option on that security or currency with a strike price no higher
than the strike price of the Option sold by the Funds (or, if higher, the Funds
may segregate Liquid Assets equal to the difference).
If the Bond Fund or the Equity Fund, as the writer of an Option, wish to
terminate its obligation, it may effect a closing purchase transaction. This is
accomplished by buying an Option of the same series as the Option previously
written. The effect of the purchase is that the Fund's position will be
canceled. However, a writer may not effect a closing purchase transaction after
being notified of the exercise of an Option. Likewise, where the Fund holds an
Option, it may liquidate its position by effecting a closing sale transaction.
This is accomplished by selling an Option of the same series as the Option
previously purchased. There is no guarantee that either a closing purchase or a
closing sale transaction can be effected.
The Bond Fund and the Equity Fund will realize a profit from a closing
transaction if the price of the transaction is less than the premium received
from writing the Option or is more than the premium paid to purchase the Option;
the Funds will realize a loss from a closing transaction if the price of the
transaction is more than the premium received from writing the Option or is less
than the premium paid to purchase the Option. Because increases in the market
price of a call Option will generally reflect increases in the market price of
the underlying security or currency, any loss resulting from the purchase of a
call Option to close out a previously written call Option is likely to be offset
in whole or in part by appreciation of the Funds' portfolio securities
denominated in such currency.
OPTIONS ON STOCK INDICES. The Equity Fund may write covered put and call Options
and purchase put and call Options on stock indices to attempt to minimize the
risks to the Equity Fund from adverse changes in market conditions and as a
substitute for an underlying investment. Options on stock indices are similar to
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<PAGE>
Options on debt securities and foreign currencies. For additional information on
the risks and benefits of Options on stock indices, see "Options on Debt
Securities and Foreign Currencies."
Call Options on stock indices written by the Equity Fund will be covered (i) by
segregating a portfolio of securities substantially replicating the movement of
the index, (ii) by holding a call Option on the same index with a strike price
no higher than the strike price of the Option written by the Fund or (iii) in
such other manner as may be in accordance with the rules of the exchange on
which the Option is traded and applicable laws and regulations.
The Equity Fund will cover put Options on stock indices by (i) segregating
Liquid Assets equal to the Option's exercise price, (ii) holding a put Option on
the same index with a strike price no higher than the strike price of the put
Option written by the Fund or (iii) in such other manner as may be in accordance
with the rules of the exchange on which the Option is traded and applicable laws
and regulations.
The Equity Fund will receive a premium for writing a put or call Option that
will increase the Fund's gross income in the event the Option expires
unexercised or is closed out at a profit. If the value of an index on which the
Equity Fund has written a call Option falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction costs)
that will offset all or a portion of any decline in the value of the securities
it owns. If the value of the index rises, however, the Equity Fund will realize
a loss in its call Option position, which will reduce the benefit of any
unrealized appreciation in the Fund's securities holdings. By writing a put
Option, the Equity Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Equity Fund correlate
with changes in the value of the index, writing covered put Options on indices
will increase the Fund's losses in the event of a market decline, although such
losses will be offset in part by the premium received for writing the Option.
FUTURES CONTRACTS ON DEBT SECURITIES, STOCK INDICES AND FOREIGN CURRENCIES. The
Bond Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of debt securities and foreign currencies to attempt to minimize
the risk to the Fund from adverse changes in currency exchange and interest
rates, and as a substitute for an underlying investment ("Futures Contracts").
The Equity Fund may enter into exchange-traded contracts for the purchase or
sale for future delivery of stock indices and foreign currencies to attempt to
minimize the risk to the Fund from adverse changes in currency exchange and
market conditions, and as a substitute for an underlying investment ("Futures
Contracts").
The acquisition or sale of Futures Contracts is designed to protect the Bond
Fund and the Equity Fund from fluctuations in currency exchange and interest
rates and market movements without actually buying or selling the underlying
currencies or securities. For example, if the Bond Fund owns long-term bonds,
and interest rates were expected to increase, the Bond Fund might enter into a
Futures Contract for the sale of debt securities. Such a sale would have much
the same effect as selling an equivalent value of long-term bonds owned by the
Bond Fund. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of the Futures Contract to the Bond
Fund would increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. The
Bond Fund could accomplish similar results by selling bonds with long maturities
and investing in bonds with short maturities. However, since the futures market
generally is more liquid than the cash market, the use of Futures Contracts as
an investment technique allows the Bond Fund to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to attempt to hedge against anticipated purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contract should be similar to that of long-term bonds, the Bond Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had been established. At that time, the
Futures Contract could be liquidated and the Bond Fund could then buy long-term
bonds on the cash market.
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All Futures Contracts to which the Bond Fund or the Equity Fund is a party will
be covered. A Futures Contract obligating the Funds to purchase a security,
financial index or currency is covered if the Funds segregate, in a special
account with the Custodian, Liquid Assets equal to the price of the Futures
Contract due on the settlement date (less any margin on deposit). The Funds may
also cover a long position by purchasing a put Option on the same Futures
Contract with an exercise price as high or higher than the price of the Futures
Contract held by the Funds (or, if lower, the Funds may segregate Liquid Assets
equal to the difference).
A Futures Contract in which the Bond Fund or the Equity Fund has the position of
a seller is covered if the Fund segregates Liquid Assets equal to the market
value of the security, index or currency underlying the Futures Contract (less
any margin on deposit, but not less then the market price at which the position
was established). Alternatively, the Funds may cover such a Futures Contract by
(i) owning the security or currency underlying the Futures Contract, or, in the
case of a financial index, segregating a portfolio of securities substantially
replicating the movement of the index or (ii) holding a call Option permitting
the Funds to purchase the same Futures Contract at a price no higher than the
price at which the position was established (or, if higher, the Funds may
segregate Liquid Assets equal to the difference).
If the Bond Fund or the Equity Fund enters into a Futures Contract, it will be
subject to initial and variation margin requirements. At the time a Futures
Contract is purchased or sold, the Funds must allocate cash or securities as an
initial margin deposit ("initial margin"). It is expected that initial margin
will be approximately 1-1/2% to 5% of a Futures Contract's face value. A Futures
Contract is valued ("marked to market") daily. The Funds will be required to
increase their margin deposit ("variation margin") when the value of a Futures
Contract decreases and, conversely, the Funds will receive payment for any
increase in the Futures Contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
may be made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a Futures Contract may
not have been issued when the contract was written.
Although Futures Contracts, by their terms, call for the actual delivery or
acquisition of an asset, in most cases the contractual obligation is fulfilled
(or "offset") before the expiration date of the Futures Contract without having
to make or take delivery of the underlying asset. Offset of a Futures Contract
is accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical Futures Contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the underlying asset.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions that may
prevent the Bond Fund or the Equity Fund from successfully using Futures
Contracts. First, all participants in the futures markets are subject to initial
and variation margin requirements. Rather than meeting variation margin
requirements, investors may close Futures Contracts through offsetting
transactions, which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures markets depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants make or take delivery, liquidity in the
futures markets could be reduced, thus producing distortion. Third, from the
point of view of speculators, margin requirements in the futures market are less
onerous than margin requirements in the cash market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct prediction of
general interest and currency exchange rates or market conditions by the Bond
Fund or the Equity Fund may not result in a successful transaction.
If the Bond Fund or the Equity Fund makes an erroneous judgment about the
general direction of interest rates, currency exchange rates or market
conditions, the Fund's overall performance would be worse than the performance
the Fund would have achieved had it not entered into any such contract. If the
Funds have hedged against the possibility of a movement in interest rates or
exchange rates or market conditions that would adversely affect the price of
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<PAGE>
their portfolio securities and such rates or markets did not move as
anticipated, the Funds would lose part or all of the benefit of the increased
value of the hedged securities because they will have offsetting losses in
futures positions. In addition, in such situations, if the Funds had
insufficient cash and were unable to effect a closing transaction, they might
have to sell securities from its portfolio to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices that reflect the rising market. The Funds may also have to sell
securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS ON DEBT SECURITIES, STOCK INDICES AND FOREIGN
CURRENCIES. The Bond Fund may purchase and write options on Futures Contracts to
attempt to minimize the risk to the Fund from adverse changes in currency
exchange and interest rates, and as a substitute for an underlying investment
("Options on Futures Contracts"). The Equity Fund may purchase and write options
on Futures Contracts on foreign currencies and stock indices to attempt to
minimize the risk to the Fund from adverse changes in currency exchange rates
and market conditions and as a substitute for an underlying securities or
currency position. ("Options on Futures Contracts").
A call Option on a Futures Contract written by the Bond Fund or the Equity Fund
constitutes a partial hedge against declining prices of the asset or currency
that are deliverable upon exercise of the Futures Contract. If the price of the
Futures Contract at expiration of the Option is below the exercise price, the
Funds will retain the full amount of the Option premium, which provides a
partial hedge against any decline that may have occurred in the Funds'
portfolio. A put Option on a Futures Contract written by the Funds constitutes a
partial hedge against increasing prices of the asset that is deliverable under
the Futures Contract. If the price of the Futures Contract at expiration of the
Option is higher than the exercise price, the Funds will retain the full amount
of the Option premium, which provides a partial hedge against an increase in the
price of securities that the Funds intend to purchase.
If a put or call Option on a Futures Contract that the Bond Fund or the Equity
Fund has written is exercised, the Funds will incur a loss, which will be
reduced by the amount of the premium the Funds received. Depending on the degree
of correlation between changes in the value of its portfolio securities and
changes in the value of its futures positions, the Funds' losses from Options on
Futures Contracts may be reduced or increased by changes in the value of their
portfolio securities.
All Options on Futures Contracts written by the Bond Fund or the Equity Fund
will be covered. In the case of the sale of a call Option on a Futures Contract,
the Funds may cover by (i) entering into a long position on the same Futures
Contract at a price no higher than the strike price of the call Option on the
Futures Contract (or, if higher, the Funds may segregate Liquid Assets equal to
the difference), (ii) owning the security or currency underlying the Futures
Contract on which the Funds hold the Option, or, with respect to a financial
index, a portfolio of securities substantially replicating the movement of the
index, or (iii) holding a separate call Option permitting the Funds to purchase
the same Futures Contract at a price no higher than the strike price of the call
Option on the Futures Contract sold by the Funds (or, if higher, the Funds may
segregate Liquid Assets equal to the difference.)
In the case of the sale of a put Option on a Futures Contract obligating the
Bond Fund or the Equity Fund to buy a Futures Contract, the Funds may establish
a segregated account containing Liquid Assets equal to the settlement value of
the Futures Contract underlying the Option on a Futures Contract. Alternatively,
the Funds may cover the Option on a Futures Contract by holding a put Option
permitting the Funds to sell the same Futures Contract at a price the same as or
higher than the strike price of the put Option sold by the Funds (or, if lower,
the Funds may segregate Liquid Assets equal to the difference).
The amount of risk the Bond Fund or the Equity Fund assumes when purchasing an
Option on a Futures Contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of such an option also entails the risk that changes in the value of
the underlying Futures Contract will not be fully reflected in the value of the
option purchased.
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Swaps and Related Caps, Floors and Collars. The Bond Fund may enter into
interest rate and foreign currency swaps and related caps, floors and collars to
minimize the risk to the Bond Fund from adverse changes in currency exchange and
interest rates and as a substitute for an underlying securities or currency
position (collectively, "Swaps").
An interest rate Swap is an agreement between two borrowers to exchange a stream
of interest payments on an agreed hypothetical or "notional" principal amount.
No principal amount is exchanged between the counterparties to an interest rate
Swap. In the typical Swap, one party agrees to pay a fixed rate on a notional
principal amount, while the counterparty pays a floating rate based on one or
more reference interest rates such as the London Interbank Offered Rate
("LIBOR"), a specified bank's prime rate, or U.S. Treasury Bill rates. Interest
rate Swaps also permit counterparties to exchange a floating rate obligation
based upon one reference interest rate (such as LIBOR) for a floating rate
obligation based upon another reference interest rate (such as U.S. Treasury
Bill rates).
A currency Swap is an agreement to exchange fixed or floating rate interest
obligations - and, in some transactions, principal obligations - in different
currencies on the basis of (i) the actual principal amount or a notional
principal amount and (ii) one or more reference interest rates.
For example, the Bond Fund may have the right to receive interest at fixed rates
on some of its portfolio securities. If interest rates were rising (and
therefore the value of portfolio securities were declining), the Bond Fund could
hedge the value of such securities by swapping its right to receive a fixed rate
of interest for a counterparty's right to receive a floating rate. Similarly,
the Bond Fund may have the right to receive interest payments on its portfolio
securities denominated in the French Franc. If the Franc were suffering an
adverse movement of its exchange rate, the Bond Fund could hedge the value of
such securities by swapping its right to receive Francs for the right to receive
U.S. Dollars or another currency.
The Bond Fund will usually enter into Swaps on a net basis, i.e., where the two
parties make net payments, with the Bond Fund receiving or paying, as the case
may be, only the net amount of the two payments. The net amount of the excess,
if any, of the Bond Fund's obligations over its entitlements, with respect to
each Swap will be accrued, and an amount of Liquid Assets having an aggregate
net asset value at least equal to the accrued excess will be maintained in a
segregated account. If the Bond Fund enters into a Swap on other than a net
basis, the Bond Fund will maintain in the segregated account the full amount of
the Fund's obligations under the Swap. Neither a Swap nor any margin or
collateral arrangement with respect to a Swap is deemed to involve a pledge of
the Bond Fund's assets, the issuance of a senior security or a borrowing.
The Swap market has grown substantially in recent years with a significant
number of banks and financial services firms acting both as principals and as
agents utilizing standardized Swap documentation. Caps, floors and collars are
more recent innovations, and they are less liquid than other Swaps. There can be
no assurance that the Bond Fund will be able to enter into or offset Swaps at
any specific time or at prices or on other terms that are advantageous. In
addition, although the terms of Swaps may provide for termination under certain
circumstances, there can be no assurance that the Bond Fund will be able to
terminate or offset a Swap on favorable terms.
Additional Risks of Forward Contracts, Options, Futures Contracts, Options on
Futures Contracts and Swaps. Hedging transactions may be effective to protect
the Bond Fund and the Equity Fund against certain changes in interest and
currency exchange rates or market movements. However, such transactions do not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline.
The ability of the Bond Fund and the Equity Fund to hedge all or a portion of
their portfolios through transactions in Forward Contracts, Options, Futures
Contracts, Options on Futures Contracts and Swaps depends on the degree to which
price movements in underlying currencies and securities correlate with price
movements in the relevant portion of the Funds' portfolio. In addition, the use
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of Futures Contracts and Options on Futures Contracts involves the risk of
imperfect correlation of movements in the prices of Futures Contracts and
Options on Futures Contracts, and movements in the prices of the underlying
assets. If the price of a Futures Contract or an Option on a Futures Contract
moves more or less than the price of the hedged asset, the Bond Fund and the
Equity Fund will experience a gain or loss that may not be completely offset by
movements in the price of the asset that is the subject of the hedge.
The Equity Fund may cover stock index Options that it has written, stock index
Futures Contracts to which it is a party, and Options on stock index Futures
Contracts that it has written through the segregation of a portfolio of stocks
that substantially replicates the movement of the underlying stock index. The
portfolio of securities used to cover such transactions may not match the actual
composition of the index. In that event, the Equity Fund will not be fully
covered and would be subject to a risk of loss in the event of adverse changes
in the value of the index.
The ability of the Bond Fund and the Equity Fund to engage in transactions
involving Options, Futures Contracts and Options on Futures Contracts and Swaps
will depend on the degree to which liquid secondary markets in such instruments
exist. Reasons for the absence of a liquid market include the following: (i)
there may be insufficient trading interest in a particular instrument; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of Options, Futures
Contracts or Options on Futures Contracts; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the Options Clearing Corporation ("OCC"), which effects the
settlement of exchange traded Options, may not be adequate at all times to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of a particular instrument (or a particular class or series of such
instrument). There can be no assurance that a liquid secondary market will exist
for any particular investment at any specific time. Thus, it may not be possible
for the Bond Fund and the Equity Fund to close certain positions.
The costs to the Bond Fund and the Equity Fund of hedging transactions vary
among the various hedging techniques and also depend on such factors as the
security, currency or stock index involved, market conditions and the length of
the contract or option period. Forward Contracts and Swaps are usually conducted
on a principal basis, and no fees or commissions are therefore involved.
However, the Bond Fund and the Equity Fund will incur brokerage commissions and
related transaction costs when they purchase, write or invest in Options,
Futures Contracts and Options on Futures Contracts. Furthermore, the Funds'
ability to engage in hedging transactions may be limited by tax considerations.
Forward Contracts and Options on foreign currencies and Swaps are not traded on
markets regulated by the Commodity Futures Trading Commission ("CFTC") or (with
the exception of certain Options traded on national securities exchanges) by the
Securities and Exchange Commission ("SEC"), but are traded through financial
institutions acting as market-makers. In an over-the-counter trading
environment, many of the protections afforded to exchange participants are not
available. For example, there are no daily price fluctuation limits, and
therefore adverse market movements could continue to an unlimited extent over a
period of time. Although the purchaser of an Option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, because the performance of over-the-counter Options, Forward
Contracts and Swaps is not guaranteed by the OCC or any other settlement agency,
there is a risk of counterparty default. Option writers and traders of Forward
Contracts could also lose amounts substantially in excess of their initial
investments, due to the margin and collateral requirements associated with such
positions.
Options traded on national securities exchanges are within the jurisdiction of
the SEC, as are other securities traded on such exchanges. As a result, many of
the protections provided to traders on organized exchanges are available with
respect to such transactions. In particular, all Options entered into on a
national securities exchange are cleared and guaranteed by the OCC, thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
Options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Bond Fund and
the Equity Fund to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
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Exchange-traded Options involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such Options
must be made exclusively through the OCC, which has established banking
relationships in certain foreign countries for that purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly exercise or settlement of such Options, or would result in
undue burdens on the OCC or its clearing members, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery,
the fixing of dollar settlement prices or prohibitions on exercise.
The exchanges on which Options, Futures Contracts and Options on Futures
Contracts are traded may impose additional limitations governing the maximum
number of positions on the same side of the market and involving the same
underlying instrument that may be held by a single investor, whether acting
alone or in concert with others (regardless of whether such positions are held
or written on the same or different exchanges or held or written in one or more
accounts or through one or more brokers). In addition, the CFTC and the various
markets have established limits, referred to as "speculative position limits,"
on the maximum net long or net short positions that any person may hold or
control in a particular Futures Contract or Option on a Futures Contract. An
exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. The Bond Fund
and the Equity Fund do not believe that these trading and position limits will
have an adverse impact on the strategies for hedging the portfolios of the
Funds.
Forward Contracts, Options, Futures Contracts, Options on Futures Contracts and
Swaps may be traded in foreign markets or on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies. The value of such positions also could
be adversely affected by, among other things: (i) other foreign political and
economic factors, (ii) lesser availability of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements and (v) lesser trading volume.
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