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[Translation]
SECURITIES REGISTRATION STATEMENT
(including the Amendments)
LOOMIS SAYLES FUNDS - LOOMIS SAYLES MANAGED BOND FUND
(2339)
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SECURITIES REGISTRATION STATEMENT
To: Director of the Kanto
Local Finance Bureau
Filing Date of SRS: March 16, 1999
Filing Date of the Amendment March 26, 1999
Name of the Registrant Trust: LOOMIS SAYLES FUNDS
Name and Official Title of Trustees: Earl W. Foell
Richard S. Holway
Michael T. Murray
Danniel J. Fuss
Address of Principal Office: One Financial Center
Boston, Massachusetts 02111
U.S.A.
Name and Title of Registration Agent: Harume Nakano
Attorney-at-Law
Signature [Harume Nakano]
---------------------------
(Seal)
Ken Miura
Attorney-at-Law
Signature [Ken Miura]
---------------------------
(Seal)
Address or Place of Business Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki 3-chome
Chiyoda-ku, Tokyo
Name of Liaison Contact: Harume Nakano
Ken Miura
Hikaru Kaieda
Attorneys-at-Law
Place of Liaison Contact: Hamada & Matsumoto
Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki 3-chome
Chiyoda-ku, Tokyo
Phone Number: 03-3580-3377
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Public Offering or Sale for Registration
----------------------------------------
Name of the Fund Making Public LOOMIS SAYLES MANAGED BOND FUND
Offering or Sale of Foreign
Investment Fund Securities:
Type and Aggregate Amount of Shares of a series of a diversified
Foreign Investment Fund Securities open-end management investment company
to be Publicly Offered or Sold: organized as a Massachusetts business
trust;
Up to 82,100,000 shares
Up to the amount derived by multiplying
82,100,000 by the respective applicable
issue prices (the estimated maximum
amount is 859.587 million dollars
(approximately 100 billion yen))
Note 1: U.S.$ amount is translated into Japanese Yen at the rate of
U.S.$l.00=(Yen)116.35 the mean of the exchange rate quotations by The
Bank of Tokyo-Mitsubishi, Ltd. for buying and selling spot dollars by
telegraphic transfer against yen on January 29, 1999.
Note 2: The estimated maximum amount is an amount calculated by multiplying the
Net Asset Value per Share as of January 31, 1999 ($ 10.47) by
82,100,000, for convenience.
Places where a copy of this Securities Registration
---------------------------------------------------
Statement is available for Public Inspection
--------------------------------------------
Not applicable.
(Total number of pages of this Securities Registration Statement in Japanese
is [ ] including front and back pages.)
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CONTENTS
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Japanese This
Original English
Translation
PART I. INFORMATION CONCERNING SECURITIES............ 1 1
PART II. INFORMATION CONCERNING ISSUER................ 4 5
I. DESCRIPTION OF THE FUND............................ 4 5
1. GENERAL INFORMATION.......................... 4 5
2. INVESTMENT POLICY............................ 8 10
3. MANAGEMENT STRUCTURE......................... 24 32
4. INFORMATION CONCERNING THE EXERCISE
OF RIGHTS BY SHAREHOLDERS, ETC............... 33 46
5. STATUS OF INVESTMENT FUND.................... 37 51
II. OUTLINE OF THE TRUST............................... 38 53
III. OUTLINE OF THE OTHER RELATED COMPANIES............. 52 75
IV. FINANCIAL CONDITION OF THE FUND.................... 55 79
V. SUMMARY OF INFORMATION CONCERNING
FOREIGN INVESTMENT FUND SECURITIES................. 58 82
VI. MISCELLANEOUS...................................... 59 82
PART III. SPECIAL INFORMATION.......................... 60 84
I. OUTLINE OF THE SYSTEM OF INVESTMENT
TRUSTS IN MASSACHUSETTS............................ 60 84
II. FINANCIAL CONDITIONS OF THE INVESTMENT
ADVISER AND INVESTMENT MANAGEMENT COMPANY.......... 67 92
III. FORM OF FOREIGN INVESTMENT......................... 107 92
FUND SECURITIES
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PART I. INFORMATION CONCERNING SECURITIES
1. NAME OF FUND: LOOMIS SAYLES MANAGED BOND FUND
(hereinafter referred to as the "Fund")
2. NATURE OF FOREIGN Shares of a series of a diversified open-end
INVESTMENT FUND SECU- management investment company organized
RITIES CERTIFICATES: as a Massachusetts business trust
3. NUMBER OF SHARES TO Up to 82,100,000 shares
BE OFFERED FOR SALE
(IN JAPAN)
4. TOTAL AMOUNT OF Up to the amount calculated by multiplying the
OFFERING PRICE: respective applicable issue price per share
(IN JAPAN) by the number of respective issues (the
estimated maximum amount will be 859.587
million dollar (approximately 100 billion yen))
Note l: The maximum amount is calculated for reference purpose only by
multiplying the Net Asset Value per share as of January 31, 1999
($10.47) by 182,100,000 shares.
Note 2: Dollar amount is translated for convenience at the rate of
$1.00=(Yen)116.35 (the mean of the exchange rate quotations by The
Bank of Tokyo-Mitsubishi, Ltd. for buying and selling spot dollars
by telegraphic transfer against yen on January 29, 1999). The same
applies hereinafter.
Note 3: In this document, money amounts and percentages have been rounded.
Therefore, there are cases in which the amount of the "total column"
is not equal to the aggregate amount. Also, translation into yen is
made simply by multiplying the corresponding amount by the
conversion rate specified and rounded up when necessary. As a
result, in this document, there are cases in which Japanese yen
figures for the same information differ from each other.
5. ISSUE PRICE: Net Asset Value per Share next calculated on
the day on which the Fund has received such
application
6. SALES CHARGE: 2.00% of the Sales Price. The Sales Price means
the Issue Price divided by 0.995 (rounded to
the third decimal place).
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7. MINIMUM AMOUNT OR The minimum amount for purchase of
NUMBER OF SHARES Shares is 100 shares and shares may be
FOR SUBSCRIPTION: purchased in integral multiples of 100 shares.
8. PERIOD OF SUBSCRIPTION: From April 1, 1999 to March 31, 2000
Provided that the subscription is handled
only on a Fund Business Day and a business
day when securities companies are open for
business in Japan.
It is expected that the Fund will reject
purchase orders in excess of U.S. $5 million
on each of the five Fund Business Days
preceding the ex-dividend day of each month.
Note: A "Fund Business Day" is any day on which the New York Stock Exchange
is open for business.
9. DEPOSIT FOR SUBSCRIPTION: None.
10. PLACE OF SUBSCRIPTION: Kokusai Securities Co., Ltd. (hereinafter
referred to as Kokusai")
Tokyo-Sumitomo-Twin-Building, East Building,
27-1, Shinkawa 2-chome, Chuo-ku, Tokyo
Note: The subscription is handled at the head office and the branch offices
in Japan of the above-mentioned securities company.
11. DATE AND PLACE Investors shall pay the Issue Price and Sales
OF PAYMENT: Charge to Kokusai within 4 business days in
Japan when Kokusai confirms the execution of
the order. The total Issue Price and the 0.50%
of the net asset value to be returned by the
Distributor will be transferred by Kokusai to
the account of the Fund at State Street Bank
and Trust Company, the custodian and transfer
agent, within 3 Fund Business Days from (and
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including) the day on which the application
becomes effective.
12. OUTLINE OF UNDERWRITING, ETC.:
(A) Kokusai undertakes to make a public offering of Shares in accordance with an
agreement dated September 14, 1998 with Loomis Sayles Distributors, L.P.
(hereinafter referred to as the "Distributor") in connection with the sale
of the Shares in Japan.
(B) During the public offering period, Kokusai will execute or forward the
purchase orders of the Shares received directly or indirectly through other
Sales and Sales Handling Companies to the Fund.
Note: Sales Handling Company means a securities agent company and/or
registration agent financial institution which shall conclude the
agreement with a distributor concerning agency business of units of
the Fund, act as agent for a distributor for subscription or
redemption of units of the Fund from investors and handle the
business, etc. concerning receipt of subscription money from investors
or payment of redemption proceeds to investors, etc.
(C) The Fund has appointed Kokusai as the Agent Company in Japan.
Note: "The Agent Company" shall mean a securities company which, under a
contract made with a foreign issuer of investment securities, makes
public the net asset value per Share and submits or forwards the
financial reports or other documents to the Japan Securities Dealers
Association ("JSDA") and other Sales and Sales Handling Companies in
Japan) rendering such other services.
13. MISCELLANEOUS:
(A) Method of Subscription:
Investors who subscribe to Shares shall enter into a Sales and Sales
Handling Company an agreement concerning transactions of foreign securities.
A Sales and Sales Handling Company in Japan shall provide to the investors a
Contract Concerning a Foreign Securities Transactions Account or other
prescribed contract (the "Contract") and the investors shall submit to the
Sales and Sales Handling Company in Japan an application for requesting the
opening of a transactions account under the Contract. The subscription
amount shall be paid in yen in principle and the yen exchange rate shall be
the exchange rate which shall be based on the foreign exchange rate quoted
in the Tokyo Foreign Exchange Market on the Trade Day of each subscription
and which shall be determined by such Sales and Sales Handling Company in
Japan.
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(B) Expenses summary:
The following information is provided as an aid in understanding the
sales charges that an investor will bear directly and the various expenses
that an investor in the Fund will bear indirectly. The information is based
on estimated expenses for the Fund's first full fiscal year. The information
below should not be considered a representation of past or future expenses,
as actual expenses may be greater or less than those shown. Also, the 5%
annual return assumed in the Example should not be considered a
representation of investment performance, as actual performance will vary.
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases (as % of offering price).... 2.50%/1/
Maximum Sales Load Imposed on Reinvested Dividends (as % of offering
price)............................................................ none
Maximum Deferred Sales Load (as % of original purchase price or
redemption proceeds).............................................. none
Redemption Fees/2/.................................................. none
Exchange Fees....................................................... none
Annual Operating Expenses (as a percentage of average net assets):
Management Fees..................................................... .60%
12b-1 Fees.......................................................... .75%
Other Operating Expenses............................................ .15%
Total Operating Expenses............................................ 1.50%
Example:
An investor would pay the following expenses on a $1,000 investment
assuming a 5% annual return (with or without a redemption at the end of
each time period):
One Year............................................................ $ 15.26
Three Years......................................................... $ 47.41
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1 The Maximum Sales Load described above does not reflect a Japanese
consumption tax of 0.10% that should be collected from Japanese
investors at the time of purchase.
2 A $5 charge applies to any wire transfer of redemption proceeds.
(C) Offerings other than in Japan:
Shares of the Fund are currently not offered in the U.S.
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PART II. INFORMATION CONCERNING ISSUER
I. DESCRIPTION OF THE FUND
1. GENERAL INFORMATION
(A) Outline of Laws Regulating the Fund in the Jurisdiction Where Established:
(1) Name of the Fund: Loomis Sayles Managed Bond Fund (the "Fund")
(2) Form of the Fund
The Fund is a series of Loomis Sayles Funds (the "Trust").
The Trust, registered with the United States Securities and Exchange
Commission ("SEC") as a diversified open-ended management investment
company, is organized as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust (the "Declaration of
Trust") dated February 20, 1991. The Trust currently has eighteen series:
Bond Fund, Managed Bond Fund, Core Value Fund, Global Bond Fund, Growth
Fund, High Yield Fund, Intermediate Maturity Bond Fund, International
Equity Fund, Investment Grade Bond Fund, Mid-Cap Growth Fund, Mid-Cap Value
Fund, Municipal Bond Fund, Short-Term Bond Fund, Small Cap Growth Fund,
Small Cap Value Fund, Strategic Value Fund, U.S. Government Securities Fund
and Worldwide Fund.
The Declaration of Trust currently permits the trustees to issue an
unlimited number of full and fractional shares of each series. Each share
of the Fund represents and equal proportionate interest in the Fund with
each other share of the Fund and is entitled to a proportionate interest in
the dividends and distributions from the Fund. The shares of the Fund do
not have any preemptive rights. Upon termination of the Fund, whether
pursuant to liquidation of the Trust or otherwise, shareholders of the Fund
are entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders. The Declaration of Trust also permits the
trustees to charge shareholders directly for custodial, transfer agency and
servicing expenses.
The assets received by the Fund for the issue or sale of its shares
and all income, earnings, profits, losses and proceeds therefrom, subject
only to the rights of creditors, are allocated to, and constitute the
underlying assets of, the Fund. The underlying assets are segregated and
are charged with the expenses with respect to the Fund and with a share of
the general expenses of the Trust. Any general expenses of the Trust that
are not readily identifiable as belonging to a particular series are
allocated by or under the direction of the trustees in such manner as the
trustees determine to be fair and equitable. While the expenses of the
Trust are allocated to the separate books of account of each series,
certain expenses may be legally chargeable against the assets of all
series.
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The Declaration of Trust also permits the trustees, without shareholder
approval, to subdivide the Fund into various classes of shares with such
dividend preferences and other rights as the trustees may designate. Shares
of the Fund are not currently divided into classes. The trustee may also,
without shareholder approval, establish one or more additional separate
portfolios for investments in the Trust or merge two or more existing
series. Shareholders' investments in such an additional or merged portfolio
would be evidenced by a separate series of shares (i.e., a new "fund").
THE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE U.S.
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THE U.S. PROSPECTUS.
(3) Governing Laws
The Trust was created under, and is subject to, the laws of the
Commonwealth of Massachusetts. The sale of the Trust's shares is subject to,
among other things, the Securities Act of 1933, as amended, and certain
state securities laws. The Trust also attempts to qualify each year and
elect to be taxed as a regulated investment company under the United States
Internal Revenue Code of 1986, as amended.
The following is a broad outline of certain of the principal statutes
regulating the operations of the Trust in the U.S.:
a. Massachusetts General Laws, Chapter 182- Voluntary Associations and
Certain Trusts
Chapter 182 provides in part as follows:
A copy of the declaration of trust must be filed with the Secretary
of State of the Commonwealth of Massachusetts and with the Clerk of the
City of Boston. Any amendment of the declaration of trust must be filed
with the Secretary and the Clerk within thirty days after the adoption
of such amendment.
A trust must annually file with the Secretary of State on or before
June 1 a report providing the name of the trust, its address, number of
shares outstanding and the names and addresses of its trustees.
Penalties may be assessed against the trust for failure to comply
with certain of the provisions of Chapter 182.
b. Investment Company Act of 1940
The Investment Company Act of 1940, as amended (the "1940 Act"), in
general, requires investment companies to register as such with the
"SEC" and
<PAGE>
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to comply with a number of substantive regulations of their operations.
The 1940 Act requires an investment company, among other things, to
provide periodic reports to its shareholders.
c. Securities Act of 1933
The Securities Act of 1933, as amended (the "1933 Act"), regulates
sales of securities. The 1933 Act, among other things, imposes various
registration requirements upon sellers of securities and provides for
various liabilities for failures to comply with its provisions or in
respect of other specified matters.
d. Securities Exchange Act of 1934
The Securities Exchange Act of 1934, as amended (the "1934 Act"),
regulates a variety of matters involving, among other things, the
secondary trading of securities, periodic reporting by the issuers of
securities, and certain of the activities of transfer agents, brokers
and dealers.
e. The Internal Revenue Code
The Trust intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code") for
federal income tax purposes and to meet all other requirements
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders.
f. Other laws
The Trust is subject to the provisions of other laws, rules, and
regulations applicable to the Trust or its operations, such as, for
example, various state laws regarding the sale of the Trust's shares.
(B) Outline of the Supervisory Authorities
Among the regulatory authorities having jurisdiction over the Trust or
certain of its operations are the SEC and state regulatory agencies or
authorities.
a. The SEC has broad authority to oversee the application and
enforcement of the federal securities laws, including the 1940 Act, the
1933 Act, and the 1934 Act, among others, to the Trust. The 1940 Act
provides the SEC broad authority to inspect the records of investment
companies, to exempt investment companies or certain practices from the
provisions of the Act, and otherwise to enforce the provisions of the
Act.
b. State authorities typically have authority to regulate the
offering and sale of securities to their residents or within
their jurisdictions and the activities of brokers, dealers, or other
persons directly or indirectly engaged in related activities.
(C) Objects and Basic Nature of the Fund:
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The Fund's investment objective is high total investment return through
a combination of current income and capital appreciation.
(D) History of the Fund:
February 20, 1991: Organization of the Trust as a
Massachusetts business trust. Adoption
of the Declaration of Trust.
April 27, 1998: Adoption of Resolutions by the Board of
Trustees of the Trust to establish the
Fund.
October 1, 1998 Commencement of management of the Fund
(E) Affiliated Companies of the Fund:
Names and related business of the affiliated companies of the Fund are
as follows:
(1) Loomis, Sayles & Company. L.P. ("Investment Management Company" or
------------------------------
"Loomis Sayles") renders investment management services to the Fund.
(2) State Street Bank and Trust Company (the "Custodian" and
-----------------------------------
"Shareholder Servicing, Transfer and Dividend Paying Agent") acts as
Custodian and Shareholder Servicing, Transfer and Dividend Paying
Servicing Agent.
(3) Loomis Sayles Distributors, L.P. ("Distributor") engages in
--------------------------------
providing marketing services to the Fund.
(4) Kokusai Securities Co.. Ltd. ("Distributor in Japan" and "Agent
----------------------------
Company") engages in forwarding the purchase or repurchase orders for
the Shares in Japan and also acts as the agent company.
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Related Companies of the Fund
-----------------------------
Loomis Sayles Funds ("Trust")
-----------------------------
Loomis Sayles Managed Bond Fund ("Fund")
----------------------------------------
Shareholder
Trustees Servicing and Transfer
(Agreement and Agent Agreement
Declaration of Trust)
-----------------------
Custody
Amended and Restated Contract
Distribution Agreement
Custodian
Distributor Shareholder Servicing,
------------------ Transfer and Dividend
Loomis Sayles Paying Agent
Distributors, L.P. -------------------------
State Street Bank and
(acts as distributor) Trust Company
- -----------------------
(acts as custodian and shareholder
services, transfer and dividend paying
agent of the Fund)
---------------------------------------
Distribution, Repurchase
and Shareholder
Servicing Agreement
Advisory Agreement
Agent Company
Agreement
Investment Managing
Distributor in Japan Company
Agent Company ---------------------------
--------------------------
Loomis Sayles & Company, L.P.
Kokusai Securities Co.,Ltd
(acts as investment management
(forwarding of sales in Japan the Fund and investment advisor
and rendering of services as concerning the Fund's assets)
agent company)
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2. INVESTMENT POLICY
(A) Basic Policy for Investment
The Fund's investment objective is high total investment return through
a combination of current income and capital appreciation.
The Fund seeks to achieve its objective by normally investing
substantially all of its assets in fixed income securities, although up to
20% of its assets may be invested in preferred stocks. At least 65% of the
Fund's total assets will normally be invested in bonds. The fixed income
securities in which the Fund may invest include corporate securities,
securities issued or guaranteed by the U.S. Government or its authorities or
instrumentality's ("U.S. Government Securities"), commercial paper, zero
coupon securities, mortgage-backed securities, stripped mortgage-backed
securities, collateralized mortgage obligations ("CMOs"), asset-backed
securities, when-issued securities, Rule 144A securities, repurchase
agreements and convertible securities. The Fund may engage in options and
futures transactions, repurchase transactions, foreign currency hedging
transactions and swap transactions.
The Fund may invest any portion of its assets in securities of Canadian
issuers, and up to 20% of its assets in securities of other non-U.S.
issuers. The Fund may also invest up to 35% of its assets in securities of
below investment grade quality (commonly known as "junk bonds"). Securities
of below investment grade quality are securities rated below the top four
rating categories by each major rating agency that has rated the security,
including securities in the lowest rating categories, and unrated securities
that Loomis Sayles determines to be of comparable quality.
The Fund intends to maintain an average credit quality of at least BBB
or Baa. In determining average dollar-weighted credit quality, Loomis Sayles
will use the highest rating assigned to each security by a nationally
recognized securities rating agency, such as Standard & Poor's or Moody's
Investors Service, Inc., and, with respect to unrated securities, will use
the rating for securities it determines to be of comparable quality.
For temporary defensive purposes, the Fund may invest any portion of
its assets in fixed income securities, cash or any other securities deemed
appropriate by Loomis Sayles.
Portfolio turnover considerations will not limit Loomis Sayles'
investment discretion in managing the Fund's assets. The Fund anticipates
that its portfolio turnover rates will vary significantly from time to time
depending on the volatility of economic and market conditions. The Fund
anticipates that its portfolio turnover rate will be 55% during its first
full fiscal year. High portfolio turnover may involve higher costs and
higher levels of taxable gains.
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(B) Objects of Investment
Debt and Other Fixed Income Securities
The Fund may invest in fixed income securities of any maturity. Fixed
income securities pay a specified rate of interest or dividends, or a rate
that is adjusted periodically by reference to some specified index or
market rate. Fixed income securities include securities issued by federal,
state, local and foreign governments and related agencies, and by a wide
range of private issuers. Because interest rates vary, it is impossible to
predict the total return of the Fund, which invests in fixed income
securities, for any particular period. The net asset value of the Fund's
shares will vary as a result of changes in the value of the securities in
the Fund's portfolio.
Fixed income securities are subject to market and credit risk. Market
risk relates to changes in a security's value as a result of changes in
interest rates generally. In general, the values of fixed income securities
increase when prevailing interest rates fall and decrease when interest
rates rise. Credit risk relates to the ability of the issuer to make
payments of principal and interest.
U.S. Government Securities
U.S. Government Securities have different kinds of government support.
For example, some U.S. Government Securities, such as U.S. Treasury bonds,
are supported by the full faith and credit of the United States, whereas
certain other U.S. Government Securities issued or guaranteed by federal
agencies or government-sponsored enterprises are not supported by the full
faith and credit of the United States.
Although U.S. Government Securities generally do not involve the
credit risks associated with other types of fixed income securities, the
market values of U.S. Government Securities do go up and down as interest
rates change. Thus, for example, the value of an investment in the Fund,
when it holds U.S. Government Securities may fall during times of rising
interest rates. Yields on U.S. Government Securities tend to be lower than
those on corporate securities of comparable maturities.
Some U.S. Government Securities, such as Government National Mortgage
Association Certificates, are known as "mortgage-backed" securities.
Interest and principal payments on the mortgages underlying mortgage-backed
U.S. Government Securities are passed through to the holders of the
security. If the Fund purchases mortgage-backed securities at a discount or
a premium, the Fund will recognize a gain or loss when the payments of
principal, through prepayment or otherwise, are passed through to the Fund
and, if the payment occurs in a period of falling interest rates, the Fund
may not be able to reinvest the payment at as favorable an interest rate.
As a
<PAGE>
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result of these principal prepayment features, mortgage-backed securities
are generally more volatile investments than many other fixed income
securities.
In addition to investing directly in U.S. Government Securities, the
Fund may purchase certificates of accrual or similar instruments ("strips")
evidencing undivided ownership interests in interest payments or principal
payments, or both, in U.S. Government Securities. These investment
instruments may be highly volatile.
U.S. Government Securities include direct obligations of the U.S.
Treasury, as well as securities issued or guaranteed by U.S. Government
agencies, authorities and instrumentalities, including, among others, the
Government National Mortgage Association, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Federal Housing
Administration, the Resolution Funding Corporation, the Federal Farm Credit
Banks, the Federal Home Loan Bank, the Tennessee Valley Authority, the
Student Loan Marketing Association and the Small Business Administration.
More detailed information about some of these categories of U.S. Government
Securities follows.
U.S. Treasury Bills Direct obligations of the United States Treasury
which are issued in maturities of one year or less. No interest is paid on
Treasury bills; instead, they are issued at a discount and repaid at full
face value when they mature. They are backed by the full faith and credit
of the U.S. Government.
U.S. Treasury Notes and Bonds Direct obligations of the United States
Treasury issued in maturities that vary between one and forty years, with
interest normally payable every six months. They are backed by the full
faith and credit of the U.S. Government.
"Ginnie Maes" Debt securities issued by a mortgage banker or other
mortgagee which represent an interest in a pool of mortgages insured by the
Federal Housing Administration or the Farmer's Home Administration or
guaranteed by the Veterans Administration. The Government National Mortgage
Association ("GNMA") guarantees the timely payment of principal and
interest when such payments are due, whether or not these amounts are
collected by the issuer of these certificates on the underlying mortgages.
An assistant attorney general of the United States has rendered an opinion
that the guarantee by GNMA is a general obligation of the United States
backed by its full faith and credit. Mortgages included in single family or
multi-family residential mortgage pools backing an issue of Ginnie Maes
have a maximum maturity of up to 30 years. Scheduled payments of principal
and interest are made to the registered holders of Ginnie Maes (such as the
Fund) each month. Unscheduled prepayments may be made by homeowners, or as
a result of a default. Prepayments are passed through to the registered
holder of Ginnie Maes along with regular monthly payments of principal and
interest.
<PAGE>
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"Fannie Maes" The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private stockholders
that purchases residential mortgages from a list of approved
seller/servicers. Fannie Maes are pass-through securities issued by FNMA
that are guaranteed as to timely payment of principal and interest by FNMA
but are not backed by the full faith and credit of the U.S. Government.
"Freddie Macs" The Federal Home Loan Mortgage Corporation ("FHLMC") is
a corporate instrumentality of the U.S. Government. Freddie Macs are
participation certificates issued by FHLMC that represent an interest in
residential mortgages from FHLMC's National Portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but
Freddie Maes are not backed by the full faith and credit of the U.S.
Government.
As described above, U.S. Government Securities generally do not
involve the same credit risks associated with investments in other types of
fixed-income securities, although, as a result, the yields available from
U.S. Government Securities are generally lower than the yields available
from corporate fixed-income securities. Like other fixed income securities,
however, the value of U.S. Government Securities change as interest rates
fluctuate. Fluctuations in the value of portfolio securities will not
affect interest income on existing portfolio securities but will be
reflected in the Fund's net asset value.
Lower Rated Fixed Income Securities
The Fund may invest up to 35% of its assets in securities rated below
investment grade (commonly referred to as "junk bonds"). A security will be
treated as being of investment grade quality if at the time the Fund
acquires it at least one major rating agency has rated the security in its
top four rating categories (even if another such agency has issued a lower
rating), or if the security is unrated but Loomis Sayles determines it to
be of investment grade quality. Lower rated fixed income securities
generally provide higher yields, but are subject to greater credit and
market risk, than higher quality fixed income securities. Lower rated fixed
income securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments.
Achievement of the investment objective of the Fund, when it invests in
lower rated fixed income securities, may be more dependent on Loomis
Sayles' own credit analysis than is the case with higher quality bonds. The
market for lower rated fixed income securities may be more severely
affected than some other financial markets by economic recession or
substantial interest rate increases, by changing public perceptions of this
market or by legislation that limits the ability of certain categories of
financial institutions to invest in these
<PAGE>
-14-
securities. In addition, the secondary market may be less liquid for lower
rated fixed income securities. This lack of liquidity at certain times may
affect the values of these securities and may make the evaluation and sale
of these securities more difficult. Securities in the lowest rating
categories may be in poor standing or in default. Securities in the lowest
investment grade category (BBB or Baa) have some speculative
characteristics.
The rating services' description of their ratings is as follows:
STANDARD & POOR'S
-----------------
AAA
---
This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA
--
Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A
-
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
---
Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest
for bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC
--------------
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligations. BB indicates the lowest
degree of speculation and CC the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C
-
The rating C is reserved for income bonds on which no interest is being
paid.
D
-
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
<PAGE>
-15-
The symbol is attached to the ratings of instruments with significant
noncredit risks such as risks to principal or volatility of expected
returns.
Plus (+) or Minus (-); The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE INC.
-----------------------------
Aaa
---
Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large, or by an
exceptionally stable, margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa
--
Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa Group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present that make the long-term risks appear somewhat larger than
in Aaa securities.
A
-
Bonds that are rated A process many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security
to principal and interests are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the
future.
Baa
---
Bonds that are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments are
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
Ba
--
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good
<PAGE>
-16-
and bad times over the future. Uncertainty of position characterizes bonds
in this class.
B
-
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
---
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca
--
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C
-
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the
following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Common Stocks and Other Equity Securities
Common stocks and similar equity securities, such as warrants and
convertibles, are volatile and more risky than some other forms of
investment. Equity securities of companies with relatively small market
capitalization may be more volatile than the securities of larger, more
established companies and than the broad equity market indexes.
<PAGE>
-17-
Zero Coupon Securities
The Fund may invest in "zero coupon" fixed income securities. These
securities accrue interest at a specified rate, but do not pay interest in
cash on a current basis. The Fund is required to distribute the income on
these securities to Fund shareholders as the income accrues, even though
the Fund is not receiving the income in cash on a current basis. Thus the
Fund may have to sell other investments to obtain cash to make income
distributions at times when Loomis Sayles would not otherwise deem it
advisable to do so. The market value of zero coupon securities is often
more volatile than that of non-zero coupon fixed income securities of
comparable quality and maturity.
Zero Coupon Bonds
Zero coupon bonds are debt obligations that do not entitle the holder
to any periodic payments of interest either for the entire life of the
obligation or for an initial period after the issuance of the obligations.
Such bonds are issued and traded at a discount from their face amount. The
amount of the discount varies depending on such factors as the time
remaining until maturity of the bonds, prevailing interest rates, the
liquidity of the security and the perceived credit quality of the issuer.
The market prices of zero coupon bonds generally are more volatile than the
market prices of securities that pay interest periodically and are likely
to respond to changes in interest rates to a greater degree than do non-
zero coupon bonds having similar maturities and credit quality. In order to
qualify as a "regulated investment company" that is accorded special tax
treatment under the Internal Revenue Code (the "Code"), the Fund must
distribute each year at least 90% of its net investment income, including
the original issue discount accrued on zero coupon bonds. Because the Fund,
when investing in zero coupon bonds, will not on a current basis receive
cash payments from the issuer in respect of accrued original issue
discount, the Fund may have to distribute cash obtained from other sources
in order to satisfy the 90% distribution requirement under the Code. Such
cash might be obtained from selling other portfolio holdings of the Fund.
In some circumstances, such sales might be necessary in order to satisfy
cash distribution requirements even though investment considerations might
otherwise make it undesirable for the Fund to sell such securities at such
time.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, such as GNMA or
Federal National Mortgage Association certificates, which differ from
traditional debt securities. Among the major differences are that interest
and principal payments are
<PAGE>
-18-
made more frequently, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans generally may be prepaid at
any time. As a result, if the Fund purchases these assets at a premium, a
faster-than-expected prepayment rate will reduce yield to maturity, and a
slower-than-expected prepayment rate will increase yield to maturity. If
the Fund purchases mortgage-backed securities at a discount, faster-than-
expected prepayments will increase, and slower-than-expected prepayments
will reduce, yield to maturity. Prepayments, and resulting amounts
available for reinvestment by the Fund, are likely to be greater during a
period of declining interest rates and, as a result, are likely to be
reinvested at lower interest rates. Accelerated prepayments on securities
purchased at a premium may result in a loss of principal if the premium has
not been fully amortized at the time of prepayment. Although these
securities will decrease in value as a result of increases in interest
rates generally, they are likely to appreciate less than other fixed-income
securities when interest rates decline because of the risk of prepayments.
Stripped Mortgage-Backed Securities
The Fund may invest in interest-only and principal-only classes of
mortgage-backed securities ("IOs" and "POs"). The yield to maturity on an
IO or PO is extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on
the underlying assets. A rapid rate of principal prepayments may have a
measurably adverse effect on the Fund's yield to maturity to the extent it
invests in IOs. if the assets underlying the IOs experience greater than
anticipated prepayments of principal, the Fund may fail to recoup fully its
initial investment in these securities. Conversely, POs tend to increase in
value if prepayments are greater than anticipated and decline if
prepayments are slower than anticipated.
The secondary market for stripped mortgage-backed securities may be
more volatile and less liquid than that for other mortgage-backed
securities, potentially limiting the Fund's ability to buy or sell those
securities at any particular time.
Collateralized Mortgage Obligations
The Fund may invest in CMOs. A CMO is a security backed by a portfolio
of mortgages or mortgage-backed securities held under an indenture. CMOs
may be issued either by U.S. Government instrumentalities or by non-
governmental entities. The issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. CMOs are issued with a number of classes or
series which have different maturities and which may represent interests in
some or all of the interest or principal on the underlying
<PAGE>
-19-
collateral or a combination thereof. CMOs of different classes are
generally retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. In the event of sufficient early prepayments on
such mortgages, the class or series of CMOs first to mature generally will
be retired prior to its maturity. As with other mortgage-backed securities,
the early retirement of a particular class or series of CMOs held by the
Fund could involve the loss of any premium the Fund paid when it acquired
the investment and could result in the Fund's reinvesting the proceeds at a
lower interest rate than the retired CMO paid. Because of the early
retirement feature, CMOs may be more volatile than many other fixed income
investments.
Asset-Backed Securities
The Fund may invest in asset-backed securities. Through the use of
trusts and special purpose corporations, automobile and credit card
receivables are securitized in pass-through structures similar to mortgage
pass-through structures or in a pass-through structure similar to the CMO
structure. Generally, the issuers of asset-backed bonds, notes or pass-
through certificates are special purpose entities and do not have any
significant assets other than the receivables securing such obligations. In
general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans. Instruments backed by pools of receivables
are similar to mortgage-backed securities in that they are subject to
unscheduled prepayments of principal prior to maturity. When the
obligations are prepaid, the Fund will ordinarily reinvest the prepaid
amounts in securities the yields of which reflect interest rates prevailing
at the time. Therefore, the Fund's ability to maintain a portfolio that
includes high-yielding asset-backed securities will be adversely affected
to the extent that prepayments of principal must be reinvested in
securities that have lower yields than the prepaid obligations. Moreover,
prepayments of securities purchased at a premium could result in a realized
loss.
When-Issued Securities
The Fund may purchase securities on a "when-issued" basis. This means
that the Fund will enter into a commitment to buy the security before the
security has been issued. The Fund's payment obligation and the interest
rate on the security are determined when the Fund enters into the
commitment. The security is typically delivered to the Fund 15 to 120 days
later. No interest accrues on the security between the time the Fund enters
into the commitment and the time the security is delivered. if the value
of the security being purchased falls between the time the Fund commits to
buy it and the payment date, the Fund may sustain a loss. The risk of this
loss is in addition to the Fund's risk of loss on the securities actually
in its
<PAGE>
-20-
portfolio at the time. In addition, when the Fund buys a security on a
when-issued basis, it is subject to the risk that market rates of interest
will increase before the time the security is delivered, with the result
that the yield on the security delivered to the Fund may be lower than the
yield available on other, comparable securities at the time of delivery.
The Fund may enter into agreements with banks or broker-dealers for
the purchase or sale of securities at an agreed-upon price on a specified
future date. Such agreements might be entered into, for example, when the
Fund invests in fixed income securities anticipating a decline in interest
rates and is able to obtain a more advantageous yield by committing
currently to purchase securities to be issued later. When the Fund
purchases securities in this manner (i.e. on a when-issued or delayed-
delivery basis), it is required to segretate aquid Assets in an amount
equal to or greater than, on a daily basis, the amount of the Fund's
when4ssued or delayed-delivery commitments. The Fund will make commitments
to purchase on a when-issued or delayed-delivery basis only securities
meeting the Fund's investment criteria. The Fund may take delivery of these
securities or, if it is deemed advisable as a matter of investment
strategy, the Fund may sell these securities before the settlement date.
When the time comes to pay for when-issued or delayed-delivery securities,
the Fund will meet its obligations from thea available cash flow or the
sale of securities, or from the sale of the when-issued or delayed-delivery
securities themselves (which may have a value greater or less than the
Fund's payment obligation).
Real Estate Investment Trusts
REITs involve certain unique risks in addition to those risks
associated with investing in the real estate industry in general (such as
possible declines in the value of real estate, lack of availability of
mortgage funds or extended vacancies of property). Equity REITs may be
affected by changes in the value of the underlying property owned by the
REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs are dependent upon management skills, are not diversified,
are subject to heavy cash flow dependency, risks of default by borrowers
and self-liquidation. REITs are also subject to the possibilities of
failing to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code"), and failing to maintain
their exemptions from registration under the Investment Company Act of 1940
(the "1940 Act").
Investment in REITs involve risk similar to those associated with
investing in small capitalization companies. REITs may have limited
financial resources, may trade less frequently and in a limited volume and
may be subject to more abrupt or erratic price movements than larger
securities.
<PAGE>
-21-
Rule 144A Securities
The Fund may invest in Rule 144A securities, which are privately offered
securities that can be resold only to certain qualified institutional buyers.
Rule 144A securities are treated as illiquid, unless Loomis Sayles has
determined, under guidelines established by the Trust's trustees, that the
particular issue of Rule 144A securities is liquid. Under the guidelines, Loomis
Sayles considers such factor as: (1) the frequency of trades and quotes for a
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades therefor.
Non-U.S. Securities
The Fund may invest in securities of issuers organized or headquartered
outside the United States ("non-U.S. securities"). The Fund may invest any
portion of its assets in securities of Canadian issuers, but will not purchase
non-U.S. securities other than those of Canadian issuers if, as a result, the
Fund's holdings of non-U.S. and non-Canadian securities would exceed 20% of the
Fund's total assets.
Although investing in non-U.S. securities may increase the Fund's
diversification and reduce portfolio volatility, non-U.S. securities may present
risks not associated with investments in comparable securities of U.S. issuers.
There may be less information publicly available about a non-U.S. corporate or
governmental issuer than about a U.S. issuer, and non-U.S. corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
non-U.S. issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Non-U.S. brokerage commissions and securities custody
costs are often higher than in the United States. With respect to certain non-
U.S. countries, there is a possibility of governmental expropriation of assets,
confiscatory taxation, political or financial instability and diplomatic
developments that could affect the value of investments in those countries. The
Fund's receipt of interest on non-U.S. government securities may depend on the
availability of tax or other revenues to satisfy the issuer's obligations.
The Fund's investments in non-U.S. securities may include investments in
countries whose economies or securities markets are not yet highly developed.
Special considerations associated with these investments (in addition to the
considerations regarding foreign investments generally) may include, among
others, greater political uncertainties, an economy's dependence on revenues
from particular
<PAGE>
-22-
commodities or on international aid or development assistance, currency transfer
restrictions, highly limited numbers of potential buyers for such securities and
delays and disruptions in securities settlement procedures.
Since most non-U.S. securities are denominated in non-U.S. currencies or
traded primarily in securities markets in which settlements are made in non-U.S.
currencies, the value of these investments and the net investment income
available for distribution to shareholders of the Fund when it invests in these
securities may be affected favorably or unfavorably by changes in currency
exchange rates, exchange control regulations or foreign withholding taxes.
Changes in the value relative to the U.S. dollar of a non-U.S. currency in which
the Fund's holdings are denominated will result in a change in the U.S. dollar
value of the Fund's assets and the Fund's income available for distribution.
In addition, although part of the Fund's income may be received or realized
in non-U.S. currencies, the Fund will be required to compute and distribute its
income in U.S. dollars. Therefore, if the value of a currency relative to the
U.S. dollar declines after the Fund's income has been earned in that currency,
translated into U.S. dollars and declared as a dividend, but before payment of
the dividend, the Fund could be required to liquidate portfolio securities to
pay the dividend. Similarly, if the value of a currency relative to the U.S.
dollar declines between the time the Fund accrues expenses in U.S. dollars and
the time such expenses are paid, the amount of such currency required to be
converted into U.S. dollars will be greater than the equivalent amount in such
currency of such expenses at the time they were incurred.
In determining whether to invest assets of the Fund in securities of a
particular non-U.S. issuer, Loomis Sayles will consider the likely effects of
applicable tax regulations on the net yield available to the Fund and its
shareholders. Compliance with applicable tax regulations may adversely affect
the Fund's performance.
Currency Hedging Transactions
The Fund may engage in foreign currency exchange transactions to protect
the value of specific portfolio positions or in anticipation of changes in
relative values of currencies in which current or future Fund portfolio holdings
are denominated or quoted. For example, to protect against a change in the
currency exchange rate between the date on which the Fund contracts to purchase
or sell a security and the settlement date for the purchase or sale, or to "lock
in" the equivalent of a dividend or interest payment in another currency, the
Fund might purchase or sell a non-U.S. currency on a spot (that is, cash) basis
at the prevailing spot rate. If conditions warrant, the Fund may also enter into
private contracts to purchase or sell non-U.S. currencies at a future date
("forward contracts"). The Fund might also purchase
<PAGE>
-23-
exchange-listed and over-the-counter call and put options on non-U.S.
currencies. Over-the-counter currency options are generally less liquid than
exchange-listed options, and will be treated as illiquid assets. The Fund may
not be able to dispose of over-the-counter options readily.
Currency transactions involve costs and may result in losses.
Non-U.S. Currency Transactions
The Fund may invest in securities of non-U.S. issuers and may enter into
forward non-U.S. currency exchange contracts, or buy or sell options on non-U.S.
currencies, in order to protect against uncertainty in the level of future non-
U.S. exchange rates. Since investment in securities of non-U.S. issuers will
usually involve currencies of non-U.S. countries, and since the Fund may
temporarily hold funds in bank deposits in non-U.S. currencies during the course
of investment programs, the value of the assets of the Fund as measured in U.S.
dollars may be affected by changes in currency exchange rates and exchange
control regulations, and the Fund may incur costs in connection with conversions
between various currencies.
The Fund may enter into forward contracts under two circumstances. First,
when the Fund enters into a contract for the purchase or sale of a security
denominated or traded in a market in which settlement is made in a non-U.S.
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contracts for the purchase or sale, for a fixed amount
of dollars, of the amount of non-U.S. currency involved in the underlying
transactions, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject non-U.S. currency during the period between the date on which the
investment is purchased or sold and the date on which payment is made or
received.
Second, when Loomis Sayles believes that the currency of a particular
country may suffer a substantial decline against another currency, it may enter
into a forward contract to sell, for a fixed amount of another currency, the
amount of the first currency approximating the value of some or all of the
Fund's portfolio investments denominated in the first currency. 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 a currency will change as a consequence of market movements in the
value of those investments between the date the forward contract is entered into
and the date it matures.
The Fund generally will not enter into forward contracts with a term of
greater than one year.
<PAGE>
-24-
Options on non-U.S. currencies are similar to forward contracts, except
that one party to the option (the holder) is not contractually bound to buy or
sell the specified currency. Instead, the holder has discretion whether to
"exercise" the option and thereby require the other party to buy or sell the
currency on the terms specified in the option. Options transactions involve
transaction costs and, like forward contract transactions, involve the risk that
the other party may default on its obligations (if the options are not traded on
an established exchange) and the risk that expected movements in the relative
value of currencies may not occur, resulting in an imperfect hedge or a loss to
the Fund.
The Fund, in conjunction with its transactions in forward contracts,
options and futures will maintain in a segregated account with its custodian
cash or certain liquid assets with a value, marked to market on a daily basis,
sufficient to satisfy the Fund's outstanding obligations under such contracts,
options and futures.
Swap Transactions
The Fund may enter into interest rate or currency swaps. The Fund will
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. Interest rate swaps involve the exchange by a Fund with another party of
their respective commitments to pay or receive interest (for example; an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the relative values of the
specified currencies. The Fund will maintain liquid assets in a segregated
custodial account to cover its current obligations under swap agreements.
Because swap agreements are not exchange-traded, but are private contracts into
which the Fund and a swap counterparty enter as principals, the Fund may
experience a loss or delay in recovering assets if the counterparty were to
default on its obligations.
Options and Futures Transactions
The Fund may buy, sell or write options on securities, securities indexes,
currencies or futures contracts and may buy and sell futures contracts on
securities, securities indexes or currencies. The Fund may engage in these
transactions either for the purpose of enhancing investment return, or to hedge
against changes in the value of other assets that the Fund owns or intends to
acquire. Options and futures fall into the broad category of financial
instruments known as "derivatives" and
<PAGE>
-25-
involve special risks. Use of options or futures for other than hedging purposes
may be considered a speculative activity, involving greater risks than are
involved in hedging.
Options can generally be classified as either "call" or "put" options.
There are two parties to a typical options transaction: the "writer" and the
"buyer." A call option gives the buyer the right to buy a security or other
asset (such as an amount of currency or a futures contract) from, and a put
option gives the buyer the right to sell a security or other asset to, the
option writer at a specified price, on or before a specified date. The buyer of
an option pays a premium when purchasing the option, which reduces the return on
the underlying security or other asset if the option is exercised, and results
in a loss if the option expires unexercised. The writer of an option receives a
premium from writing an option, which may increase its return if the option
expires or is closed out at a profit. If the Fund as the writer of an option is
unable to close out an unexpired option, it must continue to hold the underlying
security or other asset until the option expires, to "cover" its obligation
under the option.
An option entitles the holder to receive (in the case of a call option) or
to sell (in the case of a put option) a particular security at a specified
exercise price. An "American style" option allows exercise of the option at any
time during the term of the option. A "European style" option allows an option
to be exercised only at the end of its term. Options may be traded on or off an
established securities exchange.
If the holder of an option wishes to terminate its position, it may seek to
effect a closing sale transaction by selling an option identical to the option
previously purchased. The effect of the purchase is that the previous option
position will be canceled. The Fund will realize a profit from closing out an
option if the price received for selling the offsetting position is more than
the premium paid to purchase the option; the Fund will realize a loss from
closing out an option transaction if the price received for selling the
offsetting option is less than the premium paid to purchase the option.
The use of options involves risks. One risk arises because of the imperfect
correlation between movements in the price of options and movements in the price
of the securities that are the subject of the hedge. The Fund's hedging
strategies will not be fully effective if such imperfect correlation occurs.
Price movement correlation may be distorted by illiquidity in the options
markets and the participation of speculators in such markets. If an insufficient
number of contracts are traded, commercial users may not deal in options because
they do not want to assume the risk that they may not be able to close out their
positions within a reasonable amount of time. In such instances, options market
prices may be driven by different forces than those driving the market in the
underlying securities,
<PAGE>
-26-
and price spreads between these markets may widen. The participation of
speculators in the market enhances its liquidity. Nonetheless, the trading
activities of speculators in the options markets may create temporary price
distortions unrelated to the market in the underlying securities.
An exchange-traded option may be closed out only on an exchange which
generally provides a liquid secondary market for an option of the same series.
If a liquid secondary market for an exchange-traded option does not exist, it
might not be possible to effect a closing transaction with respect to a
particular option, with the result that the Fund would have to exercise the
option in order to accomplish the desired hedge. Reasons for the absence of a
liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (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 or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options Clearing Corporation
or other clearing organization may not at all times be adequate 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 options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class of series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Options Clearing Corporations as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The successful use of options depends in part on the ability of Loomis
Sayles to forecast correctly the direction and extent of interest rate, stock
price or currency value movements within a given time frame. To the extent
interest rates, stock prices or currency values move in a direction opposite to
that anticipated, the Fund may realize a loss on the hedging transaction that is
not fully or partially offset by an increase in the value of portfolio
securities. In addition, whether or not interest rates or the relevant stock
price or relevant currency values move during the period that the Fund holds
options positions, the Fund will pay the cost of taking those positions (i.e.,
brokerage costs). As a result of these factors, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
An over-the-counter option (an option not traded on an established
exchange) may be closed out only with the other party to the original option
transaction. While the Fund will seek to enter into over-the-counter options
only with dealers who agree to or are expected to be capable of entering into
closing transactions with the Fund,
<PAGE>
-27-
there can be no assurance that the Fund will be able to liquidate an over-the-
counter option at a favorable price at any time prior to its expiration.
Accordingly, the Fund might have to exercise an over-the-counter option it holds
in order to achieve the intended hedge. Over-the-counter options are not subject
to the protections afforded purchasers of listed options by the Options Clearing
Corporation or other clearing organization.
The staff of the SEC has taken the position that over-the-counter options
should be treated as illiquid securities for purposes of the Fund's investment
restriction prohibiting it from investing more than 15% of its net assets in
illiquid securities. The Fund intends to comply with this position.
Income earned by the Fund from its hedging activities will be treated as
capital gain and, if not offset by net recognized capital losses incurred by the
Fund, will be distributed to shareholders in taxable distributions. Although
gain from options transactions may hedge against a decline in the value of the
Fund's portfolio securities, that gain, to the extent not offset by losses, will
be distributed in light of certain tax considerations and will constitute a
distribution of that portion of the value preserved against decline.
A futures contract creates an obligation by the seller to deliver and the
buyer to take delivery of the type of instrument or cash at the time and in the
amount specified in the contract. Although many futures contracts call for the
delivery (or acceptance) of the specified instrument, futures are usually closed
out before the settlement date through the purchase (or sale) of a comparable
contract. If the price of the sale of the futures contract by the Fund exceeds
(or is less than) the price of the offsetting purchase, the Fund will realize a
gain (or loss).
The value of options purchased by the Fund and futures contracts held by a
Fund may fluctuate based on a variety of market and economic factors. In some
cases, the fluctuations may offset (or be offset by) changes in the value of
securities held in the Fund's portfolio. All transactions in options and
futures involve the possible risk of loss to the Fund of all or a significant
part of the value of its investment. In some cases, the risk of loss may exceed
the amount of the Fund's investment. When the Fund writes a call option or
sells a futures contract without holding the underlying securities, currencies
or futures contracts, its potential loss is unlimited. The Fund will be
required, however, to set aside with its custodian bank liquid assets in amounts
sufficient at all times to satisfy its obligations under options, futures and
contracts.
The successful use of options and futures will usually depend on Loomis
Sayles' ability to forecast stock market, currency or other financial market
movements correctly. The Fund's ability to hedge against adverse changes in the
value of
<PAGE>
-28-
securities held in its portfolio through options and futures also depends on the
degree of correlation between changes in the value of futures or options
positions and changes in the values of the portfolio securities. The successful
use of futures and exchange traded options also depends on the availability of a
liquid secondary market to enable the Fund to close its positions on a timely
basis. There can be no assurance that such a market will exist at any
particular time. In the case of options that are not traded on an exchange
("over-the-counter" options), the Fund is at risk that the other party to the
transaction will default on its obligations, or will not permit the Fund to
terminate the transaction before its scheduled maturity. As a result of these
characteristics, the Fund will treat most over-the-counter options (and the
assets it segregates to cover its obligations thereunder) as illiquid.
The options and futures markets of foreign countries are small compared to
those of the United States and consequently are characterized in most cases by
less liquidity than are the U.S. markets. In addition, foreign markets may be
subject to less detailed reporting requirements and regulatory controls than
U.S. markets. Furthermore, investments in options in foreign markets are subject
to many of the same risks as other foreign investments. See "Non-U.S.
Securities" above.
Repurchase Agreements
The Fund may enter into repurchase agreements, by which the Fund purchases
a security and obtains a simultaneous commitment from the seller (a bank or, to
the extent permitted by the 1940 Act, a recognized securities dealer) to
repurchase the security at an agreed upon price and date (usually seven days or
less from the date of original purchase). The resale price is in excess of the
purchase price and reflects an agreed upon market rate unrelated to the coupon
rate on the purchased security. Such transactions afford the Fund the
opportunity to earn a return on temporarily available cash at minimal market
risk. While the underlying security may be a bill, certificate of indebtedness,
note or bond issued by an agency, authority or instrumentality of the U.S.
Government, the obligation of the seller is not guaranteed by the U.S.
Government and there is a risk that the seller may fail to repurchase the
underlying security. In such event, the Fund would attempt to exercise rights
with respect to the underlying security, including possible disposition in the
market. However, the Fund may be subject to various delays and risks of loss,
including (a) possible declines in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (1) possible
reduced levels of income and lack of income during this period and (c) inability
to enforce rights and the expenses involved in attempted enforcement.
<PAGE>
-29-
Year 2000
Many computer software systems in use today cannot properly process
date related information from and after January 1, 2000. Should any of the
computer systems employed by the Fund's major service providers fail to
process this type of information properly, that could have a negative
impact on the Fund's operations and the services that are provided to the
Fund's shareholders. Loomis Sayles has advised the Funds that it is
reviewing all of its computer systems with the goal of modifying or
replacing such systems prior to January 1, 2000 to the extent necessary to
avoid any such negative impact. In addition, Loomis Sayles has been advised
by the Custodian that it is also in the process of reviewing its systems
with the same goal. As of the date of this Securities Registration
Statement, the Fund and Loomis Sayles have no reason to believe that these
goals will not be achieved. Similarly, the values of certain of the Fund's
assets may be adversely affected by the inability of their issuer or third
parties to process this type of information properly.
(C) Restrictions of Investment:
The investment policies of the Fund may be changed by the Fund's
adviser, subject to review and approval by the Trust's board of trustees,
without shareholder approval except that any Fund policy explicitly
identified as "fundamental" may not be changed without the approval of the
holder of a majority of the outstanding shares of the Fund (which means the
lesser of (i) 67% of the shares of the Fund represented at a meeting at
which 50% of the outstanding shares are represented or (ii) more than 50%
of the outstanding shares). Except in the case of the 15% limitation on
illiquid securities, the percentage limitations set forth below and in the
Prospectus will apply at the time a security is purchased and will not be
considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such purchase.
The following investment restrictions are policies of the Fund (and
those marked with an asterisk are fundamental policies of the Fund):
The Fund will not:
(1) Invest in companies for the purpose of exercising control or
management.
*(2) Engage in the business of underwriting securities issued by other
persons.
*(3) Invest in oil, gas or other mineral leases, rights or royalty
contracts or in real estate, commodities or commodity contracts. (This
restriction does not prevent the Fund from engaging in transactions in
futures contracts relating to securities indexes, interest rates or
financial instruments, or options thereon, or from investing in
issuers that invest
<PAGE>
-30-
or deal in the foregoing types of assets or from purchasing securities
that are secured by real estate.)
*(4) Make loans. (For purposes of this investment restriction, neither (i)
entering into repurchase agreements nor (ii) purchasing bonds,
debentures, commercial paper, corporate notes and similar evidences of
indebtedness, which are a part of an issue to the public or to
financial institutions, is considered the making of a loan.)
(5) With respect to 75% of its assets, purchase any security (other than a
U.S. Government Security) if, as a result, more than 5% of the Fund's
total assets (taken at current value) would then be invested in
securities of a single issuer.
(6) With respect to 75% of its assets, acquire more than 10% of the
outstanding voting securities of an issuer.
(7) Pledge, mortgage, hypothecate or otherwise encumber any of its assets,
except that the Fund may pledge assets having a value not exceeding
10% of its total assets to secure borrowings permitted by restriction
(9) below. (For the purpose of this restriction, collateral
arrangements with respect to options, futures contracts and options on
futures contracts and with respect to initial and variation margin are
not deemed to be a pledge or other encumbrance of assets.)
*(8) Purchase any security (other than U.S. Government Securities) if, as a
result, more than 25% of the Fund's total assets (taken at current
value) would be invested in any one industry (in the utilities
category, gas, electric, water and telephone companies will be
considered as being in separate industries).
*(9) Borrow money in excess of 10% of its total assets (taken at cost) or
5% of its total assets (taken at current value), whichever is lower,
nor borrow any money except as a temporary measure for extraordinary
or emergency purposes.
(10) Purchase securities on margin (except such short term credits as are
necessary for clearance of transactions); or make short sales (except
where, by virtue of ownership of other securities, it has the right to
obtain, without payment of additional consideration, securities
equivalent in kind and amount to those sold).
(11) Participate on a joint or joint and several basis in any trading
account in securities. (The "bunching" of orders for the purchase or
sale of portfolio securities with Loomis Sayles or accounts under its
management to reduce brokerage commissions, to average prices
<PAGE>
-31-
among them or to facilitate such transactions is not considered a
trading account in securities for purposes of this restriction.)
(12) Purchase any illiquid security, including any security that is not
readily marketable, if, as a result, more than 15% of the Fund's net
assets (based on current value) would then be invested in such
securities.
(13) Write or purchase puts, calls or combinations of both except that the
Fund may (1) acquire warrants or rights to subscribe to securities of
companies issuing such warrants or rights, or of parents or
subsidiaries of such companies, (2) purchase and sell put and call
options on securities or securities indexes or on futures contracts
and (3) write, purchase and sell put and call options on currencies
and may enter into currency forward contracts.
*(14) Issue senior securities. (For the purpose of this restriction none of
the following is deemed to be a senior security: any pledge or other
encumbrance of assets permitted by restriction (7) above; any
borrowing permitted by restriction (9) above; any collateral
arrangements with respect to options, futures contracts and options
on futures contracts and with respect to initial and variation
margin; and the purchase or sale of options, forward contracts,
futures contracts or options on futures contracts.)
(15) Invest more than 10% of its net assets in the securities of other
registered open-end investment funds or companies.
Although the Fund has no current intention of investing in repurchase
agreements, it intends, based on the views of the staff of the Securities and
Exchange Commission (the "SEC"), to restrict its investments in repurchase
agreements maturing in more than seven days, together with other investments in
illiquid securities, to the percentage permitted by restriction (12) above.
In connection with the offering of its shares in Japan, the Fund has
undertaken to the Japan Securities Dealers Association: (1) that the Fund will
not invest more than 10% of the Fund's net assets in securities that are not
traded on a recognized exchange: (2) that the Fund may not acquire more than 10%
of the voting securities of any issuer; (3) that the Fund will not invest more
than 5% of its total assets in the securities of any one issuer (other than the
U.S. Government) and (4) that the Fund will not, together with other registered
investment companies managed by Loomis Sayles, acquire more than 15% of the
voting securities of any issuer.
If the undertaking is violated, the Fund will, promptly after discovery,
take such action as may be necessary to cause the violation to cease, which
shall be the only obligation of the Fund and the only remedy in respect of the
violation. This
<PAGE>
-32-
undertaking will remain in effect as long as shares of the Fund are
qualified for offer or sale in Japan and such undertaking is required by
the Japan Securities Dealers Association as a condition of such
qualification.
(D) Distribution Policy:
The Fund generally declares and pays dividends monthly. The first
monthly dividend was paid in December 1998. The Fund also distributes all
of its net capital gains realized from the sale of portfolio securities.
Any capital gain distributions are normally made annually, but may, to the
extent permitted by law, be made more frequently as deemed advisable by the
trustees of the Trust. The Fund normally pays distributions to investors
who own shares of the Fund as of the last day of each month (record date).
The Trust's trustees may change the frequency with which the Fund declares
or pays dividends.
Dividends and capital gain distributions will automatically be
reinvested in additional shares of the Fund on the record date unless an
investor has elected to receive cash.
It is the policy of the Fund to pay its shareholders, as dividends,
substantially all net investment income and to distribute annually all net
realized capital gains, if any, after offsetting any capital loss
carryovers.
Income dividends and capital gain distributions are payable in full
and fractional shares of the Fund based upon the net asset value determined
as of the close of regular trading on the New York Stock Exchange on the
record date for each dividend or distribution. Shareholders on record date,
however, may elect to receive their income dividends or capital gain
distributions, or both, in cash. The election may be made on behalf of
Japanese Shareholders by Agent Company at any time by submitting a written
request directly to State Street Bank. In order for a change to be in
effect for any dividend or distribution, it must be received by State
Street Bank on or before the record date for such dividend or distribution.
The Japanese investors shall receive applicable dividend monthly
through Kokusai. The election to receive distributions in shares or in cash
may be made by Japanese investors by submitting a written request directly
to the Agent Company.
3. MANAGEMENT STRUCTURE
(A) Outline of Management of Assets, etc.:
A. Valuation of assets:
The net asset value of the shares of the Fund is determined by dividing
the Fund's total net assets (the excess of its assets over its liabilities)
by the total number of shares of the Fund outstanding and rounding to the
nearest cent. Such
<PAGE>
-33-
determination is made as of the close of regular trading on the New York
Stock Exchange on each day on which that Exchange is open for unrestricted
trading, and no less frequently than once daily on each day during which
there is sufficient trading in the Fund's portfolio securities that the
value of the Fund's shares might be materially affected. During the 12
months following the date of this Securities Registration Statement, the
New York Stock Exchange is expected to be closed on the following weekdays:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day. Long-term debt securities are valued by a pricing services, which
determines valuations of normal institutional-size trading units of long-
term debt securities. Such valuations are determined using methods based on
market transactions for comparable securities and on various relationships
between securities which are generally recognized by institutional traders.
Other securities for which current market quotations are not readily
available (including restricted securities, if any) and all other assets
are taken at fair value as determined in good faith by the board of
trustees, although the actual calculations may be made by persons acting
pursuant to the direction of the board.
Generally, trading in non-U.S. securities markets is substantially
completed each day at various times prior to the close of regular trading
on the New York Stock Exchange. Occasionally, events affecting the value of
non-U.S. fixed income securities may occur between the completion of
substantial trading of such securities for the day and the close of regular
trading on the New York Stock Exchange, which events will not be reflected
in the computation of the Fund's net asset value. If events materially
affecting the value of the Fund's portfolio securities occur during such
period, then these securities will be valued at their fair value as
determined in good faith by or in accordance with procedures approved by
the trustees.
B. Management Fee, etc.:
(1) Management Fee:
(a) Management Company Fee
The Fund pays Loomis Sayles a monthly investment advisory fee of
.60% of the Fund's average daily net assets. In addition to the
investment advisory fee, the Fund pays all expenses not expressly
assumed by Loomis Sayles, including taxes, brokerage commissions, fees
and expenses of registering or qualifying the Fund's shares under
federal and state securities laws, fees of the Fund's custodian,
transfer agent, independent accountants and legal counsel, expenses of
shareholders' and trustees' meetings, expenses of preparing, printing
and mailing prospectuses to existing shareholders and fees
<PAGE>
-34-
of trustees who are not directors, officers or employees of
Loomis Sayles or its affiliated companies.
(b) Custodian Fee and Charges of the Shareholder Servicing,
Transfer and Dividend Paying Agent
The Fund pays to State Street Bank and Trust Company, the
Fund's Custodian, an annual fee at the rate of .066% on the first
$20 million of assets, .033% on the next $80 million of assets
and .0100% on amounts exceeding $80 million, subject to certain
minimum monthly charges.
The Fund pays to State Street Bank and Trust Company, the
Fund's Transfer and Servicing Agent, an annual fee at the rate of
0.10% of assets subject to certain maximum monthly charges.
(c) Fee on Distribution Plan
Under a Service and Distribution Plan adopted pursuant to
Rule 12b-1 under the 1940 Act, the Fund pays the Distributor, a
subsidiary of Loomis Sayles, a monthly service fee at an annual
rate not to exceed 0.25% of the Fund's average net assets and a
monthly distribution fee at an annual rate not to exceed 0.50% of
the Fund's average net assets. The Distributor may pay all or any
portion of the service fee to securities dealers or other
organizations for providing personal service to investors and/or
the maintenance of shareholder accounts and all or any portion of
the distribution fee to securities dealers who are dealers of
record with respect to the Fund's shares, as distribution fees in
connection with the sale of the Fund's shares. The Distributor
retains the balance of these fees as compensation for its
services as distributor.
(d) Other Expenses:
The Trust pays no compensation to its officers or to the
trustees who are directors, officers or employees of Loomis
Sayles. Each trustee who is not a director, officer or employee
of Loomis Sayles is compensated at the rate of $1,250 per fund
per annum.
COMPENSATION TABLE
for the fiscal period ended September 30, 1998
<TABLE>
<CAPTION>
(3) (5)
Pension or Total
(2) Retirement (4) Compensation
(1) Aggregate Benefits Estimated From Trust and
Name of Person, Compensation Accrued as Part Annual Benefits Fund Complex*
Position From Trust of Fund upon Retirement Paid to Trustee
- ----------------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Earl W. Foell, Trustee $15,937.50 N/A N/A $12,812.50
Richard S. Holway, Trustee $15,937.50 N/A N/A $12,812.50
Terry R. Lautenbach**, Trustee $15,937.50 N/A N/A $12,812.50
Michael T. Murray, Trustee $15,937.50 N/A N/A $12,812.50
</TABLE>
<PAGE>
-35-
____________
* No Trustee receives any compensation from any mutual funds affiliated with
Loomis Sayles, other than the Trust.
** Mr. Lautenbach retired from the Board of Trustees on October 26, 1998.
In placing orders for the purchase and sale of portfolio securities
for the Fund, Loomis Sayles always seeks the best price and execution.
Transactions in unlisted securities are carried out through broker-dealers
who make the primary market for such securities unless, in the judgment of
Loomis Sayles, a more favorable price can be obtained by carrying out such
transactions through other brokers or dealers.
Loomis Sayles selects only brokers or dealers which it believes are
financially responsible, will provide efficient and effective services in
executing, clearing and settling an order and will charge commission rates
which, when combined with the quality of the foregoing services, will
produce the best price and execution for the transaction. This does not
necessarily mean that the lowest available brokerage commission will be
paid. However, the commissions are believed to be competitive with
generally prevailing rates. Loomis Sayles will use its best efforts to
obtain information as to the general level of commission rates being
charged by the brokerage community from time to time and will evaluate the
overall reasonableness of brokerage commissions paid on transactions by
reference to such data. In making such evaluation, all factors affecting
liquidity and execution of the order, as well as the amount of the capital
commitment by the broker in connection with the order, are taken into
account. The Fund will not pay a broker a commission at a higher rate than
otherwise available for the same transaction in recognition of the value
of research services provided by the broker or in recognition of the value
of any other services provided by the broker which do not contribute to
the best price and execution of the transaction.
Receipt of research services from brokers may sometimes be a factor in
selecting a broker which Loomis Sayles believes will provide the best
price and execution for a transaction. These research services include not
only a wide variety of reports on such matters as economic and political
developments, industries, companies, securities, portfolio strategy,
account performance, daily prices of securities, stock and bond market
conditions and projections, asset allocation and portfolio structure, but
also meetings with management representatives of issuers and with other
analysts and specialists. Although it is not possible to assign an exact
dollar value to these services they may, to the extent used, tend to
reduce Loomis Sayles' expenses. Such
<PAGE>
-36-
services may be used by Loomis Sayles in serving other client accounts and
in some cases may not be used with respect to the Funds. Receipt of
services or products other than research from brokers is not a factor in
the selection of brokers.
C. Sales, Repurchases and Custody:
(1) Sales of Shares:
a. Sales in the United States
--------------------------
An investor may make an initial purchase of shares of the Fund by
submitting a completed application form and payment to:
State Street Bank and Trust Company
Mutual Fund Services
One Heritage Drive
North Quincy, Massachusetts 02171
All purchases made by check should be in U.S. dollars and made payable
to State Street Bank and Trust Company ("State Street Bank"). Third party
checks will not be accepted. When purchases are made by check or periodic
account investment, redemption will not be allowed until the investment being
redeemed has been in the account for 15 calendar days.
Upon acceptance of an investor's order, State Street Bank opens an
account, applies the payment to the purchase of full and fractional Fund
shares and mails a statement of the account confirming the transaction.
After an account has been established, an investor may send subsequent
investments at any time directly to State Street Bank at the above address.
The remittance must be accompanied by either the account identification slip
detached from a statement of account or a note containing sufficient
information to identify the account, i.e., the Fund name and the investor's
account number or name and social security number.
Subsequent investments can also be made by federal funds wire. Investors
should instruct their banks to wire federal funds to State Street Bank and
Trust Company, ABA #011000028. The text of the wire should read as follows:
"$_____ amount, STATE STREET BOS ATTN Mutual Funds. Credit Loomis Sayles
Managed Bond, DDA #4133-408-7, Account Name, Account Number." A bank may
charge a fee for transmitting funds by wire.
The Fund and the Distributor reserve the right to reject any purchase
order, including orders in connection with exchanges, for any reason which
the Fund or the Distributor in its sole discretion deems appropriate.
Although the Fund does not presently anticipate that it will do so, the Fund
reserves the right
<PAGE>
-37-
to suspend or change the terms of the offering of its shares. In order to avoid
dividend dilution, it is expected that the Fund will reject purchase orders in
excess of U.S. $5 million on each of the five Fund business days preceding the
ex-dividend date of each month. A "Fund business day" is any day on which the
New York Stock Exchange is open for business.
The price an investor pays will be the per share net asset value next
calculated after a proper investment order is received by the Trust's transfer
or other agent or subagent (in the case of the Initial Public Offering Period,
$9.95) plus a 2.50% sales charge (the "public offering price") which is 2.56% of
the net amount invested. The amount reallowed to dealers is 2.00% as a
percentage of the offering price. The Fund receives the net asset value. The
Distributor will retain 0.50% of the net asset value. The foregoing percentages
do not reflect the Japanese Consumption tax of 0.10% of the amount reallowed to
dealers that is collected from investors at the time of purchase. The net asset
value of the Fund's shares is calculated once daily as of the close of regular
trading on the New York Stock Exchange on each day the Exchange is open for
trading, by dividing the Fund's net assets by the number of shares outstanding.
Portfolio securities are valued at their market value.
The Distributor may accept telephone orders from broker-dealers who have
been previously approved by the Distributor. It is the responsibility of such
broker-dealers to promptly forward purchase or redemption orders to the
Distributor. Although there is no sales charge imposed by the Fund or the
Distributor, broker-dealers may charge the investor a transaction-based fee or
other fee for their services at either the time of purchase or the time of
redemption. Such charges may vary among broker-dealers but in all cases will be
retained by the broker-dealer and not remitted to the Fund.
A shareholder's investment in the Fund is automatically credited to an open
account maintained for the shareholder by State Street Bank. Certificates
representing shares are issued only upon written request to State Street Bank
but are not issued for fractional shares. Following each transaction in the
account, a shareholder will receive an account statement disclosing the current
balance of shares owned and the details of recent transactions in the account.
After the close of each fiscal year, State Street Bank will send each
shareholder a statement providing federal tax information on dividends and
distributions paid to the shareholder during the year. This should be retained
as a permanent record. Shareholders will be charged a fee for duplicate
information.
<PAGE>
-38-
The open account system permits the purchase of full and fractional shares
and, by making the issuance and delivery of certificates representing shares
unnecessary, eliminates the problems of handling and safekeeping certificates,
and the cost and inconvenience of replacing lost, stolen, mutilated or destroyed
certificates.
The costs of maintaining the open account system are borne by the Trust,
and no direct charges are made to shareholders. Although the Trust has no
present intention of making such direct charges to shareholders, it reserves the
right to do so. Shareholders will receive prior notice before any such charges
are made.
b. Sales in Japan
--------------
In Japan, Shares of the Fund are offered on any Fund Business Day and any
business day of securities company in Japan during the applicable Subscription
Period mentioned in 8. Period of Subscription, Part I Information concerning
Securities" of a securities registration statement pursuant to the terms set
forth in "Part I. Information concerning Securities" of the relevant securities
registration statement. A Handling Securities Company shall provide to the
investors a Contract Concerning a Foreign Securities Transactions Account or
other prescribed contract (the "Contract") and receive from such investors an
application for requesting the opening of a transactions account under the
Contract. Shares may be purchased in the minimum investment amount of 100 shares
and in integral multiples of 100 shares.
The Issue Price is the net asset value per Share next calculated on the day
on which the Fund has received such application. The contract day in Japan is
the day when Kokusai confirms the execution of the order (usually, the next
business day in Japan following the day of placement of the order), and in
respect of the Continuous Offering Period, the settlement shall be made within 4
business days from the contract day, and investors shall pay the Sales Charge by
such payment day.
The sales charge in Japan shall be 2% of the Sales Price.
The Investors having entrusted a Sales and Sales Handling Company in Japan
with safekeeping of the certificates for Fund shares will receive a certificate
of safekeeping in exchange for the purchase price. In such case payment shall be
made in yen in principle and the applicable exchange rate shall be the exchange
rate which shall be based on the foreign exchange rate quoted in the Tokyo
Foreign Exchange Market on the Trade Day and which shall be determined by such
Sales and Sales Handling Company in Japan.
<PAGE>
-39-
The payment may be made in dollars to the extent that the Sales and Sales
Handling Companies in Japan can agree.
In addition, Sales and Sales Handling Companies in Japan who are
members of the Japan Securities Dealers Association cannot continue sales
of the Shares in Japan when the net assets of the Fund are less than (Yen)
l00,000,000 or the Shares otherwise cease to comply with the "Standards of
Selection of Foreign Investment Fund Securities" established by the
Association.
The Fund and the Distributor reserve the right to reject any purchase
order from the Distributor in Japan for any reason which the Fund or the
Distributor in its sole discretion deems appropriate. Although the Fund
does not presently anticipate that it will do so, the Fund reserves the
right to suspend or change the terms of the offering of its shares. In
order to avoid dividend dilution, it is expected that the Fund will reject
purchase orders in excess of U.S.$5 million on each of the five Fund
business days preceding the ex-dividend date of each month. A "Fund
business day" is any day on which the New York Stock Exchange is open for
business.
(2) Repurchase of Shares:
a. Repurchase in the United States
-------------------------------
An investor can redeem shares by sending a written request to State
Street Bank and Trust Company, Mutual Fund Services, One Heritage Drive,
North Quincy, Massachusetts 02171. Proceeds from a written request may be
sent to the investor in the form of a check.
The written request must include the name of the Fund, the account
number, the exact name(s) in which the shares are registered, and the number
of shares or the dollar amount to be redeemed. All owners of the shares must
sign the request in the exact names in which the shares are registered (this
appears on an investor's confirmation statement) and should indicate any
special capacity in which they are signing (such as trustee or custodian or
on behalf of a partnership, corporation or other entity). Shareholders
requesting that redemption proceeds be wired to their bank accounts must
provide specific wire instructions.
The redemption price will be the net asset value per share next
determined after the redemption request and any necessary special
documentation are received by State Street Bank in proper form.
Proceeds resulting from a written redemption request will normally be
mailed to an investor within seven days after receipt of the investor's
request in good order. If an investor purchased shares by check and the check
was
<PAGE>
-40-
deposited less than 15 days prior to the redemption request, the Fund may
withhold redemption proceeds until the check has cleared.
The Fund may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the SEC when trading on
the Exchange is restricted or during an emergency which makes it impracticable
for the Fund to dispose of its securities or to determine fairly the value of
its net assets, or during any other period permitted by the SEC for the
protection of investors.
A redemption generally constitutes a sale of the shares for federal income
tax purposes on which the investor may realize a long- or short-term capital
gain or loss.
b. Repurchase in Japan
-------------------
Shareholders in Japan may at any time request repurchase of their Shares.
Repurchase requests in Japan may be made to State Street Bank through the Sales
and Sales Handling Company in Japan on a Fund Business Day that is a business
day of securities companies in Japan. The repurchase of shares will be in full
share amounts in the amount of one share except in the case of a shareholder who
is closing an account for whom full and fractional shares will be repurchased.
The price a shareholder in Japan will receive is the net asset value next
calculated after the Fund receives the repurchase request from Kokusai, provided
the request is received before the close of regular trading on the New York
Stock Exchange. The payment of the price shall be made in yen through the Sales
and Sales Handling Companies in Japan pursuant to the Contracts or, if the Sales
and Sales Handling Companies in Japan agree, in dollars. The payment for
repurchase proceeds shall ordinarily be on the third business day by the Fund to
the Agent Company. The payment for repurchase proceeds ordinarily shall be made
on the fourth business day of securities companies in Japan after and including
the day when Sales and Sales Handling Companies in Japan confirm the execution
of the order (ordinarily the business day in Japan next following the placement
or repurchase request). The Fund may suspend the right of repurchase and may
postpone payment for more than seven days when the New York Stock Exchange is
closed for other than weekends or holidays, or if permitted by the rules of the
SEC when trading on the Exchange is restricted or during an emergency which
makes it impracticable for the Fund to dispose of its securities or to determine
fairly the
<PAGE>
-41-
value of its net assets, or during any other period permitted by the SEC
for the protection of investors.
(3) Custody of Shares:
Share certificates shall be held by Shareholders at their own risk.
The custody of the Share certificates (if issued) representing Shares
sold to Japanese Shareholders shall, unless otherwise instructed by the
Shareholder, be held, in the name of the custodian, by the custodian of
Kokusai. Certificates of custody for the Shares shall be delivered by the
Sales and Sales Handling Companies in Japan to the Japanese Shareholders.
D. Miscellaneous:
(1) Duration and Liquidation:
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust or the Fund, however, may be terminated at any time by
vote of at least two-thirds of the outstanding shares of the Trust or the
Fund, respectively. The Declaration of Trust further provides that the
trustees may also terminate the Trust or the Fund upon written notice to
the shareholders.
(2) Accounting Year:
The Fund's fiscal year ends on September 30.
(3) Authorized Shares:
There is no limit on the number of shares to be issued.
(4) Agreement and Declaration of Trust:
Originals or copies of the Declaration of Trust, as amended, are
maintained in the office of the Trust and are made available for public
inspection by the Shareholders. Originals or copies of the Declaration of
Trust, as amended, are on file in the United States with the Secretary of
State of The Commonwealth of Massachusetts and with the Clerk of the City
of Boston.
The Declaration of Trust may be amended at any time by an instrument
in writing signed by a majority of the Trustees when authorized to do so by
vote of Shareholders holding a majority of the Shares entitled to vote,
except that an amendment which in the determination of the Trustees shall
affect the holders of one or more series or classes of Shares but not the
holders of all outstanding series and classes shall be authorized by vote
of the Shareholders holding majority of the Shares entitled to vote of each
series and class affected and no vote of Shareholders of a series or class
not affected shall be required. Amendments having the purpose of changing
the name of the Trust, of establishing, changing or eliminating the par
value of any series or of
<PAGE>
-42-
supplying any omission, curing any ambiguity or curing, or supplementing
any defective or inconsistent provision contained therein shall not require
authorization by vote of any Shareholders.
In Japan, material changes in the Declaration of Trust shall be
published and notice thereof shall be sent to the Japanese Shareholders.
(5) Issue of Warrants, Subscription Rights, etc.:
The Fund may not grant privileges to purchase shares of the Fund to
shareholders or investors by issuing warrants, subscription rights or
options, or other similar rights.
(6) How Performance Is Shown:
The Fund's investment performance may from time to time be included in
advertisements about the Fund or Loomis Sayles Funds. "Yield" for each
class of shares is calculated by dividing the annualized net investment
income per share during a recent 30-day period by the maximum public
offering price per share of the class on the last day of that period.
For purposes of calculating yield, net investment income is calculated
in accordance with SEC regulations and may differ from net investment
income as determined for financial reporting purposes. SEC regulations
require that net investment income be calculated on a "yield-to-maturity"
basis, which has the effect of amortizing any premiums or discounts in the
current market value of fixed income securities. The current dividend rate
is based on net investment income as determined for tax purposes, which may
not reflect amortization in the same manner.
"Total return" for the one-, five- and ten-year periods (or for the
life of a class, if shorter) through the most recent calendar quarter
represents the average annual compounded rate of return on an investment of
$1,000 in the Fund. Total return may also be presented for other periods.
Yield. Yield with respect to the Fund will be computed by
dividing the Fund's net investment income for a recent 30-day period by the
maximum offering price (reduced by any undeclared earned income expected to
be paid shortly as a dividend) on the last trading day of that period. Net
investment income will reflect amortization of any market value premium or
discount of fixed income securities (except for obligations backed by
mortgages or other assets) and may include recognition of a pro rata
portion of the stated dividend rate of dividend paying portfolio
securities. The Fund's yield will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio and operating
expenses of the Fund. These factors, and possible differences in the
methods used in calculating
<PAGE>
-43-
yield, should be considered when comparing the Fund's yield to yields
published for other investment companies and other investment
vehicles. Yield should also be considered relative to changes in the
value of the Fund's shares and to the relative risks associated with
the investment objectives and policies of the Fund.
At any time in the future, yields may be higher or lower than
past yields and there can be no assurance that any historical results
will continue.
Investors in the Fund are specifically advised that the net asset
value per share of the Fund may vary, just as yields for the Fund may
vary. An investor's focus on yield to the exclusion of the
consideration of the value of shares of the Fund may result in the
investor's misunderstanding the total return he or she may derive from
the Fund.
Total Return. Total Return with respect to the Fund is
a measure of the change in value of an investment in the Fund over the
period covered, and assumes any dividends or capital gains
distributions are reinvested immediately, rather than paid to the
investor in cash. The formula for total return used herein includes
four steps: (1) adding to the total number of shares purchased through
a hypothetical $1,000 investment (giving effect to the maximum sales
charge) in the Fund all additional shares which would have been
purchased if all dividends and distributions paid or distributed
during the period had been immediately reinvested; (2) calculating the
value of the hypothetical initial investment of $1,000 as of the end
of the period by multiplying the total number of shares owned at the
end of the period by the net asset value per share on the last trading
day of the period; (3) assuming redemption at the end of the period;
and (4) dividing the resulting account value by the initial $1,000
investment.
Yield and Total Return. The Fund may from time to time include
its total return information in advertisements or in information
furnished to present or prospective shareholders. The Fund may from
time to time include the yield and/or total return of its shares in
advertisements or information furnished to present or prospective
shareholders.
(B) Outline of Disclosure System:
(1) Disclosure in U.S.A.:
(i) Disclosure to shareholders
In accordance with the Investment Company Act of 1940, the fund
is required to send to its shareholders annual and semi-annual reports
containing financial information. Audited financial statements will be
prepared and
<PAGE>
-44-
distributed annually and unaudited financial statements will be prepared
and distributed semi-annually.
(ii) Disclosure to the SEC
The Fund has filed a registration statement with the SEC on Form N-
1A; the Fund updates that registration statement periodically in accordance
with the Investment Company Act of 1940.
(2) Disclosure in Japan:
(i) Disclosure under Securities and Exchange Law of Japan
a. Disclosure to the Supervisory Authority:
When the Fund intends to offer the Shares amounting to more than 500
million yen in Japan, it shall submit to the Director of Kanto Local
Financial Bureau of the Ministry of Finance securities registration
statements together with the copies of the Agreement and Declaration of the
Fund and the agreements with major related companies as attachments
thereto. These documents are made available for public inspection for
investors and any other persons who desire at the Kanto Local Finance
Bureau of the Ministry of Finance.
The Sales and Sales Handling Companies in Japan of the Shares shall
deliver to the investors prospectuses the contents of which are
substantially identical to Part I and Part II of the securities
registration statements. For the purpose of disclosure of the financial
conditions, etc., the Trustees shall submit to the Director of Kanto Local
Finance Bureau of the Ministry of Finance of Japan securities reports
within 6 months of the end of each fiscal year, semiannual reports within 3
months of the end of each semi-annual period and extraordinary reports from
time to time when material changes in the operation of the Fund occur as to
material subjects of the Fund. These documents are available for public
inspection for the investors and any other persons who desire at the Kanto
Local Finance Bureau of the Ministry of Finance of Japan.
(ii) Notifications, etc. under the Law Concerning Securities Investment
Trusts and Securities Investment Companies
If the Investment Management Company offers for sale of shares of the
Fund, etc., it must file in advance the prescribed matters on the Fund with
the Commissioner of Financial Supervisory Agent under the Law Concerning
Securities Investment Trusts and Securities Investment Companies (the Law
No. 198; 1951) (hereinafter referred to the "Investment Trusts Law"). In
addition, if the Investment Management Company amends the Agreement and the
Declaration of Trust of the Fund, it must file in advance such amendment
and the details thereof with the Commissioner of Financial Supervisory
Agent.
<PAGE>
-45-
Further, the Investment Management Company must prepare the Management
Report on the prescribed matters concerning the assets of the Fund
under the Investment Trusts Law immediately after the end of each
calculation period of the Fund and must file such Report with the
Commissioner of Financial Supervisory Agent.
b. Disclosure to Japanese Shareholders:
If the Investment Management Company makes any material amendment
to the Agreement and the Declaration of Trust of the Fund, the
substance of which is important, it must give in advance public notice
concerning its intention to make such amendment and the substance of
such amendment at least 30 days prior to such amendment, and must
deliver the written documents containing the above matters to the
unitholders known in Japan. Provided, however, that if the said
written documents are delivered to all the shareholders in Japan, the
relevant public notice is not required to be given.
The Japanese Shareholders will be notified of the material facts
which would change their position, including material amendments to
the Declaration of Trust of the Fund, and of notices from the
Trustees, through the Sales and Sales Handling Companies in Japan.
The financial statements shall be sent to the Japanese
Shareholders through the Handling Securities Companies or the summary
thereof shall be carried in daily newspapers.
The above-described Management Report on the Fund will be sent to
the known shareholders in Japan.
(C) Restrictions on Transactions with Interested Parties:
Portfolio securities of the Fund may not be purchased from or sold or
loaned to any Trustee of the Fund, Loomis, Sayles & Company, L.P., acting
as investment manager of the Fund, or any affiliate thereof or any of their
directors, officers, or employees, or any major shareholder thereof
(meaning a shareholder who holds to the actual knowledge of Investment
Management Company, on his own account whether in his own or other name (as
well as a nominee's name), 10% or more of the total issued outstanding
shares of such a company) acting as principal or for their own account
unless the transaction is made within the investment restrictions set forth
in the Fund's prospectus and statement of additional information and either
(i) at a price determined by current publicly available quotations
(including a dealer quotation) or (ii) at competitive prices or interest
rates prevailing from time to time on internationally recognized securities
markets or internationally recognized money markets (including a dealer
quotation).
<PAGE>
-46-
4. INFORMATION CONCERNING THE EXERCISE OF RIGHTS BY SHAREHOLDERS, ETC.
(A) Rights of Shareholders and Procedures for Their Exercise:
Shareholders must register their shares in their own name in order to
exercise directly their rights as Shareholders. Therefore, the Shareholders
in Japan who entrust the custody of their Shares to the Sales and Sales
Handling Companies in Japan cannot exercise directly their Shareholder
rights, because their Shares are registered in the name of the custodian.
Shareholders in Japan may have the Sales and Sales Handling Companies in
Japan exercise their rights on their behalf in accordance with the Account
Agreement with the Sales and Sales Handling Companies in Japan.
Shareholders in Japan who do not entrust the custody of their Shares to the
Sales and Sales Handling Companies in Japan are responsible for exercising
their rights in accordance with their own arrangement under their own
responsibility.
The major rights enjoyed by Shareholders are as follows:
(i) Voting rights
Shareholders are entitled to one vote for each full share held
(with fractional votes for each fractional share held) and may vote
(to the extent provided in the Declaration of Trust) on the election
of trustees and the termination of the Trust and on other matters
submitted to the vote of shareholders.
The Declaration of Trust provides that on any matter submitted to
a vote of all Trust shareholders, all Trust shares entitled to vote
shall be voted together irrespective of series or sub-series unless
the rights of a particular series or sub-series would be adversely
affected by the vote, in which case a separate vote of that series or
sub-series shall also be required to decide the question. Also, a
separate vote shall be held whenever required by the 1940 Act or any
rule thereunder. Rule 18f-2 under the 1940 Act provides in effect that
a class shall be deemed to be affected by a matter unless it is clear
that the interests of each class in the matter are substantially
identical or that the matter does not affect any interest of such
class. On matters affecting an individual series, only shareholders of
that series are entitled to vote. Consistent with the current position
of the SEC, shareholders of all series vote together, irrespective of
series, on the election of trustees and the selection of the Trust's
independent accountants, but shareholders of each series vote
separately on other matters requiring shareholder approval, such as
certain changes in investment policies of that series or the approval
of the investment management agreement relating to that series.
<PAGE>
-47-
There will normally be no meetings of shareholders for the purpose of
electing trustees except that, in accordance with the 1940 Act, (i) the Trust
will hold a shareholders' meeting for the election of trustees at such time as
less than a majority of the trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy on the board of trustees,
less than two-thirds of the trustees holding office have been elected by the
shareholders, that vacancy may be filled only by a vote of the shareholders. In
addition, trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for that purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of shares having a net asset value
constituting 1% of the outstanding shares stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Trust has undertaken to provide a list of shareholders or to disseminate
appropriate materials (at the expense of the requesting shareholders).
Except as set forth above, the trustees shall continue to hold office and
may appoint successor trustees. Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust, except
(i) to change the Trust's name or to cure technical problems in the Declaration
of Trust and (ii) to establish, change or eliminate the par value of any shares
(currently all shares have no par value).
(ii) Repurchase rights
Shareholders are entitled to request repurchase of Shares at their Net
Asset Value at any time.
(iii) Rights to receive dividends
The Fund generally declares and pays dividends monthly. The first monthly
dividend is expected to be paid in December 1998. The Fund also distributes all
of its net capital gains realized from the sale of portfolio securities. Any
capital gain distributions are normally made annually, but may, to the extent
permitted by law, be made more frequently as deemed advisable by the trustees of
the Trust. The Fund normally pays distributions to investors who own shares of
the Fund as of the last day of each month. The Trust's trustees may change the
frequency with which the Fund declares or pays dividends.
<PAGE>
-48-
(iv) Right to receive distributions upon dissolution
Shareholders of a fund are entitled to receive distributions upon
dissolution in proportion to the number of shares then held by them,
except as otherwise required.
(v) Right to inspect accounting books and the like
Shareholders are entitled to inspect the Declaration of Trust, the
accounting books at the discretion of the Court and the minutes of
any shareholders' meetings.
(vi) Right to transfer shares
Shares are transferable without restriction except as limited by
applicable law.
(vii) Rights with respect to the U.S. registration statement
If, under the 1933 Act, there is any false statement concerning
any material matter in the U.S. Registration Statement, or any omission
of any statement of material matters to be stated therein or necessary
in order not to cause any misunderstanding of an important matter,
shareholders are generally entitled to institute a lawsuit, against the
person who had signed the relevant Registration Statement, the trustee
of the issuer (or any person placed in the same position) at the time of
filing such Statement, any person involved in preparing such Statement
or any subscriber of the relevant shares.
(B) Tax Treatment of Shareholders in Japan:
The tax treatment of Shareholders in Japan shall be as follows:
(1) The distributions to be made by the Fund will be treated as
distributions made by a domestic investment trust.
a. The distributions made by the Fund to Japanese individual
shareholders will be subject to separate taxation from other income
(i.e. withholding of income tax at the rate of 15% and withholding of
local taxes at the rate of 5% in Japan). In this case, no report
concerning distributions will be filed with the Japanese tax
authorities.
b. The distributions made by the Fund to Japanese corporate
shareholders will be subject to withholding of income tax at the rate of
15% and to withholding of local taxes at the rate of 5% in Japan. In
certain cases, the Handling Securities Companies will prepare a report
concerning distributions and file such report with the Japanese tax
authorities.
c. Net investment returns such as dividends, etc. and distributions of
short-term net realized capital gain, among distributions on Shares of
the Fund, will be, in principle, subject to withholding of U.S. federal
income tax at the rate of 15% and the amount obtained after such
deduction will be paid in Japan.
<PAGE>
-49-
Distributions of long-term net realized capital gain will not be
subject to withholding of U.S. federal income tax and the full amount
thereof will be paid in Japan. The amount subject to withholding of
U.S. federal income tax may be deducted from the tax levied on a
foreign entity in Japan.
The Japanese withholding tax imposed on distributions as referred
to in a. and b. above will be collected by way of so-called
"difference collecting method". In this method only the difference
between the amount equivalent to 20% of the distributions before U.S.
withholding tax and the amount of U.S. withholding tax withheld in the
U.S. will be collected in Japan.
(2) The provisions of Japanese tax laws giving the privilege of a certain
deduction from taxable income to corporations, which may apply to dividends
paid by a domestic corporation, shall not apply.
(3) Capital gains and losses arising from purchase and repurchase of the
Shares shall be treated in the same way as those arising from purchase and
sale of a domestic investment trust. The distribution of the net
liquidation assets shall be also treated in the same way as those arising
from liquidation of a domestic investment trust.
(4) The Japanese securities transaction tax will not be imposed so far as
the transactions concerned are conducted outside Japan. Such tax, however,
is applicable to dealers' transactions for their own account and to
privately negotiated transactions conducted in Japan.
(C) Foreign Exchange Control in U.S.A.:
In the U.S.A., there are no foreign exchange control restrictions on
remittance of dividends, repurchase money, etc. of the Shares to Japanese
Shareholders.
(D) Agent in Japan:
Hamada & Matsumoto
Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki 3-chome
Chiyoda-ku, Tokyo
The foregoing law firm is the true and lawful agent of the Fund to
represent and act for the Fund in Japan for the purpose of:
(1) the receipt of any and all legal claims, actions, proceedings,
process, and communications addressed to the Trust or the Fund.
(2) representation in and out of court in connection with any and all
disputes, controversies or differences regarding the transactions relating
to the public offering, sale and repurchase in Japan of the Shares of the
Fund.
The agent for the registration with the Director of Kanto Local
Finance Bureau of the initial public offering concerned as well as for the
continuous disclosure is each of the following persons:
Harume Nakano
<PAGE>
-50-
Ken Miura
Attorneys-at-law
Hamada & Matsumoto
Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki, 3-chome
Chiyoda-ku, Tokyo
(E) Jurisdiction:
Limited only to litigation brought by Japanese investors regarding
transactions relating to (D)(2) above, the Fund has agreed that the following
court has jurisdiction over such litigation and the Japanese law is applicable
thereto:
Tokyo District Court
1-4, Kasumigaseki 1 -chome
Chiyoda-ku, Tokyo
<PAGE>
-51-
5. STATUS OF INVESTMENT FUND
(1) Diversification of Investment Portfolio (Diversification of Investment
Portfolio by Types of Assets and Geographic Regions):
(As of the end of January, 1999)
- --------------------------------------------------------------------------------
Market Value Total Investment Ratio
Types of Assets Name of Country Dollar (%)
- --------------------------------------------------------------------------------
Bond and Notes U.S.A. 23,669,735 71.33
- --------------------------------------------------------------------------------
Canada 7,280,473 21.94
- --------------------------------------------------------------------------------
Preferred Stocks U.S.A. 1,086,829 3.28
- --------------------------------------------------------------------------------
Sub-total 32,037,037 96.55
- --------------------------------------------------------------------------------
Cash, Deposit and
Other Assets (After 1,146,175 3.45
Deduction of
Liabilities)
- --------------------------------------------------------------------------------
Total 33,183,212 100.00
(Net Asset Value) (3,861 million JPY)
- --------------------------------------------------------------------------------
Note: Investment Ratio is calculated by dividing the types of asset at their
market value by the total net asset value. The same applies
hereinafter.
(2) Results of Past Operations
(a) Record of Changes in Net Assets
Record of changes in net assets from October, 1998 to January, 1999 at the
end of each month are as follows:
---------------------------------------------------------------------------
Net Asset Value per
Total Net Asset Value Share
---------------------------------------------
Dollar Yen
(thousand) (millions) Dollar Yen
---------------------------------------------
l997 End of October 30,196 3,513 9.79 1,139
November 32,531 3,785 10.43 1,214
December 32,180 3,744 10.17 1,183
l999 End of January 33,183 3,861 10.47 1,219
----------------------------------------------------------------------------
<PAGE>
-52-
(Note) The Fund commenced its operation on October 1, 1998.
(b) Record of Distributions Paid
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Distribution Date Ex-distribution Distribution per Share
Date
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
End of December, 1998 January 6, 1999 December 31, 1998 US$ 0.065((Yen)7.56)
- ----------------------------------------------------------------------------------------
End of January, 1999 February 4, 1999 February 1, 1999 US$ 0.054((Yen)6.28)
- ----------------------------------------------------------------------------------------
</TABLE>
(c) Record of Sales and Redemption
Record of sales and repurchases from the commencement of the management of
the Fund to the end of January, 1999 and number of outstanding Shares of the
Fund as at the end of January, 1999 are as follows:
-------------------------------------------------------------------
Number of Shares Number of Shares Number of Shares
Sold Redeemed Outstanding
-------------------------------------------------------------------
3,846,040 677,340 3,168,700
-------------------------------------------------------------------
(3,245,700) (77,000) (3,168,700)
-------------------------------------------------------------------
Note 1: The figures in parentheses show those sold, redeemed or outstanding
in Japan.
Note 2: The number of shares sold includes those held during the initial
public offering.
<PAGE>
-53-
II. OUTLINE OF THE TRUST
1. Trust
(A) Law of Place of Incorporation
The Trust is a Massachusetts business trust organized in
Massachusetts, U.S.A. on February 20, 1991.
Chapter 182 of the Massachusetts General Laws prescribes the
fundamental matters in regard to the operations of certain business trusts
constituting voluntary associations under that chapter.
The Trust is an open-end, diversified management company under the
Investment Company Act of 1940.
(B) Outline of the Supervisory Authority
Refer to I-1(B) Outline of the Supervisory Authority.
(C) Purpose of the Trust
The purpose of the Trust is to provide investors a managed investment
primarily in securities, debt instruments and other instruments and rights
of a financial character and to carry on such other businesses as the
Trustees may from time to time determine pursuant to their authority under
the Declaration of Trust.
(D) History of the Trust
February 20, 1991: Organization of the Trust as a Massachusetts
business trust. Adoption of the Declaration
of Trust.
(E) Amount of Capital Stock
Not applicable.
(F) Structure of the Management of the Trust
Subject to the provisions of the Declaration of Trust, the business of
the Trust shall be managed by the Trustees, and they shall have all powers
necessary or convenient to carry out that responsibility. Without limiting
the foregoing, the Trustees may adopt By-Laws not inconsistent with the
Declaration of Trust providing for the conduct of the business of the Trust
and may amend and repeal them to the extent that such By-Laws do not
reserve that right to the Shareholders; they may fill vacancies, including
vacancies caused by enlargement of their number, and may remove Trustees
with or without cause; they may elect and remove, with or without cause,
such officers and appoint and terminate such agents as they consider
appropriate; they may appoint from their own number, and terminate, any one
or more committees consisting of two or more Trustees, including an
executive committee which may, when the Trustees are not in session,
exercise some or all of the power and authority of the Trustees as the
Trustees may determine; they may employ one or more
<PAGE>
-54-
custodians of the assets of the Trust and may authorize such custodians to
employ subcustodians and to deposit all or any part of such assets in a system
or systems for the central handling of securities, retain a transfer agent or a
Shareholder servicing agent, or both, provide for the distribution of Shares by
the Trust, through one or more principal underwriters or otherwise, set record
dates for the determination of Shareholders with respect to various matters, and
in general delegate such authority as they consider desirable to any officer of
the Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian or underwriter.
Except as otherwise provided in the Declaration of Trust or from time to
time in the By-Laws, any action to be taken by the Trustees may be taken (A) by
a majority of the Trustees present at a meeting of the Trustees (a quorum being
present), within or without Massachusetts, including any meeting held by means
of a conference telephone or other communications equipment by means of which
all persons participating in the meeting can hear each other at the same time
(participation by which means shall for all purposes constitute presence in
person at a meeting), or (B) by written consents of a majority of the Trustees
then in office (which written consents shall be filed with the records of the
meetings of the Trustees and shall be treated for all purposes as a vote taken
at a meeting of Trustees).
The Shareholders shall have power to vote only (i) for the election of
Trustees as provided in Article IV, Section 1 of the Declaration of Trust,
provided, however, that no meeting of Shareholders is required to be called for
- -------- -------
the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees have been elected by the Shareholders, (ii) with
respect to any Investment Management Company or Sub-Adviser as provided in
Article IV, Section 6 of the Declaration of Trust to the extent required by the
1940 Act, (iii) with respect to any termination of the Trust to the extent and
as provided in Article IX, Section 4 of the Declaration of Trust, (iv) with
respect to any amendment of the Declaration of Trust to the extent and as
provided in Article IX, Section of 7 of the Declaration of Trust, (v) to the
same extent as the stockholders of a Massachusetts business corporation as to
whether or not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders, and (vi) with respect to such additional matters relating
to the Trust as may be required by law, the Declaration of Trust, the By-Laws or
any registration of the Trust with the Commission (or any successor agency) or
any state, or as the Trustees may consider necessary or desirable. Each whole
Share shall be entitled to one vote as to any matter on which it is entitled to
vote and each fractional Share shall be entitled to a proportionate fractional
vote. On any matter submitted to a vote of Shareholders all Shares of the Trust
then entitled to vote shall be voted by individual Series, except (i) when
required by the 1940 Act,
<PAGE>
-55-
Shares shall be voted in the aggregate and not by individual Series and (ii)
when the Trustees have determined that the matter affects only the interests of
one or more Series or Classes, then only Shareholders of such Series or Classes
shall be entitled to vote thereon. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. Until Shares are issued, the Trustees
may exercise all rights of Shareholders and may take any action permitted or
required of the Shareholders by law, the Declaration of Trust or the By-Laws.
Meetings of the Shareholders may be called by the Trustees for the purpose
of electing Trustees as provided in Article IV, Section 1 of the Declaration of
Trust and for such other purposes as may be prescribed by law, by the
Declaration of Trust or by the By-Laws. Meetings of the Shareholders may also be
called by the Trustees from time to time for the purpose of taking action upon
any other matter deemed by the Trustees to be necessary or desirable. A meeting
of Shareholders may be held at any place designated by the Trustees. Written
notice of any meeting of Shareholders shall be given or caused to be given by
the Trustees by mailing such notice at least seven days before such meeting,
postage prepaid, stating the time and place of the meeting, to each Shareholder
entitled to vote at such meeting at the Shareholder's address as it appears on
the records of the Trust. Whenever notice of a meeting is required to be given
to a Shareholder under the Declaration of Trust or the By-Laws, a written waiver
thereof, executed before or after the meeting by such Shareholder or his or her
attorney thereunto authorized and filed with the records of the meeting, shall
be deemed equivalent to such notice.
Forty percent (40%) of the Shares entitled to vote shall be a quorum for
the transaction of business at a Shareholders' meeting, except that where any
provision of law or of the Declaration of Trust or the By-Laws permits or
requires that holders of any Series or Class shall vote as a Series or Class,
then forty percent (40%) of the aggregate number of Shares of that Series or
Class entitled to vote shall be necessary to constitute a quorum for the
transaction of business by that Series or Class. Any lesser number shall be
sufficient for adjournments. Any adjourned session or sessions may be held,
within a reasonable time after the date set for the original meeting, without
the necessity of further notice. Except when a larger vote is required by any
provision of law or the Declaration of Trust or the By-Laws, a majority of the
Shares voted shall decide any questions and a plurality shall elect a
<PAGE>
-56-
Trustee, provided that where any provision of law or of the Declaration of Trust
or the By-Laws permits or requires that the holders of any Series or Class shall
vote as a Series or Class, then a majority of the Shares of that Series or Class
voted on the matter (or a plurality with respect to the election of a Trustee)
shall decide that matter insofar as that Series or Class is concerned.
Any action taken by Shareholders may be taken without a meeting if a
majority of Shareholders entitled to vote on the matter (or such larger
proportion thereof as shall be required by any express provision of law or the
Declaration of Trust or the By-Laws) consent to the action in writing and such
written consents are filed with the records of the meetings of Shareholders.
Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
Under Massachusetts law shareholders could, under certain circumstances, be
held personally liable for the obligations of the Fund of which they are
shareholders. However, the Declaration of Trust disclaims shareholder liability
for acts or obligations of the Fund and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the trustees. The Declaration of Trust provides for indemnification
out of Fund property for all loss and expenses of any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote since it is limited to circumstances in which the disclaimer
is inoperative and the Fund itself would be unable to meet its obligations.
The Declaration of Trust farther provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a trustee against any liability to which the
trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. The By-Laws of the Trust provide for indemnification by the Trust of
the trustees and officers of the Trust except with respect to any matters as to
which any such person did not act in good faith in the reasonable belief that
such action was in or not opposed to the best interests of the Trust. No officer
or trustee may be indemnified against any liability to the Trust or the Trust's
shareholders to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
The Trustees may, at any time and from time to time, contract for exclusive
or nonexclusive advisory and/or management services with any corporation, trust,
association or other organization (the "Manager"), every such contract to comply
with such requirements and restrictions as may be set forth in the By-Laws; and
any such
<PAGE>
-57-
contract may provide for one or more sub-advisers who shall perform all or part
of the obligations of the Manager under such contract and may contain such other
terms interpretive of or in addition to said requirements and restrictions as
the Trustees may determine, including, without limitation, authority to
determine from time to time what investments shall be purchased, held, sold or
exchanged and what portion, if any, of the assets of the Trust shall be held
uninvested and to make changes in the Trust's investments. The Trustees may
also, at any time and from time to time, contract with the Manager or any other
corporation, trust, association or other organization, appointing it exclusive
or nonexclusive distributor or principal underwriter for the Shares, every such
contract to comply with such requirements and restrictions as may be set forth
in the By-Laws; and any such contract may contain such other terms interpretive
of or in addition to said requirements and restrictions as the Trustees may
determine.
Unless terminated as provided in the Declaration of Trust, the Trust shall
continue without limitation of time. The Trust may be terminated at any time by
vote of Shareholders holding at least sixty-six and two-thirds percent (66 2/3%)
of the shares entitled to vote, or by the Trustees by written notice to the
Shareholders. Any Series or Class of shares may be terminated at any time by
vote of Shareholders holding at least sixty-six and two-thirds percent (66 2/3%)
of the shares of such Series or Class entitled to vote, or by the Trustees by
written notice to the Shareholders of such Series or Class. Upon termination of
the Trust or of any one or more Series or Classes of shares, after paying or
otherwise providing for all charges, taxes, expenses and liabilities, whether
due or accrued or anticipated, of the Trust or of the particular Series or Class
as may be determined by the Trustees, the Trust shall in accordance with such
procedures as the Trustees consider appropriate reduce the remaining assets to
distributable form in cash or shares or other property, or any combination
thereof, and distribute the proceeds to the Shareholders of the Series involved,
ratably according to the number of shares of such Series held by the several
Shareholders of such Series on the date of termination, except to the extent
otherwise required or permitted by the preferences and special or relative
rights and privileges of any Classes of shares of that Series, provided that any
distribution to the Shareholders of a particular Class of shares shall be made
to such Shareholders pro rata in proportion to the number of shares of such
Class held by each of them.
<PAGE>
- 58 -
(G) Information Concerning Major Shareholders
Not applicable.
(H) Information Concerning Directors, Officers and Employees
(1) Trustees and Officers of the Trust
as of January 31, 1999
- -------------------------------------------------------------------------------
Shares
Name Office and Title Resume Owned
- -------------------------------------------------------------------------------
EARL W. FOELL Trustee formerly: Editor in-Chief, World 6,060.426
Monitor Magazine and
Editor-in-Chief, The
Christian Science Monitor
- -------------------------------------------------------------------------------
RICHARD S. Trustee formerly: Vice President, Loomis 34,580.069
HOLWAY Sayles. Director,
Sandwich Cooperative
Bank.
- -------------------------------------------------------------------------------
MICHAEL T. Trustee formerly: Vice President, Loomis 21,369.858
MURRAY Sayles
- -------------------------------------------------------------------------------
DANIEL J. President and present: Executive Vice 518,444.914
FUSS Trustee President and Director,
Loomis Sayles
- -------------------------------------------------------------------------------
SHEILA M. Secretary and present: Assistant General 0
BARRY Compliance Counsel and Vice
Officer. President, Loomis Sayles
formerly: Senior Counsel and Vice
President, New England
Funds, L.P.
- -------------------------------------------------------------------------------
ROBERT J. Executive Vice present: President, Chairman, 14,644.423
BLANDING President Director and Chief
Executive Officer,
Loomis Sayles
- -------------------------------------------------------------------------------
JAMES C. Vice President present: Vice President, Loomis 0
CARROLL Sayles
formerly: Managing Director and
Senior Energy Analyst at
Paine Webber, Inc.
- -------------------------------------------------------------------------------
MARY C. Vice President present: Vice President, Loomis 0
CHAMPAGNE Sayles
formerly: Portfolio manager, NBD
Bank
- -------------------------------------------------------------------------------
E. JOHN Vice President present: Vice President, Loomis 0.057
DEEBER Sayles
- -------------------------------------------------------------------------------
PAUL H. Vice President present: Vice President, Loomis 0
DREXLER Sayles
formerly: Deputy Manager, Brown
Brothers Harriman & Co.
------------------------------------------------------------------------------
<PAGE>
- 59 -
- --------------------------------------------------------------------------------
WILLIAM H. Vice President present: Vice President, Loomis 0
EIGEN, JR. Sayles
formerly: Vice President,
INVESCO Funds Group
and Vice President, The
Travelers Corp.
- --------------------------------------------------------------------------------
CHRISTOPHER Vice President present: Vice President, Loomis 1,965.462
R. ELY Sayles
formerly: Senior Vice
President and portfolio
manager, Keystone
Investment Management
Company, Inc.
- --------------------------------------------------------------------------------
QUENTIN P. Vice President present: Vice President, Loomis 0
FAULKNER Sayles
- --------------------------------------------------------------------------------
PHILIP C. Vice President present: Vice President, Loomis 0
FINE Sayles
formerly: Vice President and
portfolio manager,
Keystone Investment
Management Company, Inc.
- --------------------------------------------------------------------------------
KATHLEEN C. Vice President present: Vice President, Loomis 0
GAFFNEY Sayles
- --------------------------------------------------------------------------------
ISAAC H. Vice President present: Vice President and 86,084
GREEN Director, Loomis Sayles
formerly: Senior Vice President and
Director of Investments at
NCM Capital
Management Group
- --------------------------------------------------------------------------------
DEAN A. GULIS Vice President present: Vice President, Loomis 1,215.063
Sayles.
formerly: Principal and Director of
Research at Roney &
Company
- --------------------------------------------------------------------------------
MARTHA F. Vice President present: Vice President, Loomis 7,167.387
HODGMAN Sayles
- --------------------------------------------------------------------------------
MARK W. Treasurer present: Vice President - Chief 62,526.105
HOLLAND Financial Officer and
Director, Loomis Sayles
- --------------------------------------------------------------------------------
JOHN HYLL Vice President present: Vice President, Loomis 0
Sayles
- --------------------------------------------------------------------------------
JEFFEREY L. Vice President present: Vice President, Executive 91,009.993
MEADE Vice President, Chief
Operating Officer and
Director, Loomis Sayles
- --------------------------------------------------------------------------------
PHILIP R. Assistant present: Vice President & 4,986.747
MURRAY Treasurer Treasurer, Loomis Sayles
- --------------------------------------------------------------------------------
<PAGE>
- 60 -
- -------------------------------------------------------------------------------
KENT P. Vice President present: Managing Partner, Vice 77,275.494
NEWMARK President and Director,
Loomis Sayles
- -------------------------------------------------------------------------------
SCOTT S. PAPE Vice President present: Vice President, Loomis 0
Sayles
- -------------------------------------------------------------------------------
JEFFEREY C. Vice President present: Vice President, Loomis 1,927.149
PETHERICK Sayles
- -------------------------------------------------------------------------------
LAUREN B. Vice President present: Vice President, Loomis 517.856
PITALIS Sayles
- -------------------------------------------------------------------------------
PHILIP J. Vice President present: Vice President and 0
SCHETTEWI Director, Loomis Sayles
- -------------------------------------------------------------------------------
DAVID L. Vice President present: Vice President, Loomis 0
SMITH Sayles
formerly: Vice President and
portfolio manager,
Keystone Investment
Management Company,Inc.
- -------------------------------------------------------------------------------
SANDRA P. Vice President present: General Counsel, 0
TICHENOR Executive Vice President,
Secretary, Clerk and
Director, Loomis Sayles
formerly: Partner, Heller, Ehrman,
White & McAuliffe
- -------------------------------------------------------------------------------
JEFFEREY W. Vice President present: Vice President, 0
WARDLOW Loomis Sayles
- -------------------------------------------------------------------------------
GREGG D. Vice President present: Vice President, Loomis 0
WATKINS Sayles
- -------------------------------------------------------------------------------
ANTHONY J. Vice President present: Vice President and 15,304.148
WILKINS Director, Loomis Sayles
- -------------------------------------------------------------------------------
JOHN F. Vice President present: Vice President, Loomis 0
YEAGER Sayles
III formerly: Vice President -
Marketing, INVESCO
Funds Group and
Assistant Comptroller,
INVESCO Capital
Management
- -------------------------------------------------------------------------------
Note 1: Previous positions during the past five years with Loomis Sayles are
omitted, if not materially different.
Note. 2: Except as indicated above, the address of each trustee and officer of
the Trust affiliated with Loomis Sayles is One Financial Center,
Boston, Massachusetts.
(2) Employees of the Trust
The Trust has no employees.
<PAGE>
-61-
(I) Description of Business and Outline of Operation
The Trust may carry out any administrative and managerial act,
including the purchase, sale, subscription and exchange of any securities,
and the exercise of all rights directly or indirectly pertaining to the
Fund's assets. The Trust has retained Loomis Sayles & Company, L.P., the
investment adviser, to render investment advisory services and State Street
Bank and Trust Company, to hold the assets of the Fund in custody and act
as Transfer, Dividend Payment and Shareholder Servicing Agent.
(J) Miscellaneous
(1) Changes of Trustees and Officers
Trustees may be removed or replaced by, among other things, a
resolution adopted by a vote of two-thirds of the outstanding
shares at a meeting called for the purpose. In the event of
vacancy, the remaining Trustees may fill such vacancy by appointing
for the remaining term of the predecessor Trustee such other person
as they in their discretion shall see fit. The Trustees may add to
their number as they consider appropriate. The Trustees may elect
and remove officers as they consider appropriate.
(2) Amendment to the Declaration of Trust
The Declaration of Trust may be amended at any time by an
instrument in writing signed by a majority of the then Trustees
when authorized to do so by vote of Shareholders holding a majority
of the Shares entitled to vote, except that an amendment which in
the determination of the Trustees shall affect the holders of one
or more Series or Classes of Shares but not the holders of all
outstanding Series and Classes shall be authorized by vote of the
Shareholders holding a majority of the Shares entitled to vote of
each Series and Class affected and no vote of Shareholders of a
Series or Class not affected shall be required. Amendments having
the purpose of changing the name of the Trust, of establishing,
changing or eliminating the par value of any Shares or of supplying
any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision contained
herein shall not require authorization by vote of any Shareholders.
(3) Litigation and Other Significant Events
There is no litigation or no other proceeding in which the
Trust is involved. The fiscal year end of the Trust is September
30. The Declaration of Trust provides for the perpetual existence
of the Trust. The Trust or the Fund, however, may be terminated at
any time by vote of at least two-thirds of the outstanding shares
of the Trust or the Fund, respectively. The Declaration
<PAGE>
-62-
of Trust further provides that the trustees may also terminate the Trust or
the Fund upon written notice to the shareholders.
<PAGE>
-63-
2. Loomis, Sayles & Company, L.P. (Investment Management Company)
(A) Law of Place of Incorporation
Loomis Sayles is a limited partnership organized under the Law of the
State of Delaware, U.S.A. Its investment advisory business is regulated
under the Investment Advisers Act of 1940.
Under the Investment Advisers Act of 1940, an investment adviser
means, with certain exceptions, any person who, for compensation, engages
in the business of advising others, either directly or through publications
or writings, as to the value of securities or as to the advisability of
investing in, purchasing or selling securities, or who, for compensation
and as part of a regular business, issues analyses or reports concerning
securities. Investment advisers under the Act may not conduct their
business unless they are registered with the SEC.
(B) Outline of the Supervisory Authority
Investment Management Company is registered with SEC as an investment
adviser under the Investment Advisers Act of 1940.
(C) Purpose of the Company
Investment Management Company's predominant business is investment
management, which includes the buying, selling, exchanging and trading of
securities of all descriptions on behalf of mutual funds in any part of the
world.
(D) History of the Company
Founded in 1926, Loomis Sayles is one of the country's oldest and
largest investment firms. Loomis Sayles' sole general partner is a wholly-
owned subsidiary of Nvest Companies, L.P. ("Nvest Companies"). Nvest
Companies' advising general partner is Nvest Corporation is a direct wholly
owned subsidiary of Metropolitan Life Insurance Company, a mutual life
insurance company. Nvest, L.P. is a publicly traded company listed on the
New York Stock Exchange. Nvest Corporation is the sole general partner of
Nvest, L.P.
In addition to selecting and reviewing the Fund's investments, Loomis
Sayles provides executive and other personnel for the management of the
Fund. The Trust's board of trustees supervises Loomis Sayles' conduct of
the affairs of the Fund.
(E) Amount of Capital Stock (as of the end of January, 1999)
1. Amount of Capital (issued capital stock at par value):
Not applicable. Provided, however, that the partner capital was
$55,449,000.
2. Number of authorized shares of capital stock:
<PAGE>
-64-
Not applicable.
3. Number of outstanding shares of capital stock:
Not applicable.
4. Amount of capital:
Not applicable. See, Note 5 to the consolidated financial statements
included in PART III SPECIAL INFORMATION, II. FINANCIAL CONDITIONS OF
THE INVESTMENT MANAGEMENT COMPANY herein.
(F) Structure of the Management of the Company
The general partner of the Investment Management Company is a special
purpose corporation that is an indirect wholly-owned subsidiary of Nvest
Companies, L.P. ("Nvest Companies"). Nvest Companies' managing general
partner, Nvest Corporation, is a direct wholly-owned subsidiary of
Metropolitan Life Insurance Company ("Met Life"), a mutual life insurance
company. Nvest Companies' advising general partner, Nvest, L.P., is a
publicly traded company listed on the New York Stock Exchange. Nvest
Corporation is the sole general partner of Nvest L.P.
-------------------------------------------------
Capital Relationship and assets under Operation
-------------------------------------------------
Metropolitan Life Insurance Company
The second largest life insurance company in the U.S.A.
Total Assets 298 billion dollars
Holder of 51% of the Nvest shares
Nvest Corporation (former New England Investment Company)
----------------------------------------------------------------
Holding Company of the U.S. first grade investment companies
Total Assets under operation 125 billion dollars
Holder of 100% shares of Loomis Sayles and other operating companies
Loomis Sayles and Company L.P.
----------------------------------
Assets under operation 64 billion dollars
Bonds 39 billion dollars
Bond Assets under operation ranked 12th
worldwide
Nvest (Nelson Information)
Companies Share 16 billion dollars
Balance 9 billion dollars
462 employees
11 offices in the U.S.
<PAGE>
-65-
Loomis Sayles serves as investment manager under a separate management
agreement relating to the Loomis Sayles Managed Bond Fund dated August 26,
1998. Under the advisory agreement, Loomis Sayles manages the investment
and reinvestment of the assets of the Fund and generally administers its
affairs, subject to supervision by the board of trustees of the Trust.
Loomis Sayles furnishes, at its own expense, all necessary office space,
facilities and equipment, services of executive and other personnel of the
Fund and certain administrative services. For these services, the
management agreement provides that the Fund shall pay Loomis Sayles a
monthly investment advisory fee at the annual percentage rate of 0.60 % of
the Fund's average daily net assets.
The Trust pays the compensation of its trustees who are not directors,
officers or employees of Loomis Sayles or its affiliates (other than
registered investment companies); registration, filing and other fees in
connection with requirements of regulatory authorities; all charges and
expenses of its custodian and transfer agent; the charges and expenses of
its independent accountants; all brokerage commissions and transfer taxes
in connection with portfolio transactions; all taxes and fees payable to
governmental agencies; the cost of any certificates representing shares of
the Fund; the expenses of meetings of the shareholders and trustees of the
Trust; the charges and expenses of the Trust's legal counsel; interest on
any borrowings by the Fund; the cost of services, including services of
counsel, required in connection with the preparation of, and the cost of
printing, the Trust's registration statements and prospectuses, including
amendments and revisions thereto, annual, semiannual and other periodic
reports of the Trust, and notices and proxy solicitation material furnished
to shareholders or regulatory authorities, to the extent that any such
materials relate to the Trust or its shareholders; and the Trust's expenses
of bookkeeping, accounting, auditing and financial reporting, including
related clerical expenses.
Under each advisory agreement, if the total ordinary business expenses
of the Fund or the Trust as a whole for any fiscal year exceed the lowest
applicable limitation (based on percentage of average net assets or income)
prescribed by any state in which the shares of the Fund or the Trust are
qualified for sale, Loomis Sayles shall pay such excess. Loomis Sayles will
not be required to reduce its fee or pay such expenses to an extent or
under circumstances which would result in the Fund's inability to qualify
as a regulated investment company under the Code. The term "expenses" is
defined in the management agreements or in relevant state regulations and
excludes brokerage commissions, taxes, interest, distribution-related
expenses and extraordinary expenses.
<PAGE>
-66-
The management agreement provides that it will continue in effect for
two years from its date of execution and thereafter from year to year if
its continuance is approved at least annually (i) by the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities
of the Fund and (ii) by vote of a majority of the Trustees who are not
"interested persons" of the Trust, as that term is defined in the 1940 Act,
cast in person at a meeting called for the purpose of voting on such
approval. Any amendment to the management agreement must be approved by
vote of a majority of the outstanding voting securities of the Fund and by
vote of a majority of the Trustees who are not such interested persons,
cast in person at a meeting called for the purpose of voting on such
approval. The agreement may be terminated without penalty by vote of the
Board of Trustees or by vote of a majority of the outstanding voting
securities of the Fund, upon sixty days' written notice, or by Loomis
Sayles upon ninety days' written notice, and each terminates automatically
in the event of its assignment. In addition, the agreement will
automatically terminate if the Trust or the Fund shall at any time be
required by Loomis Sayles to eliminate all reference to the words "Loomis"
and "Sayles" in the name of the Trust or the Fund, unless the continuance
of the agreement after such change of name is approved by a majority of the
outstanding voting securities of the Fund and by a majority of the Trustees
who are not interested persons of the Trust or Loomis Sayles.
The management agreement provides that Loomis Sayles shall not be
subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
Loomis Sayles acts as investment adviser or subadviser to New England
Value Fund, New England Strategic Income Fund, New England Star Advisers
Fund; New England Star Small Cap Fund and New England Balanced Fund, which
are series of New England Funds Trust I, a registered open-end management
investment company, New England High Income Fund, a series of New England
Fund Trust III, a registered, open-end management investment company, New
England Equity Income Fund, a series of New England Funds Trust II, a
registered open-end management investment company, and to the Balanced
Series and the Small Cap Series of New England Zenith Fund, which is also a
registered open-end management investment company, as well as to Loomis
Sayles Investment Trust, also registered open-end management investment
company, Loomis Sayles also provides investment advice to certain other
open-end management investment companies and numerous other corporate and
fiduciary clients.
Certain officers and trustees of the Trust also serve as officers,
directors and trustees of other investment companies and clients advised by
Loomis Sayles. The
<PAGE>
-67-
other investment companies and clients sometimes invest in securities in
which the Fund also invests. If the Fund and such other investment companies
or clients desire to buy or sell the same portfolio securities at the same
time, purchases and sales may be allocated, to the extent practicable, on a
pro rats basis in proportion to the amount desired to be purchased or sold
for each. It is recognized that in some cases the practices described in
this paragraph could have a detrimental effect on the price or amount of the
securities which the Fund purchases or sells. In other cases, however, it is
believed that these practices may benefit the Fund. It is the opinion of the
trustees that the desirability of retaining Loomis Sayles as adviser for the
Fund outweighs the disadvantages, if any, which might result from these
practices.
Daniel J. Fuss, President of the Trust and Executive Vice President of
Loomis Sayles, will serve as the portfolio manager of the Loomis Sayles
Managed Bond Fund. Kathleen C. Gaffney, Vice President of the Trust and
Loomis Sayles, will serve as associate portfolio manager of Loomis Sayles
Managed Bond Fund.
<TABLE>
<CAPTION>
Names Year Business Experience
(at least 5 years)
<S> <C> <C>
Daniel J. Fuss 1976 Executive Vice President, Director
and Managing Partner of
Loomis, Sayles & Company, L.P.
BS, Marquette University
MBA, Marquette University
Joined Loomis Sayles in 1976
began investment career in 1961
Past Professional Experience:
The Boston Company; Vice President,
Investment Counsel
Endowment Management & Research Co.:
Vice President,
Investment Management
Continental Illinois National Bank:
Second Vice President and Trust
Officer
Kathleen C. Gaffney 1984 Vice President of Loomis, Sayles &
Company, L.P.
BA, University of Massachusetts
joined Loomis Sayles in 1984
began investment career in 1984
</TABLE>
(G) Information Concerning Major Stockholders
Not applicable.
(H) Information Concerning Officers and Employees
<PAGE>
-68-
The following table lists the names of various officers and directors of
Investment Management Company and their respective positions with
Investment Management Company. (Although, technically, the Investment
Management Company does not have officers and directors because it is a
limited partnership, the officers and directors of the General Partner
serve the same function for the Investment Management Company and
therefore, assume the same titles. Hereinafter the same.)For each named
individual, the table lists: (1) any other organizations (excluding other
Investment Management Company's funds) with which the officer and/or
director has recently had or has substantial involvement; and (ii)
positions held with such organization:
List of Officers and Directors of Loomis, Sayles & Company, L.P. (as of
January 31, 1999)
<TABLE>
<CAPTION>
Position with
Loomis, Sayles &
Name Company, L.P.. Other Business Affiliation
<S> <C> <C>
Daniel J. Fuss Executive Vice President and Trustee of the Trust
President and
Director
Sheila M. Assistant General Secretary and Compliance Officer
Barry Counsel and Vice of the Trust
President
Robert J. President, Chairman, Executive Vice President of the
Blanding Director and Chief Trust
Executive Officer
James C. Vice President Vice President of the Trust
Carroll
Mary C. Vice President Vice President of the Trust
Champagne
E. John Vice President Vice President of the Trust
DeBeer
Parl H. Vice President Vice President of the Trust
Drexler
William H. Vice President Vice President of the Trust
Eiger, Jr.
Christopher Vice President Vice President of the Trust
R. Ely
Quentin P. Vice President Vice President of the Trust
Faulkner
</TABLE>
<PAGE>
-69-
<TABLE>
<S> <C> <C>
Philip C. Fine Vice President Vice President of the Trust
Kathleen C. Vice President Vice President of the Trust
Gaffney
Isaac H. Vice President and Vice President of the Trust
Green Director
Dean A. Vice President Vice President of the Trust
Gulis
Martha F. Vice President Vice President of the Trust
Hodgman
Mark W. Vice President - Treasurer of the Trust
Holland Chief Financial
Officer and Director
John Hyll Vice President Vice President of the Trust
Jeffrey L. Executive Vice Vice President of the Trust
Meade President, Chief
Operating Officer
and Director
Philip R. Vice President and Assistant Treasurer of the
Murray Treasurer Trust
Kent P. Managing Partner, Vice President of the Trust
Newmark Vice President and
Director
Scott S. Pape Vice President Vice President of the Trust
Jeffrey C. Vice President Vice President of the Trust
Petherick
Lauren B. Vice President Vice President of the Trust
Pitalis
Philip J. Vice President and Vice President of the Trust
Schettewi Director
David L. Vice President Vice President of the Trust
Smith
Sandra P. General Counsel, Vice President of the Trust
Tichenor Executive Vice
President, Secretary,
Clerk and Director
</TABLE>
<PAGE>
-70-
<TABLE>
<S> <C> <C>
Jeffrey W. Vice President Vice President of the Trust
Wardlow
Gregg D. Vice President Vice President of the Trust
Watkins
Anthony J. Vice President and Vice President of the Trust
Wilkins Director
John F. Vice President Vice President of the Trust
Yeager III
</TABLE>
(I) Summary of Business Lines and Business Operation
Investment Management Company is engaged in the business of providing
investment management and investment advisory services to mutual funds. As
of the end of January, 1999, Investment Management Company managed, advised,
and/or administered the following 40 funds and fund portfolios:
<PAGE>
-71-
<TABLE>
<CAPTION>
Fund List
(as of the end of January, 1999)
- --------------------------------------------------------------------------------------------------------------------------
Month/Date Principal Total Net Net Asset
Year Characteristics Asset Value Value per
Fund Established ($ million) share ($)
R=Retail R=Retail
I=Institutional I=Institutional
A=Admin A=Admin
- --------------------------------------------------------------------------------------------------------------------------
LOOMIS SAYLES FUNDS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bond 5/16/91 Fixed 55.9 (R) 12.16 (R)
1527.5 (I) 12.17 (I)
Income/Open 1.4 (A) 12.16 (A)
- --------------------------------------------------------------------------------------------------------------------------
Global Bond 5/10/91 Global/Open 6.1 (R) 12.34 (R)
34.1 (I) 12.34 (I)
- --------------------------------------------------------------------------------------------------------------------------
Growth 5/16/91 Equity/Open 0.6 (R) 10.68 (R)
27.3 (I) 10.76 (1)
- --------------------------------------------------------------------------------------------------------------------------
Core Value 5/13/91 Equity/Open 1.0 (R) 17.25 (R)
76.8 (I) 17.28 (I)
- --------------------------------------------------------------------------------------------------------------------------
High Yield 9/11/96 Fixed 5.9 (R) 8.30 (R)
Income/Open 12.0 (I) 8.30 (I)
- --------------------------------------------------------------------------------------------------------------------------
Intermediate Maturity Bond 12/31/96 Fixed 0.8 (R) 9.69 (R)
Income/Open 9.0 (I) 9.70 (I)
- --------------------------------------------------------------------------------------------------------------------------
International Equity 5/10/91 Global/Open 0.2 (R) 11.97 (R)
76.1 (I) 12.01 (I)
- --------------------------------------------------------------------------------------------------------------------------
Investment Grade Bond 12/31/96 Fixed 2.4 (R) 10.16 (R)
Income/Open 3.0 (I) 10.17 (I)
- --------------------------------------------------------------------------------------------------------------------------
Mid-Cap Growth 12/31/96 Equity/Open 0.1 (R) 12.45 (R)
2.8 (I) 12.49 (I)
- --------------------------------------------------------------------------------------------------------------------------
Mid-Cap Value 12/31/96 Equity/Open 0.2 (R) 11.14 (R)
3.8 (I) 11.14 (I)
- --------------------------------------------------------------------------------------------------------------------------
Municipal Bond 5/29/91 Fixed 10.7 (I) 11.79 (I)
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
Short-Term Bond 8/3/92 Fixed 0.5 (R) 9.77 (R)
Income/Open 29.2 (I) 9.78 (I)
- --------------------------------------------------------------------------------------------------------------------------
Small Cap Growth 12/31/96 Equity/Open 4.2 (R) 13.76 (R)
38.1 (I) 13.81 (I)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-72-
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Value 5/13/91 Equity/Open 67.4 (R) 17.28 (R)
331.3 (I) 17.29 (I)
2.2 (A) 17.27 (A)
- --------------------------------------------------------------------------------------------------------------------------
Strategic Value 12/31/96 Equity/Open 0.3 (R) 13.12 (R)
1.4 (I) 13.13 (I)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 5/21/91 Fixed 23.1 (I) 11.18 (I)
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
Worldwide 5/1/96 Global/Open 0.1 (R) 9.40 (R)
5.8 (I) 9.42 (I)
- --------------------------------------------------------------------------------------------------------------------------
Managed Bond 4/27/98 Equity/Open
- --------------------------------------------------------------------------------------------------------------------------
LOOMIS SAYLES INVESTMENT TRUST
- --------------------------------------------------------------------------------------------------------------------------
California Tax-Free Income 6/1/95 Fixed 20.4 10.58
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
Core Fixed Income 4/24/96 Fixed 20.6 10.85
Income/Open
--------------------------------------------------------------------------------------------------------------------------
Core Growth 10/1/95 Equity/Open 26.1 12.79
- --------------------------------------------------------------------------------------------------------------------------
Fixed Income 1/17/95 Fixed 266.7 12.10
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
High Yield Fixed Income 6/5/96 Fixed 17.6 7.95
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
Intermediate Duration 1/28/98 Fixed 11.3 9.79
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
Investment Grade Fixed Income 7/1/94 Fixed 131.7 11.61
Income/Open
--------------------------------------------------------------------------------------------------------------------------
NEW ENGLAND FUNDS
--------------------------------------------------------------------------------------------------------------------------
Cl. A= 216.7 A= 13.44
New England Balanced (I) 11/27/68 Balanced/Open B= 83.3 B= 13.32
C= 5.5 C= 13.27
Y= 72.0 D= 13.47
- --------------------------------------------------------------------------------------------------------------------------
New England Equity Income Fund 11/28/95 Equity Open Cl.A= 16.8 A= 16.94
(III) B= 14.9 B= 16.93
C= 2.0 C= 16.94
- --------------------------------------------------------------------------------------------------------------------------
New England High Income Fund (II) 2/22/84 Fixed Cl. A= 74.1 A= 9.00
Income/Open B= 63.7 B= 9.00
C= 8.0 C= 9.00
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-73-
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cl. A= 45.5 A= 14.24
New England International Equity 5/21/92 Global/Open B= 19.2 B= 13.95
Fund (I) C= O.8 C= 13.99
Y= 5.5 Y= 14.43
- --------------------------------------------------------------------------------------------------------------------------
Cl. A= 459.0 A= 20.96
New England Star Advisers (I) 7/7/94 Equity/Open B= 527.0 B= 20.12
C= 100.7 C= 20.14
Y= 46.0 Y= 21.33
- --------------------------------------------------------------------------------------------------------------------------
Cl. A= 57.7 A= 15.99
New England Star Small Cap (I) 12/31/96 Equity/Open B= 61.9 B= 15.75
C= 15.3 C= 15.75
- --------------------------------------------------------------------------------------------------------------------------
Cl. A= 127.4 A= 11.50
New England Strategic Income (I) 5/1/95 Fixed B= 134.4 B= 11.50
Income/Open C= 45.2 C= 11.49
- --------------------------------------------------------------------------------------------------------------------------
Cl. A= 302.9 A= 9.43
New England Value (I) 6/5/70 Equity/Open B= 82.1 B= 9.13
C= 5.9 C= 9.14
Y= 17.0 Y= 9.40
--------------------------------------------------------------------------------------------------------------------------
NEW ENGLAND ZENITH FUND
- --------------------------------------------------------------------------------------------------------------------------
Balanced 10/31/94 Balanced/Open 189.5 15.23
- --------------------------------------------------------------------------------------------------------------------------
Small Cap 5/2/94 Equity/Open 225.3 146.11
- --------------------------------------------------------------------------------------------------------------------------
UNRELATED FUNDS
- --------------------------------------------------------------------------------------------------------------------------
1st Source 11/3/87 Equity/Open 89.7 11.34
- --------------------------------------------------------------------------------------------------------------------------
Manager's Bond fund 5/84 Fixed 36.1 22.71
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
Maxim Small-Cap Aggressive 11/1/94 Equity/Open 115.0 1.3745
Growth Fund
- --------------------------------------------------------------------------------------------------------------------------
Maxim Foreign Equity 2/14/97 Global 78.4 0.9765
Equity/Open
- --------------------------------------------------------------------------------------------------------------------------
Maxim Corporate Bond 11/1/94 Fixed 200.4 1.1339
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
Metropolitan High Yield Bond 3/97 Fixed 44.3 8.59
Income/Open
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-74-
(J) Miscellaneous
1. Election and Removal of Directors
Directors of the General Partner of the Investment Management Company
are elected to office or removed from office by vote of either stockholders
or directors, in accordance with the By-Laws of the General Partner of
Investment Management Company.
2. Results of operations
Officers of the General Partner of the Investment Management Company
are elected by the Board of Directors. The Board of Directors may remove
any officer without cause.
3. Supervision by SEC of Changes in Directors and Certain Officers
Loomis Sayles files certain reports with the SEC in accordance with
Sections 203 and 204 of the Investment Advisers Act of 1940, which reports
list and provide certain information relating to directors and officers of
Investment Management Company.
4. Amendment to the Agreement of Limited Partnership of Investment
Management Company, Articles of Organization and By-Laws of its
General Partner, Transfer of Business and Other Important Matters.
5. Litigation, etc.
On June 7, 1996, a lawsuit has been instituted against Loomis, Sayles
& Company, L.P. by three related trusts who are former institutional
clients for losses sustained in connection with the liquidation of certain
mortgage-backed securities in their accounts. The action alleges that
Loomis Sayles breached its ERISA fiduciary duties and certain contractual
obligations in purchasing the mortgage-backed securities for the clients'
accounts. The former clients concede that persons other than Loomis Sayles
made the decision to sell the securities at issue. Loomis Sayles believes
that the purchase of the mortgage-backed securities at issue was authorized
by contract, appropriate for the clients' accounts, and fully consistent
with ERISA standards. On March 3, 1997, the Court granted Loomis Sayles'
motion to dismiss certain of the causes of action of the plaintiffs and to
strike the plaintiffs' request for punitive damages. The case has proceeded
through the trial phase and both parties are submitting post trial briefs.
Management believes that it has meritorious defenses and continues to
vigorously contest both allegations of liability and damages. Management
believes that resolution of this matter will not have a material adverse
effect on Loomis Sayles' financial condition.
<PAGE>
-75-
III. OUTLINE OF THE OTHER RELATED COMPANIES
(A) State Street Bank and Trust Company (the Transfer Agent, Shareholder
Service Agent, Dividend Paying Agent and Custodian)
(1) Amount of Capital
U.S.$ 4.8 trillion as of the end of January, 1999
(2) Description of Business
State Street Bank and Trust Company, Boston, Massachusetts
02102, is the Trust's custodian. As such, State Street Bank holds
in safekeeping certificated securities and cash belonging to the
Fund and, in such capacity, is the registered owner of securities
held in book entry form belonging to the Fund. Upon instruction,
State Street Bank receives and delivers cash and securities of
the Fund in connection with Fund transactions and collects all
dividends and other distributions made with respect to Fund
portfolio securities. State Street Bank also maintains certain
accounts and records of the Fund and calculates the total net
asset value, total net income and net asset value per share of
the Fund on a daily basis.
(3) Outline of Business Relationship with the Fund
State Street Bank and Trust Company provides transfer agent
services, shareholder services, dividend paying services and
custody services to the Fund.
(B) Loomis Sayles Distributors, L.P. (the Distributor)
(1) Amount of Capital
U.S.$ 408,566 as of the end of January, 1999
(2) Description of Business
Under an agreement with the Trust (the "Distribution
Agreement"), Loomis Sayles Distributors, L.P. serves as the
general distributor of the Fund. Under this agreement, Loomis
Sayles Distributors, L.P. is not obligated to sell a specific
number of shares. Loomis Sayles Distributors, L.P. bears the cost
of making information about the Fund available through
advertising and other means and the cost of printing and mailing
prospectuses to persons other than shareholders. The Fund pays
the cost of registering and qualifying their shares under state
and federal securities laws and the distribution of prospectuses
to existing shareholders.
The Fund has adopted a Service and Distribution Plan adopted
pursuant to Rule 12b-1 under the 1940 Act (the "Plan") under
which the Fund pays the Distributor, a subsidiary of Loomis
Sayles, a monthly service fee at an annual rate not to exceed
0.25% of the Fund's average net assets and a monthly
<PAGE>
-76-
distribution fee at an annual rate not to exceed 0.50% of the
Fund's average net assets. Pursuant to Rule 12b-1 under the 1940
Act, the Plan (together with the Distribution Agreement) was
approved by the board of trustees, including a majority of the
trustees who are not interested persons of the Trust (as defined
in the 1940 Act) and who have no direct or indirect financial
interest in the operations of the Plan or the Distribution
Agreement (the "Independent Trustees").
The Plan may be terminated by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding
voting securities of the Fund. The Plan may be amended by vote of
the trustees, including a majority of the Independent Trustees,
cast in person at a meeting called for the purpose. The Trust's
trustees review quarterly written reports of such costs and the
purposes for which such costs have been incurred. The Plan
provides that, for so long as that Plan is in effect, selection
and nomination of those trustees who are not interested persons
of the Trust shall be committed to the discretion of such
disinterested persons.
The Distribution Agreement may be terminated at all time
with respect to the Fund on 60 days' written notice without
payment of any penalty by the Trust or by vote of majority of the
outstanding voting securities of the Fund or by vote of a
majority of the Independent Trustees.
The Distribution Agreement and the Plan will continue in
effect for successive one-year periods, provided that each such
continuance is specifically approved (1) by the vote of a
majority of the entire board of trustees and (ii) by the vote of
a majority of the Independent Trustees, in each case cast in
person at a meeting called for that purposes.
(3) Outline of Business Relationship with the Fund Loomis Sayles
Distributors, L.P. engages in providing marketing services to the
Fund.
(C) Kokusai Securities Co., Ltd. (Distributor in Japan and Agent Company)
(1) Amount of Capital
(Yen)55.6 billion as of the end of January, 1999
(2) Description of Business
Kokusai Securities Co., Ltd. is a diversified securities company in
Japan. It engages in the handling of the sale and repurchase of Units
of the Fund in respect of the investment trusts issued by Kokusai
Investment Trust Management Co., Ltd. and engages in selling and
repurchasing, as a Distribution and Repurchase Company and as an Agent
Company, of Units of foreign investment trusts, namely International
<PAGE>
- 77 -
Bond Index Fund, Fidelity Special Growth Fund, ACM International Healthcare
Fund, European and Asian Fund, ACM Global Growth Trend Portfolio, Evergreen
Small Company Growth Fund, Evergreen Global Opportunities Fund, Fresh Korea
Fund, Putnam High Yield Advantage Fund, Putnam US Government Income Fund,
Super Fenix Fund, Salomon Euro Bond Fund, Loomis Sayles Managed Bond Fund
and Super Fenix Fund II and as the Underwriting Company for AGF Growth
Equity Fund, G.T. Investment Fund, Sci/Tech ASA Fund and Morgan Stanley
Money Market Family.
(3) The Company acts as a Distributor in Japan and Agent Company for the Fund
in connection with the offering of shares in Japan.
(D) Capital Relationships
N/A.
(E) Interlocking Directors and Auditors
Names and functions of officers of the Fund who also are officers of
the related companies are as follows:
<TABLE>
<CAPTION>
(as of the end of January, 1999)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Name of Investment Transfer
Officer or Management Agent and
Trustee Trust Company Shareholder
Service Agent
- ----------------------------------------------------------------------------------------
Daniel J. Fuss President & Trustee Executive Vice President None
and Director
- ----------------------------------------------------------------------------------------
Sheila M. Secretary and Assistant General Councel None
Barry Compliance Officer & Vice President
- ----------------------------------------------------------------------------------------
Robert J. Executive Vice Executive Vice President. None
Blanding President President,Chairman,
Director & Chief Executive
Officer
- ----------------------------------------------------------------------------------------
Mark W. Treasurer Vice President-Chief None
Holland Financial Officer and
Director
- ----------------------------------------------------------------------------------------
Jeffrey L. Vice President Executive Vice President, None
Meade Chief Operating Officer &
Director, Clerk
- ----------------------------------------------------------------------------------------
Philip R. Assistant Treasurer Vice President and None
Murray Treasurer
- ----------------------------------------------------------------------------------------
Kent P. Vice President Managing Partner, Vice None
Newmark President & Director
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- 78 -
<TABLE>
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Philip J. Vice President Vice President & Director None
Schettewi
- -------------------------------------------------------------------------------
Sandra P. Vice President General Counsel, Executive None
Tichenor Vice President, Secretary
and Director
- -------------------------------------------------------------------------------
Anthony J. Vice President Vice President and Director None
Wilkins
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
-79-
IV. FINANCIAL CONDITION OF THE FUND
1. The Fund started its operations on 1st October, 1998 after the completion
of the public offering of the Shares and the first accounting year of the Fund
will end on 30th September, 1999. Accordingly, no audited financial statements
of the Fund has been prepared.
The Fund shall use as the auditors the professional services of
Pricewaterhouse Coopers.
2. Conditions of the Fund
(a) Statement of Net Assets
(As of the end of January 1999)
- -------------------------------------------------------------
U.S.$ Japanese Yen
- -------------------------------------------------------------
(in thousands
except column e.)
- -------------------------------------------------------------
a. Total Asset 33,252,931 3,868,979
- -------------------------------------------------------------
b. Total Liabilities 69,719 8,112
- -------------------------------------------------------------
c. Total Net Assets 33,183,212 3,860,867
(a-b)
------------------------------------------------------------
d. Total Number of Units 3,168,700
Outstanding
------------------------------------------------------------
e. Net Asset Value 10.47 1,219
per Unit (c/d)
------------------------------------------------------------
(b) Names of Major Portfolio Shares
<PAGE>
As of the end of January 1999, no equity shares are included in the
portfolio except for certain preferred stocks.
<TABLE>
<CAPTION>
(As of the end of January, 1999)
- -----------------------------------------------------------------------------------------------------------------------------------
Quantity U.S.$ Invest-
-------------------------------------------
(Number Acquisition Cost Current Value ment
-------------------------------------------
of per per Ratio
Name of Issue Country Kind of Issue Shares) Share Total Share Total (%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Loews Corp. U.S.A. Bond 2,150,000 0.80 1,710,087.00 0.80 1,720,000.00 5.18
2 Province of Ontario Canada Bond 12,000,000 0.12 1,420,185.00 0.13 1,616,090.00 4.87
3 Canadian Government Canada Bond 9,500,000 0.16 1,480,919.00 0.17 1,610,946.00 4.85
4 Thermo Electron U.S.A Bond 1,750,000 0.87 1,520,625.00 0.91 1,583,750.00 4.77
5 MetroNet Communications Canada Bond 2,250,000 0.56 1,270,815.00 0.68 1,530,000,00 4.61
6 Bell Atlantic Financial U.S.A. Bond 1,325,000 0.98 1,294,782.00 1.15 1,522,094.00 4.59
7 Province of British Columbia Canada Bond 4,500,000 0.30 1,363,504.00 0.32 1,451,283.00 4.37
8 Baker Hughes U.S.A. Bond 2,050,000 0.67 1,381,561.00 0.65 1,337,625.00 4.03
9 KN Energy U.S.A. Bond 1,250,000 0.95 1,184,262.00 1.01 1,266,813.00 3.82
10 NTL, Inc. U.S.A. Bond 1,750,000 0.59 1,037,095.00 0.70 1,227,187.00 3.70
11 Fox Family Worldwide U.S.A. Bond 1,750,000 0.65 1,133,600.00 0.63 1,089,125.00 3.31
12 Owens Corning U.S.A. Bond 1,000,000 0.93 930,870.00 0.99 987,120.00 2.97
13 Tennessee Gas Pipelines U.S.A. Bond 900,000 0.99 887,769.00 1.04 933,840.00 2.81
14 Chesapeake Energy U.S.A. Bond 1,200,000 0.88 1,060,500.00 0.74 888,000.00 2.68
15 First Industrial U.S.A. Bond 900,000 0.92 824,049.00 0.90 805,545.00 2.43
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Quantity U.S.$ Invest-
--------------------------------------------
(Number Acquisition Cost Current Value ment
--------------------------------------------
of per per Ratio
Name of Issue Country Kind of Issue Shares) Share Total Share Total (%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
16 Nextel Communications U.S.A. Bond 1,200,000 0.59 711,000.00 0.65 780,000.00 2.35
17 Dell Computer U.S.A. Bond 750,000 0.98 731,573.00 1.02 765,495.00 2.31
18 Hyperion Telecommunications U.S.A. Bond 1,000,000 0.69 686,250.00 0.76 760,000.00 2.29
19 Columbia/HCA Healthcare U.S.A. Bond 800,000 0.87 696,960.00 0.89 708,160.00 2.13
20 U.S. Treasury Bond U.S.A. Bond 625,000 1.10 690,430.00 1.10 686,038.00 2.07
21 RCN Corp. U.S.A. Bond 1,100,000 0.55 607,750.00 0.58 638,000.00 1.92
22 Cleanet Communications Canada Bond 1,750,000 0.30 521,812.00 0.36 625,207.00 1.88
23 Diamond Offshore Drilling U.S.A. Bond 650,000 0.86 561,438.00 0.93 604,500.00 1.82
24 Trico Marine Services U.S.A. Bond 650,000 0.88 574,347.00 0.86 559,000.00 1.68
25 Susa Partnership LP U.S.A. Bond 600,000 0.89 533,216.00 0.92 552,012.00 1.66
26 ConAgra U.S.A. Bond 500,000 1.00 499,820.00 1.06 531,050.00 1.60
27 Arch Communications U.S.A. Bond 900,000 0.48 428,625.00 0.58 524,250.00 1.58
28 Read Rite U.S.A. Bond 650,000 0.55 357,500.00 0.80 516,750.00 1.56
29 Hyperion Telecommunications U.S.A. Preferred Stock 611 825.69 504,495.00 810.07 494,954.00 1.49
30 Security Capital U.S.A. Bond 500,000 0.88 437,575.00 0.95 473,870.00 1.43
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-81-
<PAGE>
-82-
V. SUMMARY OF INFORMATION CONCERNING FOREIGN INVESTMENT TRUST SECURITIES
1. Transfer of the Shares
The transfer agent for the registered share certificates is State
Street Bank and Trust Company, Boston, Massachusetts 02102, U.S.A.
The Japanese investors who entrust the custody of their shares to a
Sales and Sales Handling Company shall have their shares transferred under
the responsibility of such company, and the other investors shall make
their own arrangements.
No fee is chargeable for the transfer of shares.
2. The Closing Period of the Shareholders' Book
For the purpose of determining the shareholders who are entitled to
vote or act at any meeting or any adjournment thereof, or who are entitled
to receive payment of any dividend or of any other distribution, the
Trustees may from time to time fix a time, which shall be not more than 90
days before the date of any meeting of shareholders or the date for the
payment of any dividend or of any other distribution, as the record date
for determining the shareholders having the right to notice of and to vote
at such meeting and any adjournment thereof or the right to receive such
dividend or distribution, and in such case only shareholders of record on
such record date shall have such right notwithstanding any transfer of
shares on the books of the Trust after the record date; or without fixing
such record date the Trustees may for any of such purposes close the
register or transfer books for all or any part of such period.
3. There are no annual shareholders' meetings. Special shareholders' meeting
may be held from time to time as required by the Declaration of Trust and
the Investment Company Act of 1940.
4. No special privilege is granted to Shareholders.
The acquisition of Shares by any person may be restricted.
VI. MISCELLANEOUS
1. (1) The ornamental design is used in cover page of the Japanese
Prospectus.
(2) Summarized Preliminary Prospectus will be used.
Attached document (Summarized Preliminary Prospectus) will be used
pursuant to the below, as the document (Summarized Preliminary
Prospectus) as set forth at Item 1.(1)(b), of Article 12 of the
Ordinance Concerning the Disclosure of the Content, etc. of the
Specified Securities.
<PAGE>
-83-
(i) The summarized Preliminary Prospectus may be used as letters,
pamphlets, direct-mails post-cards, letters), etc., and may be
published in newspapers, magazines, books, etc.
(ii) The summarized Preliminary Prospectus may be, depending on the
media types, modified as to its lay-out, kinds of paper,
printed-color, design, etc. In addition, photographs and
illustrations attached may be added thereto.
(iii) For information of the Fund's achievements, the changes of the
net asset value per share and the fluctuation rates since the
establishment of the Fund or for the latest 3 months, 6 months,
one year, two years, three years or five years may be set out in
the figures or graphs, compared to the recognized bond index
from time to time. Such information regarding the Fund's
achievement may be converted into and presented in yen.
2. As to the Fund, following documents have been filed with the Kanto Local
Finance Bureau of the Ministry of Finance of Japan.
September 4, 1998 Securities Registration Statement.
September 10, 1998 Amendment to the Securities Registration Statement
September 14, 1998 Amendment to the Securities Registration Statement
September 16, 1998 Amendment to the Securities Registration Statement
December 1, 1998 Amendment to the Securities Registration Statement
<PAGE>
-84-
PART III. SPECIAL INFORMATION
SECTION I OUTLINE OF GENERAL INFORMATION ABOUT OPEN-END
MASSACHUSETTS INVESTMENT COMPANIES
Below is an outline of certain general information about open-end U.S.
investment companies. This outline is not intended to provide comprehensive
information about such investment companies or the various laws, rules or
regulations applicable to them, but provides only a brief summary of certain
information which may be of interest to investors. The discussion below is
qualified in its entity by the complete registration statement of the fund and
the full text of any referenced statutes and regulations.
I. Massachusetts Business Trusts
A. General Information
Many investment companies are organized as Massachusetts business
trusts. A Massachusetts business trust is organized pursuant to a
declaration of trust, setting out the general rights and obligations of the
shareholders, trustees, and other related parties. Generally, the trustees
of the trust oversee its business, and its officers and agents manage its
day-to-day affairs.
Chapter 182 of the Massachusetts General Laws applies to certain
"voluntary associations", including many Massachusetts business trusts.
Chapter 182 provides for, among other things, the filing of the declaration
of trust with the Secretary of State of the Commonwealth of Massachusetts
and the filing by the trust of an annual statement regarding, among other
things, the number of its shares outstanding and the names and addresses of
its trustees.
B. Shareholder Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a trust.
Typically, a declaration of trust disclaims shareholder liability for acts
or obligations of the trust and provides for indemnification out of trust
property for all loss and expense of any shareholder held personally liable
for the obligations of a trust. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which a particular trust would be unable to meet its
obligations.
II. United States Investment Company Laws and Enforcement
A. General
In the United States, pooled investment management arrangements which
offer shares to the public are governed by a variety of federal statutes
and regulations. Most mutual funds are subject to these laws. Among the
more significant of these statutes are:
<PAGE>
-85-
1. Investment Company Act of 1940
The Investment Company Act of 1940, as amended (the "1940 Act"), in
general, requires investment companies to register as such with the U.S.
Securities and Exchange Commission (the "SEC"), and to comply with a number
of substantive regulations of their operations. The 1940 Act requires an
investment company, among other things, to provide periodic reports to its
shareholders.
2. Securities Act of 1933
The Securities Act of 1933, as amended (the "1933 Act"), regulates
many sales of securities. The Act, among other things, imposes various
registration requirements upon sellers of securities and provides for
various liabilities for failures to comply with its provisions or in
respect of other specified matters.
3. Securities Exchange Act of 1934
The Securities Exchange Act of 1934, as amended (the "1934 Act"), regulates
a variety of matters involving, among other things, the secondary trading
of securities, periodic reporting by the issuers of securities, and certain
of the activities of transfer agents and brokers and dealers.
4. The Internal Revenue Code of 1986
An investment company is an entity subject to federal income taxation
under the Internal Revenue Code of 1986, as amended. However, under the
Code, an investment company may be relieved of federal taxes on income and
gains it distributes to shareholders if it qualifies as a "regulated
investment company" under the Code for federal income tax purposes and
meets all other necessary requirements.
5. Other laws
The Fund is subject to the provisions of other laws, rules, and
regulations applicable to the Fund or its operations, such as, for example,
various state laws regarding the sale of the Fund's shares.
B. Outline of the Supervisory Authorities
Among the regulatory authorities having jurisdiction over the Fund or
certain of its operations are the SEC and state regulatory agencies or
authorities.
1. The SEC has broad authority to oversee the application and
enforcement of the federal securities laws, including the 1940 Act, the
1933 Act, and the 1934 Act, among others, to the Fund. The 1940 Act
provides the SEC broad authority to inspect the records of investment
companies, to exempt
<PAGE>
-86-
investment companies or certain practices from the provisions of the
Act, and otherwise to enforce the provisions of the Act.
2. State authorities typically have broad authority to regulate the
offering and sale of securities to their residents or within their
jurisdictions and the activities of brokers, dealers, or other persons
directly or indirectly engaged in related activities.
C. Offering Shares to the Public
An investment company ("investment company" or fund) offering its
shares to the public must meet a number of requirements, including, among
other things, registration as an investment company under the 194o Act;
registration of the sale of its shares under the 1933 Act; registration of
the fund, the sale of its shares, or both, with state securities
regulators; delivery of a current prospectus to current or prospective
investors; and so forth. Many of these requirements must be met not only at
the time of the original offering of the fund's shares, but compliance must
be maintained or updated from time to time throughout the life of the fund.
D. Ongoing Requirements
Under U.S. law, a fund is subject to numerous ongoing requirements,
including, but not limited to;
1. Updating its prospectus if it becomes materially inaccurate or
misleading;
2. Annual update of its registration statement;
3. Filing semi-annual and annual financial reports with the SEC and
distributing them to shareholders;
4. Annual trustee approval of investment advisory arrangements,
distribution plans, underwriting arrangements, errors and
omissions/director and officer liability insurance, foreign custody
arrangements, and auditors;
5. Maintenance of a code of ethics; and
6. Periodic board review of certain fund transactions, dividend
payments, and payments under a fund's distribution plan.
III. Management of a Fund
The board of directors or trustees of a fund is responsible for generally
overseeing the conduct of a fund's business. The officers and agents of a fund
are generally responsible for the day-to-day operations of a fund. The trustees
and officers of a fund may or may not receive a fee for their services.
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The investment adviser to a fund is typically responsible for implementing
the fund's investment program. The adviser typically receives a fee for its
services based on a percentage of the net assets of a fund. Certain rules govern
the activities of investment advisers and the fees they may charge. In the
United States, investment advisers to investment companies must be registered
under the Investment Advisers Act of 1940, as amended.
IV. Share Information
A. Valuation
Shares of a fund are generally sold at the net asset value next
determined after an order is received by a fund, plus any applicable sales
charges. A fund normally calculates its net asset value per share by
dividing the total value of its assets, less liabilities, by the number of
its shares outstanding. Shares are typically valued as of the close of
regular trading on the New York Stock Exchange (4:00) each day the Exchange
is open.
B. Redemption
Shareholders may generally sell shares of a fund to that fund any day
the fund is open for business at the net asset value next computed after
receipt of the shareholders' order. Under unusual circumstances, a fund may
suspend redemptions, or postpone payment for more than seven days, if
permitted by U.S. securities laws. A fund may charge redemption fees as
described in its prospectus.
C. Transfer agency
The transfer agent for a fund typically processes the transfer of
shares, redemption of shares, and payment and/or reinvestment of
distributions.
V. Shareholder Information, Rights and Procedures for the Exercise of Such
Rights
A. Voting Rights
Voting rights vary from fund to fund. In the case of many funds
organized as Massachusetts business trusts, shareholders are entitled to
vote on the election of trustees, approval of investment advisory
agreements, underwriting agreements, and distribution plans (or amendments
thereto), certain mergers or other business combinations, and certain
amendments to the declaration of trust. Shareholder approval is also
required to modify or eliminate a fundamental investment policy.
B. Dividends
Shareholders are typically entitled to receive dividends when and if
declared by a fund's trustees. In declaring dividends, the trustees will
normally set a record date, and all shareholders of record on that date
will be entitled to receive the dividend paid.
C. Dissolution
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Upon liquidation of a fund, Shareholders would normally be entitled to
receive a portion of the fund's net assets in accordance with the
proportion of the fund's outstanding shares owned.
D. Transferability
Shares of a fund are typically transferable without restriction.
E. Right to Inspection
Shareholders of a Massachusetts business trust have the right to
inspect the records of the trust as provided in the declaration of trust or
as otherwise provided by applicable law.
VI. U.S. Tax Matters
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended. As such, so long as the Fund
distributes substantially all its net investment income and net capital gains to
its shareholders, the Fund itself does not pay any federal income tax to the
extent such income and gains are so distributed.
An investor's income dividends and short-term capital gain distributions
are taxable as ordinary income whether distributed in cash or additional shares.
Distributions designated by the Fund as deriving from net gains on securities
held for more than one year will be taxable as such generally at a 20% rate for
non-corporate shareholders whether distributed in cash or additional shares and
regardless of how long an investor has owned shares of the Fund. Shareholders
who are not subject to U.S. federal income tax generally will not have to pay
tax on such long-term capital gain distributions. Distributions are taxable to a
shareholder of the Fund even if they are paid from income or gains earned by the
Fund prior to the Shareholder's investment and thus were included in the price
paid by the Shareholder.
The Fund generally is required to withhold 31% of any redemption proceeds
(including the value of shares exchanged) and all income dividends and capital
gain distributions it pays (1) if an investor does not provide a correct,
certified taxpayer identification number, (2) if the Fund is notified that an
investor has underreported income in the past, or (3) if an investor falls to
certify to the Fund that he or she is not subject to such withholding. Special
withholding rules may apply to non-U.S. shareholders, as described in the
Statement of Additional Information.
Dividends derived from interest on U.S. government securities may be exempt
from state and local taxes.
State Street Bank will send investors and the IRS an annual statement
detailing federal tax information, including information about dividends and
distributions paid during the preceding year. An investor should keep this
statement as a permanent record.
NOTE: The foregoing summarizes certain tax consequences of investing in the
Fund. Before investing, an investor should consult his or her own tax
adviser for
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more information concerning the federal, foreign, state and local tax
consequences of investing in, redeeming or exchanging Fund shares.
As required by federal law, detailed federal tax information will be
furnished to each shareholder for each calendar year on or before January 31 of
the succeeding year.
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Code. In order so to qualify, and to qualify for the
favorable tax treatment accorded regulated investment companies and their
shareholders, the Fund must, among other things, (i) derive at least 90% of its
gross income from dividends, interest, payments with respect to certain
securities loans, gains from the sale of securities of foreign currencies, or
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; (ii) distribute with respect to each taxable
year at least 90% of the sum of its taxable net investment income, its tax-
exempt income, and the excess, if any, of net short-term capital gains over net
long-term capital losses for such year; (iii) at the end of each quarter of the
taxable year maintain at least 50% of the value of its total assets in cash,
U.S. Government securities, securities of other regulated investment companies,
and other securities of issuers which represent, with respect to each issuer, no
more than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer; and (iv) at the end of each quarter of the
taxable year, hold not more than 25% of the value of its assets in the
securities (other than those of the U.S. Government or other regulated
investment companies) of any one issuer or of two or more issuers which the Fund
controls and which are engaged in the same, similar or related trades and
businesses. To the extent it qualifies for treatment as a regulated investment
company, the Fund will not be subject to federal income tax on income paid to
its shareholders in the form of dividends or capital gain distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of
the Fund's "required distribution" over its actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Fund's ordinary
income for the calendar year plus 98% of its capital gain net income realized
during the one-year period ending on October 31 (or December 31, if the Fund so
elects) plus undistributed amounts from prior years. The Fund intends to make
distributions sufficient to avoid imposition of the excise tax. Distributions
declared by the Fund during October, November or December to shareholders of
record on a date in any such month and paid by the Fund during the following
January will be treated for federal tax purposes as paid by the Fund and
received by shareholders on December 31 of the year in which declared.
Shareholders of the Fund will be subject to federal income taxes on
distributions made by the Fund whether received in cash or additional shares of
the Fund. Distributions by the Fund of net income and short-term capital gains,
if any, will be taxable to shareholders as ordinary income. Distributions
designated by the Fund as deriving from net gains on securities held for more
than one year will be taxable to shareholders as long-term capital gain
(generally taxable at a 20% tax rate for non-corporate Shareholders without
regard to how long a shareholder has held shares of the Fund.
Dividends and distributions on the Fund's share are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a
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particular shareholder's investment. Such distributions are likely to occur in
respect of shares purchased at a time when a Fund's net asset value reflects
gains that are either unrealized, or realized but not distributed. Such realized
gains may be required to be distributed even when a Fund's net asset value also
reflects unrealized losses.
The Fund's transactions, if any, in foreign currencies are likely to result
in a difference between the Fund's book income and taxable income. This
difference may cause a portion of the Fund's income distributions to constitute
a return of capital for tax purposes or require the Fund to make distributions
exceeding book income to avoid excise tax liability and to qualify as a
regulated investment company.
Investments by the Fund in "passive foreign investment companies" could
subject the Fund to a U.S. federal income tax or other charge on the proceeds
from the sale of its investment in such a company; however, this tax can be
avoided by making an election to mark such investments to market annually or to
treat the passive foreign investment company as a "qualified electing fund." A
"passive foreign investment company" is any foreign corporation; (i) 75% or more
of the income of which for the taxable year is passive income, or (ii) the
average percentage of the assets of which (generally by value, but by adjusted
tax basis in certain cases) that produce or are held for the production of
passive income is at least 50 percent. Generally, passive income for this
purpose means dividends, interest (including income equivalent to interest),
royalties, rents annuities, the excess of gains over losses from certain
property transactions and commodities transactions, and foreign currency gains.
Passive income for this purpose does not include rents and royalties received by
the foreign corporation from active business and certain income received from
related persons.
The Fund's investment in securities issued at a discount and certain other
obligations will (and investments in securities purchased at a discount may)
require the Fund to accrue and distribute income not yet received. In such
cases, the Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
If the Fund engages in hedging transactions, including hedging transactions
in options, future contracts and straddles, or other similar transactions, it
will be subject to special tax rules (including constructive sale, mark-to-
market, straddle, wash sale, and short sale rules), the effect of which may be
to accelerate income to the Fund, defer losses to the Fund, cause adjustments in
the holding periods of the Fund's securities, or convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders. The Fund will
endeavor to make any available elections pertaining to such transactions in a
manner believed to be in the best interests of the Fund.
Redemptions and exchanges of the Fund's shares are taxable events and,
accordingly, shareholders may realize gains and losses on these transactions. In
general, any gain realized upon a taxable disposition of shares will be long-
term capital gain (generally taxable to non-corporate Shareholders at a 20%
rate) if the shares have been held for more than one year. Otherwise the gain on
the sale, exchange or redemption of the Fund shares will be treated as short-
term capital gain. If a shareholder sells Fund shares at a loss within six
months after purchasing the shares, the loss will be treated as a long-term
capital loss to the extent of any
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long-term capital gain distributions received by the shareholder with respect to
the shares. Furthermore, all or a portion of any loss on the sale of Fund shares
may be disallowed if the shareholder acquired other shares of the Fund within 30
days prior to the sale of the loss shares or 30 days after such sale.
Shareholders who are not subject to U.S. federal income tax generally will not
have to pay tax on gains realized upon a disposition of Fund shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and regulations currently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative action.
Dividends and distributions also may be subject to foreign, state and local
taxes. Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, foreign, state or local taxes.
The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Fund, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty), the possibility that a non-U.S.
investor may be subject to U.S. tax on capital gain distributions and gains
realized upon the sale of Fund shares if the investor is present in the United
States for more than 182 days during the taxable year (and certain other
conditions apply), or the possibility that a non-U.S. investor may be subject to
U.S. tax on income from the Fund that is "effectively connected" with a U.S.
trade or business carried on by such investor.
The Internal Revenue Service recently revised its regulations affecting the
application to foreign investors of the back-up withholding tax rules. The new
regulations will generally be effective for payments made on or after December
31, 1999 (although transition rules will apply). In some circumstances, the new
rules will increase the certification and filing requirements imposed on foreign
investors in order to qualify for exemption from the 31% back-up withholding tax
and for reduced withholding tax rates under income tax treaties. Foreign
investors in the Fund should consult their tax advisors with respect to the
potential application of these new regulations.
VII. Important Participants in Offering of Mutual Fund Shares
A. Investment Company
Certain pooled investment vehicles qualify as investment companies
under the 1940 Act. There are open-end investment companies (those which
offer redeemable securities) and closed-end investment companies (any
others).
B. Investment Adviser/Administrator
The investment adviser is typically responsible for the implementation
of an investment company's investment program. It, or another affiliated or
unaffiliated entity, may also perform certain record keeping and
administrative functions.
C. Underwriter
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An investment company may appoint one or more principal underwriters
for its shares. The activities of such a principaly underwriter are
generally governed by a number of legal regimes, including, for example,
the 1940 Act, the 1933 Act, the 1934 Act, and state laws.
D. Transfer Agent
A transfer agent performs certain bookkeeping, data processing, and
administrative services pertaining to the maintenance of shareholder
accounts. A transfer agent may also handle the payment of any dividends
declared by the trustees of a fund.
E. Custodian
A custodian's responsibilities may include, among other things,
safeguarding and controlling a fund's cash and securities, handling the
receipt and delivery of securities, and collecting interest and dividends
on a fund's investments.
II. FINANCIAL CONDITIONS OF THE INVESTMENT MANAGEMENT COMPANY
[Omitted, in Japanese version, financial statements of the Investment
Management Company and Japanese translations thereof are incorporated
here.]
III. FORM OF FOREIGN INVESTMENT FUND SECURITIES
[Main items to be set forth on the share certificate of the Fund (if
issued) are as follows:-
(1) Front
a. Name of the Fund
b. Number of shares represented
c. Signatures of the Chairman and Transfer Agent
d. Description stating that the Declaration of Trust applies to
shareholders and assignees therefrom
(2) Back
a. Space for endorsement
b. Description concerning delegation of transfer agency]
