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TCW GALILEO FUNDS, INC.
865 South Figueroa Street, Suite 1800
Los Angeles, California 90017
(800) FUND TCW
THE GALILEO FUNDS
STATEMENT OF ADDITIONAL INFORMATION
March 1, 2000
As Supplemented April 20, 2000
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This Statement of Additional Information is not a prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus dated the same date which describes TCW Galileo Money Market Fund;
TCW Galileo Core Fixed Income Fund, TCW Galileo High Yield Bond Funds, TCW
Galileo Mortgage-Backed Securities Fund, TCW Galileo Total Return
Mortgage-Backed Securities Fund (collectively, the "Bond Funds"); TCW Galileo
Aggressive Growth Equities Fund, TCW Galileo Convertible Securities Fund, TCW
Earnings Momentum Fund, TCW Galileo Large Cap Growth Fund, TCW Galileo Large Cap
Value Fund, TCW Galileo Select Equities Fund, TCW Galileo Small Cap Growth Fund,
TCW Galileo Small Cap Value Fund, TCW Galileo Value Opportunities Fund, TCW
Galileo Asia Pacific Equities Fund, TCW Galileo Emerging Markets Equities Fund,
TCW Galileo European Equities Fund, TCW Galileo International Equities Fund, TCW
Galileo Japanese Equities Fund and TCW Galileo Latin America Equities Fund
("collectively, the "Equity Funds"); and TCW Galileo Emerging Markets Income
Fund. Each Fund offers two classes of shares, Institutional Class I shares and
Class N shares. This Statement of Additional Information should be read in
conjunction with the Prospectus. A Prospectus may be obtained without charge by
writing TCW Galileo Funds, Inc., Attention: Investor Relations Department, 865
South Figueroa Street, Suite 1800, Los Angeles, California 90017 or by calling
the Company's Investor Relations Department at (800) FUND TCW. This Statement of
Additional Information, although not in itself a prospectus, is incorporated by
reference into the Prospectus in its entirety.
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TABLE OF CONTENTS
INVESTMENT PRACTICES......................................................1
RISK CONSIDERATIONS......................................................20
INVESTMENT RESTRICTIONS..................................................36
DIRECTORS AND OFFICERS OF THE COMPANY....................................38
INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS..........................42
DISTRIBUTION OF COMPANY SHARES...........................................45
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......................46
ADMINISTRATION AGREEMENT.................................................49
CODE OF ETHICS...........................................................49
DETERMINATION OF NET ASSET VALUE.........................................49
HOW TO BUY AND REDEEM SHARES.............................................49
HOW TO EXCHANGE SHARES...................................................50
PURCHASES-IN-KIND........................................................50
DISTRIBUTIONS AND TAXES..................................................51
INVESTMENT RESULTS.......................................................54
ORGANIZATION, SHARES AND VOTING RIGHTS...................................57
TRANSFER AGENT AND CUSTODIANS............................................58
INDEPENDENT AUDITORS.....................................................58
LEGAL COUNSEL............................................................58
FINANCIAL STATEMENTS.....................................................58
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INVESTMENT PRACTICES
In attempting to achieve its investment objective, a Fund may utilize, among
others, one or more of the strategies or securities set forth below. The Funds
may, in addition, invest in other instruments (including derivative investments)
or use other investment strategies that are developed or become available in the
future and that are consistent with their objectives and restrictions. The Fund,
for purposes of calculating certain comparative guidelines, will utilize the
previous month-end range.
Strategies Available to All Funds
Money Market Instruments. All Funds may invest in money market instruments,
although the Bond Funds, Equity Funds and Emerging Markets Income will generally
do so for defensive or temporary purposes only. These instruments include, but
are not limited to:
U.S. Government Securities.
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Obligations issued or guaranteed as to principal and interest by the United
States or its agencies (such as the Export-Import Bank of the United States,
Federal Housing Administration and Government National Mortgage Association) or
its instrumentalities (such as the Federal Home Loan Bank), including Treasury
bills, notes and bonds;
Bank Obligations.
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(All Funds except Money Market) Obligations including certificates of
deposit, bankers' acceptances, commercial paper (see below) and other debt
obligations of banks subject to regulation by the U.S. Government and having
total assets of $1 billion or more, and instruments secured by such obligations,
not including obligations of foreign branches of domestic banks except as
permitted below.
(Money Market Fund) U.S. dollar denominated instruments issued or
guaranteed by the 50 largest bank holding companies in the United States, in
terms of total assets, their subsidiaries and their London branches. Such bank
obligations may be general obligations of the parent bank holding company or may
be limited to the issuing entity by the terms of the specific obligation or by
government regulation;
Eurodollar Certificates of Deposit. (All Funds) Eurodollar certificates of
deposit issued by foreign branches of domestic banks having total assets of $1
billion or more (investments in Eurodollar certificates may be affected by
changes in currency rates or exchange control regulations, or changes in
governmental administration or economic or monetary policy in the United States
and abroad);
Obligations of Savings Institutions.
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(All Funds) Certificates of deposit of savings banks and savings and loan
associations, having total assets of $1 billion or more (investments in savings
institutions above $100,000 in principal amount are not protected by federal
deposit insurance);
Fully Insured Certificates of Deposit.
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(All Funds except Money Market) Certificates of deposit of banks and
savings institutions, having total assets of less than $1 billion, if the
principal amount of the obligation is insured by the Bank Insurance Fund or the
Savings Association Insurance Fund (each of which is administered by the Federal
Deposit Insurance Corporation), limited to $100,000 principal amount per
certificate and to 15% or less of the Fund's total assets in all such
obligations and in all illiquid assets, in the aggregate;
Commercial Paper.
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The Funds may purchase commercial paper rated within the two highest
ratings categories by Standard & Poor's Corporation ("S&P") or Moody's Investors
Service, Inc. ("Moody's") or, if not rated, the security is determined by the
Adviser to be of comparable quality.
World Bank Securities.
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(Money Market Fund) Obligations of the International Bank for
Reconstruction and Development, also known as the World Bank (these obligations
are supported by subscribed but unpaid commitments of member countries, and
there is no assurance that these commitments will be undertaken or complied with
in the future).
Money Market Mutual Funds.
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(All Funds) Shares of United States money market investment companies not
affiliated with the Adviser, subject to applicable legal restrictions and the
Adviser's determination that such investments are beneficial to the relevant
Fund and appropriate in view of such considerations as yield (taking into
account the advisory fees and expenses of the money market fund), quality and
liquidity.
Other Short-Term Obligations.
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(All Funds). Debt securities that have a remaining maturity of 397 days or
less and that have a long-term rating within the three highest ratings
categories by S&P or Moody's.
Repurchase Agreements. Repurchase agreements, which may be viewed as a type of
secured lending by a Fund, typically involve the acquisition by a Fund of debt
securities from a selling financial institution such as a bank, savings and loan
association or broker-dealer. The repurchase agreements will provide that the
Fund will sell back to the institution, and that the institution will
repurchase, the underlying security ("collateral") at a specified price and at a
fixed time in the future, usually not more than seven days from the date of
purchase. The collateral will be maintained in a segregated account and, with
respect to United States repurchase agreements, will be marked to market daily
to ensure that the full value of the collateral, as specified in the repurchase
agreement, does not decrease below the repurchase price plus accrued interest.
If such a decrease occurs, additional collateral will be requested and, when
received, added to the account to maintain full collateralization. The Fund will
accrue interest from the institution until the date the repurchase occurs.
Although this date is deemed by each Fund to be the maturity date of a
repurchase agreement, the maturities of the collateral securities are not
subject to any limits and may exceed one year. Repurchase agreements maturing in
more than seven days will be considered illiquid for purposes of the restriction
on each Fund's investment in illiquid and restricted securities.
Lending of Portfolio Securities. Each Fund may, consistent with applicable
regulatory requirements, lend their portfolio securities to brokers, dealers and
other financial institutions, provided such loans are callable at any time by
the Funds (subject to the notice provisions described below), and are at all
times secured by cash, bank letters of credit, other money market instruments
rated A-1, P-1 or the equivalent or securities of the United States Government
(or its agencies or instrumentalities), which are maintained in a segregated
account and that are equal to at least the market value, determined daily, of
the loaned securities. The advantage of such loans is that the Funds continue to
receive the income on the loaned securities while at the same time earning
interest on the cash amounts deposited as collateral, which will be invested in
short-term obligations. A Fund will not lend more than 25% of the value of its
total assets. A loan may be terminated by the borrower on one business day's
notice, or by a Fund on two business day's notice. If the borrower fails to
deliver the loaned securities within two days after receipt of notice, the Fund
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any extension
of credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower fail financially. However, loans of
portfolio securities will only be made to firms deemed by the Adviser to be
creditworthy. Upon termination of the loan, the borrower is required to return
the securities to the Funds. Any gain or loss in the marketplace during the loan
period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will call the loaned securities, to be delivered within one
day after notice, to permit the Fund to vote the securities if the matters
involved would have a material effect on the Fund's investment in such loaned
securities. A Fund will pay reasonable finder's, administrative and custodian
fees in connection with a loan of securities.
When-Issued and Delayed Delivery Securities and Forward Commitments. From time
to time, in the ordinary course of business, any Bond Fund, Equity Fund or
Emerging Markets Income may purchase securities on a when-issued or delayed
delivery basis and may purchase or sell securities on a forward commitment
basis. When such transactions are negotiated, the price is fixed at the time of
the commitment, but delivery and payment can take place a month or more after
the date of the commitment. The securities so purchased or sold are subject to
market fluctuation, and no interest or dividends accrue to the purchaser prior
to the settlement date. While a Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the settlement
date, if it is deemed advisable. At the time a Fund makes the commitment to
purchase or sell securities on a when-issued, delayed delivery or forward
commitment basis, the Fund will record the transaction and thereafter reflect
the value, each day, of such security purchased or, if a sale, the proceeds to
be received, in determining its net asset value. At the time of delivery of the
securities, the value may be more or less than the purchase or sale price. An
increase in the percentage of a Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value. The Adviser does not believe that any
Fund's net asset value or income will be adversely affected by its purchase of
securities on such basis.
When, As and If Issued Securities. Emerging Markets Income and the Bond and
Equity Funds may purchase securities on a "when, as and if issued" basis under
which the issuance of the security depends upon the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization, leveraged buyout
or debt restructuring. The commitment for the purchase of any such security will
not be recognized in the portfolio of the Fund until the Adviser determines that
issuance of the security is probable. At such time, the Fund will record the
transaction and, in determining its net asset value, will reflect the value of
the security daily. At such time, the Fund will also establish a segregated
account with its custodian bank in which it will continuously maintain cash or
U.S. Government Securities or other liquid portfolio securities equal in value
to recognized commitments for such securities. Settlement of the trade will
ordinarily occur within three Business Days of the occurrence of the subsequent
event. Once a segregated account has been established, if the anticipated event
does not occur and the securities are not issued, the Fund will have lost an
investment opportunity. Each Fund may purchase securities on such basis without
limit. An increase in the percentage of the Fund's assets committed to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of its net asset value. The Adviser does not believe that the net
asset value of the Fund will be adversely affected by its purchase of securities
on such basis. Each Fund may also sell securities on a "when, as and if issued"
basis provided that the issuance of the security will result automatically from
the exchange or conversion of a security owned by the Fund at the time of the
sale.
Strategies Available to Money Market, Core Fixed Income, Mortgage-Backed
Securities and Total Return Mortgage-Backed Securities
Reverse Repurchase Agreements. Reverse repurchase agreements involve sales by a
Fund of portfolio securities concurrently with an agreement by the Fund to
repurchase the same securities at a later date at a fixed price. Generally, the
effect of such a transaction is that the Fund can recover all or most of the
cash invested in the portfolio securities involved during the term of the
reverse repurchase agreement, while it will be able to keep the interest income
associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the Fund of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise.
Strategies Available to Emerging Markets Income, All Bond Funds and Equity Funds
(Except Aggressive Growth Equities, Small Cap Value, Value Opportunities and
International Equities)
Options. Emerging Markets Income, the Bond Funds and the Equity Funds (except
Aggressive Growth Equities, Small Cap Value, Value Opportunities and
International Equities) may purchase and write (sell) call and put options,
including options listed on U.S. or foreign securities exchanges or written in
over-the-counter transactions ("OTC Options").
Exchange-listed options are issued by the Options Clearing Corporation ("OCC")
(in the U.S.) or other clearing corporation or exchange which assures that all
transactions in such options are properly executed. OTC Options are purchased
from or sold (written) to dealers or financial institutions which have entered
into direct agreements with a Fund. With OTC Options, such variables as
expiration date, exercise price and premium will be agreed upon between a Fund
and the transacting dealer, without the intermediation of a third party such as
the OCC. If the transacting dealer fails to make or take delivery of the
securities or amount of foreign currency underlying an option it has written, in
accordance with the terms of that option, a Fund would lose the premium paid for
the option as well as any anticipated benefit of the transaction. Each Fund will
engage in OTC Option transactions only with brokers or financial institutions
deemed creditworthy by the Fund's management.
Covered Call Writing. Emerging Markets Income, the Bond Funds and the Equity
Funds (except Aggressive Growth Equities, Small Cap Value, Value Opportunities
and International Equities) are permitted to write covered call options on
securities and (for the Equity Funds, except Aggressive Growth Equities, Small
Cap Value, Value Opportunities and International Equities and, for the Bond
Funds, Core Fixed Income and Emerging Markets Income) on the U.S. dollar and
foreign currencies. Generally, a call option is "covered" if a Fund owns, or has
the right to acquire, without additional cash consideration (or for additional
cash consideration held for the Fund by its custodian in a segregated account)
the underlying security (currency) subject to the option except that in the case
of call options on U.S. Treasury bills, a Fund might own U.S. Treasury bills of
a different series from those underlying the call option, but with a principal
amount and value corresponding to the exercise price and a maturity date no
later than that of the security (currency) deliverable under the call option. A
call option is also covered if a Fund holds a call on the same security as the
underlying security (currency) of the written option, where the exercise price
of the call used for coverage is equal to or less than the exercise price of the
call written or greater than the exercise price of the call written if the
marked to market difference is maintained by a Fund in cash, U.S. Government
Securities or other liquid portfolio securities which a Fund holds in a
segregated account maintained with its custodian.
The writer of an option receives from the purchaser, in return for a call it has
written, a "premium"; i.e., the price of the option. Receipt of these premiums
may better enable a Fund to earn a higher level of current income than it would
earn from holding the underlying securities (currencies) alone. Moreover, the
premium received will offset a portion of the potential loss incurred by the
Fund if the securities (currencies) underlying the option are ultimately sold
(exchanged) by the Fund at a loss. Furthermore, a premium received on a call
written on a foreign currency will ameliorate any potential loss of value on the
portfolio security due to a decline in the value of the currency.
However, during the option period, the covered call writer has, in return for
the premium on the option, given up the opportunity for capital appreciation
above the exercise price should the market price of the underlying security (or
the exchange rate of the currency in which it is denominated) increase, but has
retained the risk of loss should the price of the underlying security (or the
exchange rate of the currency in which it is denominated) decline. The premium
received will fluctuate with varying economic market conditions. If the market
value of the portfolio securities (or the currencies in which they are
denominated) upon which call options have been written increases, a Fund may
receive a lower total return from the portion of its portfolio upon which calls
have been written than it would have had such calls not been written.
As regards listed options and certain OTC Options, during the option period, a
Fund may be required, at any time, to deliver the underlying security (currency)
against payment of the exercise price on any calls it has written (exercise of
certain listed and OTC Options may be limited to specific expiration dates).
This obligation is terminated upon the expiration of the option period or at
such earlier time when the writer effects a closing purchase transaction. A
closing purchase transaction is accomplished by purchasing an option of the same
series as the option previously written. However, once the Fund has been
assigned an exercise notice, the Fund will be unable to effect a closing
purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on an
outstanding call option, to prevent an underlying security (currency) from being
called, to permit the sale of an underlying security (or the exchange of the
underlying currency) or to enable a Fund to write another call option on the
underlying security (currency) with either a different exercise price or
expiration date or both. A Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the amount of the premium received
on the call option is more or less than the cost of effecting the closing
purchase transaction. Any loss incurred in a closing purchase transaction may be
wholly or partially offset by unrealized appreciation in the market value of the
underlying security (currency). Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part or exceeded by a
decline in the market value of the underlying security (currency).
If a call option expires unexercised, a Fund realizes a gain in the amount of
the premium on the option less the commission paid. Such a gain, however, may be
offset by depreciation in the market value of the underlying security (currency)
during the option period. If a call option is exercised, a Fund realizes a gain
or loss from the sale of the underlying security (currency) equal to the
difference between the purchase price of the underlying security (currency) and
the proceeds of the sale of the security (currency) plus the premium received on
the option less the commission paid.
Covered Put Writing. As a writer of a covered put option, a Fund incurs an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election (certain listed and OTC put options written by a Fund will
be exercisable by the purchaser only on a specific date). A put is "covered" if,
at all times, the Fund maintains, in a segregated account maintained on its
behalf at the Fund's custodian, cash, U.S. Government Securities or other liquid
portfolio securities in an amount equal to at least the exercise price of the
option, at all times during the option period. Similarly, a short put position
could be covered by the Fund by its purchase of a put option on the same
security (currency) as the underlying security of the written option, where the
exercise price of the purchased option is equal to or more than the exercise
price of the put written or less than the exercise price of the put written if
the marked to market difference is maintained by the Fund in cash, U.S.
Government Securities or other liquid portfolio securities which the Fund holds
in a segregated account maintained at its custodian. In writing puts, a Fund
assumes the risk of loss should the market value of the underlying security
(currency) decline below the exercise price of the option (any loss being
decreased by the receipt of the premium on the option written). In the case of
listed options, during the option period, the Fund may be required, at any time,
to make payment of the exercise price against delivery of the underlying
security (currency). The operation of and limitations on covered put options in
other respects are substantially identical to those of call options.
The Funds will write put options for three purposes: (a) to receive the income
derived from the premiums paid by purchasers; (b) when the Adviser wishes to
purchase the security (or a security denominated in the currency underlying the
option) underlying the option at a price lower than its current market price, in
which case it will write the covered put at an exercise price reflecting the
lower purchase price sought; and (c) to close out a long put option position.
The potential gain on a covered put option is limited to the premium received on
the option (less the commissions paid on the transaction) while the potential
loss equals the differences between the exercise price of the option and the
current market price of the underlying securities (currencies) when the put is
exercised, offset by the premium received (less the commissions paid on the
transaction).
Purchasing Call and Put Options. A Fund may purchase a call option in order to
close out a covered call position (see "Covered Call Writing" above), to protect
against an increase in price of a security it anticipates purchasing or, in the
case of a call option on foreign currency, to hedge against an adverse exchange
rate move of the currency in which the security it anticipates purchasing is
denominated vis-a-vis the currency in which the exercise price is denominated.
The purchase of the call option to effect a closing transaction on a call
written over-the-counter may be a listed or an OTC Option. In either case, the
call purchased is likely to be on the same securities (currencies) and have the
same terms as the written option. If purchased over-the-counter, the option
would generally be acquired from the dealer or financial institution which
purchased the call written by the Fund.
A Fund may purchase put options on securities or currencies which it holds in
its portfolio to protect itself against a decline in the value of the security
and to close out written put option positions. If the value of the underlying
security or currency were to fall below the exercise price of the put purchased
in an amount greater than the premium paid for the option, the Fund would incur
no additional loss. In addition, a Fund may sell a put option which it has
previously purchased prior to the sale of the securities (currencies) underlying
such option. Such a sale would result in a net gain or loss depending whether
the amount received on the sale is more or less than the premium and other
transaction costs paid on the put option which is sold. Such gain or loss could
be offset in whole or in part by a change in the market value of the underlying
security (currency). If a put option purchased by a Fund expired without being
sold or exercised, the premium would be lost.
Options on Treasury Bonds and Notes. Because trading interest in options written
on Treasury bonds and notes tends to center on the most recently auctioned
issues, the exchanges on which such securities trade will not continue
indefinitely to introduce options with new expirations to replace expiring
options on particular issues. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new expirations
as the original ones expire. Options trading on each issue of bonds or notes
will thus be phased out as new options are listed on more recent issues, and
options representing a full range of expirations will not ordinarily be
available for every issue on which options are traded.
Options on Treasury Bills. Because a deliverable Treasury bill changes from week
to week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if a Fund holds a long position in Treasury bills
with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, a Fund will hold the
Treasury bills in a segregated account with its custodian, so that they will be
treated as being covered.
Options on Foreign Currencies. The Equity Funds (except Aggressive Growth
Equities, Small Cap Value, Value Opportunities and International Equities), Core
Fixed Income and Emerging Markets Income may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
foreign currency forward contracts. For example, in order to protect against
declines in the dollar value of portfolio securities which are denominated in a
foreign currency, a Fund may purchase put options on an amount of such foreign
currency equivalent to the current value of the portfolio securities involved.
As a result, the Fund would be enabled to sell the foreign currency for a fixed
amount of U.S. dollars, thereby "locking in" the dollar value of the portfolio
securities (less the amount of the premiums paid for the options). Conversely, a
Fund may purchase call options on foreign currencies in which securities it
anticipates purchasing are denominated to secure a set U.S. dollar price for
such securities and protect against a decline in the value of the U.S. dollar
against such foreign currency. Each of these Funds may also purchase call and
put options to close out written option positions.
Each of these Funds may also write call options on foreign currency to protect
against potential declines in its portfolio securities which are denominated in
foreign currencies. If the U.S. dollar value of the portfolio securities falls
as a result of a decline in the exchange rate between the foreign currency in
which it is denominated and the U.S. dollar, then a loss to a Fund occasioned by
such value decline would be ameliorated by receipt of the premium on the option
sold. At the same time, however, the Fund gives up the benefit of any rise in
value of the relevant portfolio securities above the exercise price of the
option and, in fact, only receives a benefit from the writing of the option to
the extent that the value of the portfolio securities falls below the price of
the premium received. A Fund may also write options to close out long call
option positions. A put option on a foreign currency would be written by the
Fund for the same reason it would purchase a call option, namely, to hedge
against an increase in the U.S. dollar value of a foreign security which a Fund
anticipates purchasing. Here, the receipt of the premium would offset, to the
extent of the size of the premium, any increased cost to a Fund resulting from
an increase in the U.S. dollar value of the foreign security. However, a Fund
could not benefit from any decline in the cost of the foreign security which is
greater than the price of the premium received. A Fund may also write options to
close out long put and call option positions.
The markets in foreign currency options are relatively new and a Fund's ability
to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Funds will not purchase
or write such options unless and until, in the opinion of the Adviser, the
market for them has developed sufficiently to ensure that the risks in
connection with such options are not greater than the risks in connection with
the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors which
influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the underlying
currency relative to the U.S. dollar. As a result, the price of the option
position may vary with changes in the value of either or both currencies and
have no relationship to the investment merits of a foreign security, including
foreign securities held in a "hedged" investment portfolio. Because foreign
currency transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign currency
options, investors may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
available is generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller transactions (i.e.,
less than $ l million) where rates may be less favorable. The interbank market
in foreign currencies is a global, around-the-clock market. To the extent that
the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
Strategies Available to Emerging Markets Income, All Bond Funds and Equity Funds
(Except Aggressive Growth Equities, Large Cap Growth, Small Cap Value, Value
Opportunities and International Equities)
Futures Contracts. Emerging Markets Income, the Bond Funds and the Equity Funds
(except Aggressive Growth Equities, Large Cap Growth, Small Cap Value, Value
Opportunities and International Equities) may purchase and sell interest rate,
currency, and index futures contracts ("futures contracts"), on securities
eligible for purchase by the Fund. Subject to certain limitations, a Fund may
enter into futures contracts or options on such contracts to attempt to protect
against possible changes in the market value of securities held in or to be
purchased by the Fund resulting from interest rate or market fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage its
effective maturity or duration, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities.
To the extent futures positions constitute "bona fide hedge" positions as
defined by the rules and regulations of the Commodity Futures Trading Commission
("CFTC"), there is no overall limitation on the percentage of a Fund's assets
which may be committed to futures contracts and options or futures contracts,
provided the aggregate value of such positions does not exceed the value of such
Fund's portfolio securities. With respect to futures positions that are not
"bona fide hedge" positions, no Fund may enter into futures contracts or related
options if, immediately thereafter, the amount of initial margin and premiums
for unexpired futures contracts and options on futures contracts exceeds 5% of
the Fund's liquidation value, after taking into account unrealized profits and
losses on such futures contracts, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is less
(more) than the market price of the underlying security) at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%.
A Fund may purchase or sell interest rate futures for the purpose of hedging
some or all of the value of its portfolio securities against changes in
prevailing interest rates or to manage its duration or effective maturity. If
the Adviser anticipates that interest rates may rise and, concomitantly, the
price of certain of its portfolio securities may fall, the Fund may sell futures
contracts. If declining interest rates are anticipated, the Fund may purchase
futures contracts to protect against a potential increase in the price of
securities the Fund intends to purchase. Subsequently, appropriate securities
may be purchased by the Fund in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts. A Fund may purchase or sell futures on various currencies in which
its portfolio securities are denominated for the purpose of hedging against
anticipated changes in currency exchange rates. A Fund will enter into currency
futures contracts to "lock in" the value of a security purchased or sold in a
given currency vis-a-vis a different currency or to hedge against an adverse
currency exchange rate movement of a portfolio security's denominated currency
vis-a-vis a different currency. Foreign currency futures contracts would be
entered into for the same reason and under the same circumstances as foreign
currency forward contracts. The Adviser will assess such factors as cost
spreads, liquidity and transaction costs in determining whether to utilize
futures contracts or forward contracts in its foreign currency transactions and
hedging strategy.
Initial margin in futures transactions is different from margin in securities
transactions in that initial margin does not involve the borrowing of funds by a
broker's client but is, rather, a good faith deposit on the futures contract
which will be returned to a Fund upon the proper termination of the futures
contract. The margin deposits are marked to market daily and the Fund may be
required to make subsequent deposits of cash or U.S. Government Securities
called "variation margin", with the Fund's futures contract clearing broker,
which are reflective of price fluctuations in the futures contract. Initial
margin requirements are established by the exchanges on which futures contracts
trade and may, from time to time, change. In addition, brokers may establish
margin deposit requirements in excess of those required by the exchanges.
At any time prior to expiration of a futures contract, a Fund may elect to close
the position by taking an opposite position which will operate to terminate the
Fund's position in the futures contract. A final determination of any variation
margin is then made, additional cash is required to be paid by or released to
the Fund and the Fund realizes a loss or gain.
Although many futures contracts call for actual commitment or acceptance of
securities, the contracts usually are closed out before the settlement date
without making or taking delivery. A short futures position is usually closed
out by purchasing futures contracts for the same aggregate amount of the
underlying instruments and with the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and realize a gain. If the offsetting purchase price exceeds the sales price,
the seller would pay the difference and would realize a loss. Similarly, a long
futures position in usually closed out by effecting a futures contract sale for
the same aggregate amount of the specific type of security (currency) and the
same delivery date. If the offsetting sales price exceeds the purchase price,
the purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that a Fund will be able to enter into a closing transactions.
Options on Futures Contracts. Emerging Markets Income, the Bond Funds and the
Equity Funds (except Large Cap Growth, Aggressive Growth Equities, Small Cap
Value, Value Opportunities and International Equities) may also purchase and
write call and put options on futures contracts which are traded on an exchange
and enter into closing transactions with respect to such options to terminate an
existing position. An option on a futures contract gives the purchaser the right
(in return for the premium paid) to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the term of the option.
Funds will purchase and write options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, a Fund wished to
protect against an increase in interest rates and the resulting negative impact
on the value of a portion of its fixed-income portfolio, it might write a call
option on an interest rate futures contract, the underlying security of which
correlates with the portion of the portfolio the Fund seeks to hedge. Any
premiums received in the writing of options on futures contracts may, of course,
provide a further hedge against losses resulting from price declines in portions
of a Fund's portfolio.
Strategies Available to High Yield Bond, Emerging Markets Income and the Equity
Funds (except International Equities)
Convertible Securities. Convertible securities include bonds, debentures, notes,
preferred stock or other securities that may be converted into or exchanged for
common stock or other equity securities of the same or a different issuer.
Convertible securities provide a conversion right for a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible debt securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common stocks
of the same or similar issuers. Therefore, they generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the proximity of its price to its value as
a nonconvertible fixed income security.
v
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege), and
its "conversion value" (the security's worth, at market value, if converted into
the underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors may also have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. To the
extent the market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. In addition, a convertible security
generally will sell at a premium over its conversion value determined by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
Strategies Available to Core Fixed Income, Asia Pacific Equities, Emerging
Markets Equities, Emerging Markets Income, European Equities and Latin America
Equities
Sovereign Debt Obligations of Emerging Market Countries. The Core Fixed Income,
Asia Pacific Equities, Emerging Markets Equities, Emerging Markets Income,
European Equities and Latin America Equities may invest in Sovereign Debt of
emerging market countries. Political conditions, in terms of a country or
agency's willingness to meet the terms of its debt obligations, are of
considerable significance. Investors should be aware that the Sovereign Debt
instruments in which these Funds may invest involve great risk and are deemed to
be the equivalent in terms of quality to securities rated below investment grade
by Moody's and S&P.
Sovereign Debt generally offers high yields, reflecting not only perceived
credit risk, but also the need to compete with other local investments in
domestic financial markets. Mexico and certain other emerging market countries
are among the largest debtors to commercial banks and foreign governments. A
foreign debtor's willingness or ability to repay principal and interest due in a
timely manner may be affected by, among other factors, its cash flow situation,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the foreign debtor's policy towards the
International Monetary Fund and the political constraints to which a sovereign
debtor may be subject. Sovereign debtors may default on their Sovereign Debt.
Sovereign debtors may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and
interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to service its debts.
In recent years, some of the emerging market countries in which the Funds expect
to invest have encountered difficulties in servicing their Sovereign Debt. Some
of these countries have withheld payments of interest and/or principal of
Sovereign Debt. These difficulties have also led to agreements to restructure
external debt obligations; in particular, commercial bank loans, typically by
rescheduling principal payments, reducing interest rates and extended new
credits to finance interest payments on existing debt. In the future, holders of
Sovereign Debt may be requested to participate in similar reschedulings to such
debt.
The ability or willingness of the governments of Mexico and other emerging
market countries to make timely payments on their Sovereign Debt is likely to be
influenced strongly by a country's balance of trade and its access to trade and
other international credits. A country whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international prices of one
or more of such commodities. Increased protectionism on the part of a country's
trading partners could also adversely affect its exports. Such events could
extinguish a country's trade account surplus, if any. To the extent that a
country receives payment for its exports in currencies other than hard
currencies, its ability to make hard currency payments could be affected.
The occurrence of political, social and diplomatic changes in one or more of the
countries issuing Sovereign Debt could adversely affect the Funds' investments.
The countries issuing such instruments are faced with social and political
issues and some of them have experienced high rates of inflation in recent years
and have extensive internal debt. Among other effects, high inflation and
internal debt service requirements may adversely affect the cost and
availability of future domestic sovereign borrowing to finance governmental
programs, and may have other adverse social, political and economic
consequences. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. There can be no assurance that adverse political changes
will not cause the Funds to suffer a loss of interest or principal on any of its
holdings.
As a result of all of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Bankruptcy, moratorium and other
similar laws applicable to issuers of Sovereign Debt Obligations may be
substantially different from those applicable to issuers of private debt
obligations. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
government debt obligations in the event of default under their commercial bank
loan agreements.
Periods of economic uncertainty may result in the volatility of market prices of
Sovereign Debt and in turn, the Funds' net asset value, to a greater extent than
the volatility inherent in domestic securities. The value of Sovereign Debt will
likely vary inversely with changes in prevailing interest rates, which are
subject to considerable variance in the international market.
<PAGE>
Strategies Available to Core Fixed Income, Mortgage-Backed Securities and Total
Return Mortgage-Backed Securities
Guaranteed Mortgage Pass-Through Securities. Core Fixed Income, Mortgage-Backed
Securities and Total Return Mortgage-Backed Securities may invest in mortgage
pass-through securities representing participation interests in pools of
residential mortgage loans purchased from individual lenders by a Federal Agency
or originated by private lenders and guaranteed, to the extent provided in such
securities, by a Federal Agency. Such securities, which are ownership interests
in the underlying mortgage loans, differ from conventional debt securities,
which provide for periodic payment of interest in fixed amounts (usually
semiannually) and principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments (not necessarily
in fixed amounts) that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which the Funds may invest
include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA certificates
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. FNMA is a federally chartered,
privately owned corporation and FHLMC is a corporate instrumentality of the
United States. FNMA and FHLMC certificates are not backed by the full faith and
credit of the United States but the issuing agency or instrumentality has the
right to borrow, to meet its obligations, from an existing line of credit with
the U.S. Treasury. The U.S. Treasury has no legal obligation to provide such
line of credit and may choose not to do so.
Certificates for these types of mortgage-backed securities evidence an interest
in a specific pool of mortgages. These certificates are, in most cases,
"modified pass-through" instruments, wherein the issuing agency guarantees the
payment of principal and interest on mortgages underlying the certificates,
whether or not such amounts are collected by the issuer on the underlying
mortgages.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities. CMOs
are debt obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
certificates, but also may be collateralized by whole loans or private mortgage
pass-through securities (such collateral is collectively hereinafter referred to
as "Mortgage Assets"). Multiclass pass-through securities are equity interests
in a trust composed of Mortgage Assets. Payments of principal of and interest on
the Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by Federal Agencies, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of a series of CMOs may elect
to be treated as a Real Estate Mortgage Investment Conduit ("REMIC"). REMICs
include governmental and/or private entities that issue a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities, but unlike CMOs, which are
required to be structured as debt securities, REMICs may be structured as
indirect ownership interests in the underlying assets of the REMICs themselves.
However, there are no effects on a Fund from investing in CMOs issued by
entities that have elected to be treated as REMICs, and all future references to
CMOs shall also be deemed to include REMIC.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semiannual basis. Certain CMOs may have variable or floating interest rates
and others may be Stripped Mortgage Securities.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO series in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to certain of the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on other mortgage-backed securities. As part of the process of creating
more predictable cash flows on most of the tranches in a series of CMOs, one or
more tranches generally must be created that absorb most of the volatility in
the cash flows on the underlying mortgage loans. The yields on these tranches
are generally higher than prevailing market yields on mortgage-backed securities
with similar maturities. As a result of the uncertainty of the cash flows of
these tranches, the market prices of and yield on these tranches generally are
more volatile. The Funds will not invest in CMO and REMIC residuals.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities are structured similarly to the GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by United States and foreign private
issuers such as originators of and investors in mortgage loans, including
savings and loan associations, mortgage banks, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed rate or adjustable rate
mortgage loans. Since private mortgage pass-through securities typically are not
guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC, such
securities generally are structured with one or more types of credit
enhancement.
Mortgage-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, those securities may contain
elements of credit support, which fall into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquencies or losses in excess of those
anticipated could adversely affect the return on an investment in a security.
The Funds will not pay any fees for credit support, although the existence of
credit support may increase the price of a security.
Stripped Mortgage Securities. Stripped Mortgage Securities may be issued by
Federal Agencies, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
Mortgage Securities not issued by Federal Agencies will be treated by the Funds
as illiquid securities so long as the staff of the Securities and Exchange
Commission maintains its position that such securities are illiquid.
Stripped Mortgage Securities usually are structured with two classes that
receive different proportions of the interest and principal distribution on a
pool of mortgage assets. A common type of Stripped Mortgage Security will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). PO classes
generate income through the accretion of the deep discount at which such
securities are purchased, and, while PO classes do not receive periodic payments
of interest, they receive monthly payments associated with scheduled
amortization and principal prepayment from the mortgage assets underlying the PO
class. The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on such security's yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities.
A Fund may purchase Stripped Mortgage Securities for income, or for hedging
purposes to protect the Fund's portfolio against interest rate fluctuations. For
example, since an IO class will tend to increase in value as interest rates
rise, it may be utilized to hedge against a decrease in value of other
fixed-income securities in a rising interest rate environment.
Mortgage Dollar Rolls. The Funds may enter into mortgage dollar rolls with a
bank or a broker-dealer. A mortgage dollar roll is a transaction in which a Fund
sells mortgage-related securities for immediate settlement and simultaneously
purchases the same type of securities for forward settlement at a discount.
While the Fund begins accruing interest on the newly purchased securities from
the purchase or trade date, it is able to invest the proceeds from the sale of
its previously owned securities, which will be used to pay for the new
securities, in money market investments until the future settlement date. The
use of mortgage dollar rolls is a speculative technique involving leverage, and
is considered to be a form of borrowing by the Fund.
Asset-Backed Securities. Asset-backed securities have structural characteristics
similar to mortgage-backed securities but have underlying assets that are not
mortgage loans or interests in mortgage loans. Various types of assets,
primarily automobile and credit card receivables, are securitized in
pass-through structures similar to mortgage pass-through structures. In general,
the collateral supporting asset-backed securities is of shorter maturity than
mortgage loans and is likely to experience substantial prepayments. As with
mortgage-related securities, asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties and use
similar credit enhancement techniques. The cash flow generated by the underlying
assets is applied to make required payments on the securities and to pay related
administrative expenses. The amount of residual cash flow resulting from a
particular issue of asset-backed or mortgage-backed securities depends on, among
other things, the characteristics of the underlying assets, the coupon rates on
the securities, prevailing interest rates, the amount of administrative expenses
and the actual prepayment experience on the underlying assets. Core Fixed
Income, Mortgage-Backed Securities and Total Return Mortgage-Backed Securities
may each invest in any such instruments or variations as may be developed, to
the extent consistent with its investment objectives and policies and applicable
regulatory requirements.
Strategies Available to Mortgage-Backed Securities and Total Return
Mortgage-Backed Securities
Inverse Floaters. Inverse floaters constitute a class of CMOs with a coupon rate
that moves inversely to a designated index, such as LIBOR or COFI. Inverse
floaters have coupon rates that typically change at a multiple of the changes of
the relevant index rate. Any rise in the index rate (as a consequence of an
increase in interest rates) causes a drop in the coupon rate on an inverse
floater while any drop in the index rate causes an increase in the coupon rate
of an inverse floater. In some circumstances, the coupon on an inverse floater
could decrease to zero. In addition, like most other fixed-income securities,
the value of inverse floaters will decrease as interest rates increase and their
average lives will extend. Inverse floaters exhibit greater price volatility
than the majority of mortgage-backed securities. In addition, some inverse
floaters display extreme sensitivity to changes in prepayments. As a result, the
yield to maturity of an inverse floater is sensitive not only to changes in
interest rates but also to changes in prepayment rates on the related underlying
mortgage assets. As described above, inverse floaters may be used alone or in
tandem with interest-only stripped mortgage instruments. The Adviser believes
that, notwithstanding the fact that inverse floaters exhibit price volatility,
the use of inverse floaters as a component of the Fund's overall portfolio, in
light of the Fund's anticipated portfolio composition in the aggregate, is
compatible with the Fund's objective.
Strategies Available to the Equity Funds (Except Aggressive Growth Equities,
Earnings Momentum, Small Cap Value, Value Opportunities and International
Equities), Core Fixed Income and Emerging Markets Income
Forward Currency Transactions. The Equity Funds (except Aggressive Growth
Equities, Earnings Momentum, Small Cap Value, Value Opportunities and
International Equities), Core Fixed Income and Emerging Markets Income may enter
into forward currency transactions. A foreign currency forward contract involves
an obligation to purchase or sell a specific currency at an agreed future date,
at a price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders. A Fund may enter
into foreign currency forward contracts in order to protect against the risk
that the U.S. dollar value of the Fund's dividends, interest and net realized
capital gains in local currency will decline to the extent of any devaluation of
the currency during the intervals between (a) (i) the time the Fund becomes
entitled to receive or receives dividends, interest and realized gains or (ii)
the time an investor gives notice of a requested redemption of a certain amount
and (b) the time such amount(s) are converted into U.S. dollars for remittance
out of the particular country or countries.
At the maturity of a forward contract, a Fund may either accept or make delivery
of the currency specified in the contract or, prior to maturity, enter into a
closing purchase transaction involving the purchase or sale of an offsetting
contract. Closing purchase transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
The cost to a Fund of engaging in forward currency transactions may vary with
factors such as the length of the contract period and the market conditions then
prevailing. Because forward currency transactions are usually conducted on a
principal basis, no fees or commissions are involved, although the price charged
in the transaction includes a dealer's markup. The use of forward currency
contracts does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved in the
future. In addition, although forward currency contracts limit the risk of loss
due to a devaluation of the foreign currency in relation to the U.S. dollar,
they also limit any potential gain if that foreign currency appreciates with
respect to the U.S. dollar.
Strategies Available to the Equity Funds (except International Equities)
Short Sales Against the Box. The Equity Funds (except International Equities)
may from time to time make short sales of securities it owns or has the right to
acquire through conversion or exchange of other securities it owns. A short sale
is "against the box" to the extent that a Fund contemporaneously owns or has the
right to obtain at no added cost securities identical to those sold short. In a
short sale, a Fund does not immediately deliver the securities sold and does not
receive the proceeds from the sale. The Fund is said to have a short position in
the securities sold until it delivers the securities sold, at which time it
receives the proceeds of the sale. When a short sale transaction is closed out
by delivery of the securities, any gain or loss on the transaction is taxable as
a short term capital gain or loss.
To secure its obligation to deliver the securities sold short, a Fund will
deposit in a separate escrow account with its custodian an equal amount of the
securities sold short or securities convertible into or exchangeable for such
securities. The Fund may close out a short position by purchasing and delivering
an equal amount of the securities sold short, rather than by delivering
securities already held by the Fund, because the Fund may want to continue to
receive interest and dividend payments on securities in its portfolio that are
convertible into the securities sold short.
A Fund may make a short sale in order to hedge against market risks when the
Adviser believes that the price of a security may decline, causing a decline in
the value of a security owned by the Fund or a security convertible into or
exchangeable for such security. However, to the extent that in a generally
rising market the Fund maintains short positions in securities rising with the
market, the net asset value of the Fund would be expected to increase to a
lesser extent than the net asset value of an investment company that does not
engage in short sales. A Fund may also make a short sale when it does not want
to sell the security it owns, because, among other reasons, it wishes to defer
recognition of gain or loss for Federal income tax purposes. In such case, any
future losses in the Fund's long position should be reduced by a gain in the
short position. The extent to which such gains or losses are reduced will depend
upon the amount of the security sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the investment value or conversion premiums.
Additionally, a Fund may use short sales when it is determined that a
convertible security can be bought at a small conversion premium and has a yield
advantage relative to the underlying common stock sold short. The potential risk
in this strategy is the possible loss of any premium over conversion value in
the convertible security at the time of purchase. The purpose of this strategy
is to produce income from the yield advantage and to provide the potential for a
gain should the conversion premium increase.
Strategies Available to Asia Pacific Equities, Latin America Equities, Emerging
Markets Equities and Emerging Markets Income
Investment in Other Investment Vehicles. Investment in other investment
companies or similar investment vehicles may be the sole or most practical means
by which a Fund can participate in certain Latin American, Asian and other
emerging securities markets or invest in particular industries within those
markets. Some of these investment vehicles may be closed-end investment
companies which may trade at a discount from their net asset value. Such
investments may involve the payment of substantial premiums above the value of
such issuers' portfolio securities, and are subject to limitations under the
1940 Act (see below) and market availability. There can be no assurance that
vehicles or funds for investing in certain Latin American, Asian and other
Emerging Markets countries will be available for investment, particularly in the
early stages of the Fund's operations. In addition, special tax considerations
may apply. The Funds do not intend to invest in such vehicles or funds unless,
in the judgment of the Adviser, the potential benefits of such investment
justify the payment of any applicable premium or sales charges. As a shareholder
in an investment company, the Funds would bear their ratable share of that
investment company's expenses, including its advisory and administration fees.
At the same time the Fund would continue to pay their own management and
advisory fees and other expenses. Under the 1940 Act, the Funds generally may
invest up to 10% of its total assets in the aggregate in shares of other
investment companies and up to 5% of its total assets in any one investment
company, as long as that investment does not represent more than 3% of the
voting stock of the acquired investment company at the time such shares are
purchased.
Strategies Available to Asia Pacific Equities, Latin America Equities and
Emerging Markets Equities
Investment for the Purpose of Acquiring Control. The Asia Pacific Equities,
Latin America Equities and Emerging Markets Equities Funds may acquire the
securities of wholly-owned subsidiaries in order to facilitate investing in the
securities of certain foreign issuers. The tax laws of certain countries impose
a capital gains tax on profits derived from securities dispositions. Certain of
these countries have double taxation treaties whereby residents of one country
are exempt from taxation on their investments in the securities of issuers in
another country. The Funds intend to establish wholly-owned subsidiaries in
certain foreign countries to take advantage of these double taxation treaties in
order to avoid the imposition of various taxes, including capital gains
RISK CONSIDERATIONS
The following risk considerations relate to investment practices undertaken by
some or all of the Funds. Generally, since shares of a Fund represent an
investment in securities with fluctuating market prices, shareholders should
understand that the value of their Fund shares will vary as the value of each
Fund's portfolio securities increases or decreases. Therefore, the value of an
investment in a Fund could go down as well as up. There is no guarantee of
successful performance, that a Fund's objective can be achieved or that an
investment in a Fund will achieve a positive return. Each Fund should be
considered as a means of diversifying an investment portfolio and is not in
itself a balanced investment program.
Prospective investors should consider the following risks.
General
Various market risks can affect the price or liquidity of an issuer's
securities. Adverse events occurring with respect to an issuer's performance or
financial position can depress the value of the issuer's securities. The
liquidity in a market for a particular security will affect its value and may be
affected by factors relating to the issuer, as well as the depth of the market
for that security. Other market risks that can affect value include a market's
current attitudes about type of security, market reactions to political or
economic events, and tax and regulatory effects (including lack of adequate
regulations for a market or particular type of instrument). Market restrictions
on trading volume can also affect price and liquidity.
Certain risks exist because of the composition and investment horizon of a
particular portfolio of securities. Prices of many securities tend to be more
volatile in the short-term and lack of diversification in a portfolio can also
increase volatility. Certain Galileo Funds are not diversified. Non-diversified
Funds are not subject to certain regulatory limits, including limits on the size
of their positions in individual issuers. To the extent such funds exceed these
limits, they will be more exposed to risks of particular issuers than a
diversified fund. Such funds will, however, comply with the diversification
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended. A
security that is leveraged, whether explicitly or implicitly, will also tend to
be more volatile in that both gains and losses are intensified by the magnifying
effects of leverage. Certain instruments (such as inverse floaters) behave
similarly to leveraged instruments. Generally, such securities contain formulas
requiring recalculation of their interest rates in a manner that multiplies the
change in a market rate.
Repurchase Agreements
In the event of a default or bankruptcy by a selling financial institution under
a repurchase agreement, a Fund will seek to sell the underlying security serving
as collateral. However, this could involve certain costs or delays, and, to the
extent that proceeds from any sale were less than the repurchase price, the Fund
could suffer a loss. Each Fund follows procedures designed to minimize the risks
associated with repurchase agreements, including effecting repurchase
transactions only with large, well-capitalized and well-established financial
institutions and specifying the required value of the collateral underlying the
agreement.
Reverse Repurchase Agreements and Mortgage Dollar Rolls
Reverse repurchase agreements and mortgage dollar rolls involve the risk that
the market value of the securities a Fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a reverse repurchase agreement or mortgage dollar roll files
for bankruptcy or becomes insolvent, the Fund's use of proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and mortgage dollar rolls are speculative
techniques involving leverage, and are considered borrowings by the Fund. Under
the requirements of the 1940 Act, the Fund is required to maintain an asset
coverage (including the proceeds of the borrowings) of at least 300% of all
borrowings. None of the Funds authorized to utilize these instruments expects to
engage in reverse repurchase agreements or mortgage dollar rolls (together with
other borrowings of the Fund) with respect to greater than 30% of the Fund's
total assets.
Fixed Income Securities
Fixed Income securities are subject to various risks. The two primary (but not
exclusive) risks affecting fixed income instruments are "credit risk" and
"interest rate risk." These risks can affect a security's price volatility to
varying degrees, depending upon the nature of the instrument. In addition, the
depth and liquidity of the market for an individual or class of fixed income
security can also affect its price and, hence, the market value of a Fund.
"Credit risk" refers to the likelihood that an issuer will default in the
payment of principal and/or interest on an instrument. Financial strength and
solvency of an issuer are the primary factors influencing credit risk. In
addition, lack of or inadequacy of collateral or credit enhancements for a fixed
income security may affect its credit risk. Credit risk of a security may change
over its life and securities which are rated by rating agencies are often
reviewed and may be subject to downgrade.
"Interest rate risk" refers to the risks associated with market changes in
interest rates. Interest rate changes may affect the value of a fixed income
security directly (especially in the case of fixed rate securities) and directly
(especially in the case of adjustable rate securities). In general, rises in
interest rates will negatively impact the price of fixed rate securities and
falling interest rates will have a positive effect on price. The degree to which
a security's price will change as a result of changes in interest rates is
measured by its "duration." For example, the price of a bond with a 5 year
duration would be expected under normal market conditions to decrease 5% for
every 1% increase in interest rates. Generally, securities with longer
maturities have a greater duration and thus are subject to greater price
volatility from changes in interest rates. Adjustable rate instruments also
react to interest rate changes in a similar manner although generally to a
lesser degree (depending, however, on the characteristics of the re-set terms,
including the index chosen, frequency of reset and reset caps or floors, among
other things).
Foreign Securities
The Equity Funds, Emerging Markets Income and Core Fixed Income are each
permitted to invest in securities issued by foreign governments or companies and
Convertible Securities and High Yield Bond may invest in securities issued by
foreign companies. Investment in foreign securities involves special risks in
addition to the usual risks inherent in domestic investments. These include:
political or economic instability; the unpredictability of international trade
patterns; the possibility of foreign governmental actions such as expropriation,
nationalization or confiscatory taxation; the imposition or modification of
foreign currency or foreign investment controls; the imposition of withholding
taxes on dividends, interest and gains; price volatility; and fluctuations in
currency exchange rates. As compared to United States companies, foreign issuers
generally disclose less financial and other information publicly and are subject
to less stringent and less uniform accounting, auditing and financial reporting
standards. Foreign countries typically impose less thorough regulations on
brokers, dealers, stock exchanges, insiders and listed companies than does the
United States, and foreign securities markets may be less liquid and more
volatile than domestic markets. Investment in foreign securities involves higher
costs than investment in U.S. securities, including higher transaction and
custody costs as well as the imposition of additional taxes by foreign
governments. In addition, security trading practices abroad may offer less
protection to investors such as the Funds. Settlement of transactions in some
foreign markets may be delayed or may be less frequent than in the U.S., which
could affect the liquidity of each Fund's portfolio. Also, it may be more
difficult to obtain and enforce legal judgments against foreign corporate
issuers than against domestic issuers and it may be impossible to obtain and
enforce judgments against foreign governmental issues.
Foreign Currency Risks
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and some of the Funds hold various foreign
currencies from time to time, the value of the net assets of those Funds as
measured in United States dollars will be affected favorably or unfavorably by
changes in exchange rates. Generally, currency exchange transactions will be
conducted on a spot (i.e., cash) basis at the spot rate prevailing in the
currency exchange market. The cost of currency exchange transactions will
generally be the difference between the bid and offer spot rate of the currency
being purchased or sold. In order to protect against uncertainty in the level of
future foreign currency exchange rates, the Equity Funds, Emerging Markets
Income and Core Fixed Income are authorized to enter into certain foreign
currency future and forward contracts. However, it is not obligated to do so
and, depending on the availability and cost of these devices, the Fund may be
unable to use them to protect against currency risk. While foreign currency
future and forward contracts may be available, the cost of these instruments may
be prohibitively expensive so that the Fund may not to be able to effectively
use them
With respect to Emerging Markets Equities, Emerging Markets Income, Core Fixed
Income and Latin America Equities, the forward currency market for the purchase
or sale of U.S. dollars in most Latin American countries, including Mexico, is
not highly developed, and in certain Latin American countries, there may be no
such market. If a devaluation of a Latin American currency is generally
anticipated, the Fund may not be able to contract to sell the currency at an
exchange rate more advantageous than that which would prevail after the
anticipated amount of devaluation, particularly as regards forward contracts for
local Latin American currencies in view of the relatively small, inactive or
even non-existent market for these contracts. In the event the Funds hold
securities denominated in a currency that suffers a devaluation, the Funds' net
asset values will suffer corresponding reductions. In this regard, in December
1994, the Mexican government determined to allow the Mexican peso to trade
freely against the U.S. dollar rather than within a controlled band, which
action resulted in a significant devaluation of the Mexican peso against the
dollar. Further, in July 1997, the Thai and Philippine governments allowed the
baht and peso, respectively, to trade freely against the U.S. dollar resulting
in a sharp devaluation of both currencies, and in 1998 Russia did the same,
causing a sharp devaluation of the ruble.
Risks Associated With Emerging Market Countries
Investors should recognize that investing in securities of emerging market
countries through investment in the Asia Pacific Equities, Emerging Markets
Equities, Emerging Markets Income, European Equities, International Equities and
Latin America Equities Funds involves certain risks, and considerations,
including those set forth below, which are not typically associated with
investing in the United States or other developed countries.
Political and economic structures in many emerging markets countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristics of more
developed countries. Some of these countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies.
The securities markets of emerging market countries are substantially smaller,
less developed, less liquid and more volatile than the major securities markets
in the United States and other developed nations. The limited size of many
emerging securities markets and limited trading volume in issuers compared to
volume of trading in U.S. securities or securities of issuers in other developed
countries could cause prices to be erratic for reasons apart from factors that
affect the quality of the securities. For example, limited market size may cause
prices to be unduly influenced by traders who control large positions. Adverse
publicity and investors' perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of portfolio securities,
especially in these markets.
In addition, emerging market countries' exchanges' and broker-dealers are
generally subject to less government and exchange regulation than their
counterparts in developed countries. Brokerage commissions, dealer concessions,
custodial expenses and other transaction costs may be higher in emerging markets
than in developed countries. As a result, Funds investing in emerging market
countries have operating expenses that are expected to be higher than other
funds investing in more established market regions.
Many of the emerging market countries may be subject to greater degree of
economic, political and social instability than is the case in the United
States, Canada, Australia, New Zealand, Japan and Western European and certain
Asian countries. Such instability may result from, among other things, (i)
popular unrest associated with demands for improved political, economic and
social conditions, and (ii) internal insurgencies. Such social, political and
economic instability could disrupt the financial markets in which the Asia
Pacific Equities, Emerging Markets Equities, Emerging Markets Income,
International Equities and Latin America Equities Funds invest and adversely
affect the value of a Fund's assets.
In certain emerging market countries governments participate to a significant
degree, through ownership or regulation, in their respective economies. Action
by these governments could have a significant adverse effect on market prices of
securities and payment of dividends. In addition, most emerging market countries
have experienced substantial, and in some periods extremely high, rates of
inflation. Inflation and rapid fluctuation in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging market countries.
Many of the currencies of emerging market countries have experienced
devaluations relative to the U.S. dollar, and major devaluations have
historically occurred in certain countries. Any devaluations in the currencies
in which portfolio securities are denominated will have a detrimental impact on
Funds investing in emerging market countries. Many emerging market countries are
experiencing currency exchange problems. Countries have and may in the future
impose foreign currency controls and repatriation control.
Futures
There are certain risks inherent in the use of futures contracts and options on
futures contracts. Successful use of futures contracts by a Fund is subject to
the ability of the Adviser to correctly predict movements in the direction of
interest rates or changes in market conditions. In addition, there can be no
assurance that there will be a correlation between price movements in the
underlying securities, currencies or index and the price movements in the
securities which are the subject of hedge. Positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board of
trade on which they were entered into, and there can be no assurance that an
active market will exist for a particular contract or option at any particular
time. If a Fund has hedged against the possibility of an increase in interest
rates or a decrease in the value of portfolio securities and interest rates fall
or the value of portfolio securities increase instead, a Fund will lose part or
all of the benefit of the increased value of securities that it has hedged
because it will have offsetting losses in its futures positions. In addition, in
such situations, if a Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements at a time when it is disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates. While utilization
of futures contracts and options on futures contracts may be advantageous to a
Fund, if the Fund is not successful in employing such instruments in managing
its investments, the Fund's performance will be worse than if the Fund not make
such investment in futures contracts and options on futures contracts.
Options
The successful use of options depends on the ability of the Adviser to forecast
interest rate and market movements correctly. For example, if a Fund were to
write a call option based on the Adviser's expectation that the price of the
underlying security would fall, but the price were to rise instead, the Fund
could be required to sell the security upon exercise at a price below the
current market price. Similarly, if a Fund were to write a put option based on
the Adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the Fund could be required to purchase the
security upon exercise at a price higher than the current market price.
When it purchases an option, a Fund runs the risk that it will lose its entire
investment in the option in a relatively short period of time, unless the Fund
exercises the option or enters into a closing transaction with respect to the
option during the life of the option. If the price of the underlying security
does not rise (in the case of a call) or fall (in the case of a put) to an
extent sufficient to cover the option premium and transaction costs, the Fund
will lose part or all of its investment in the option. This contrasts with an
investment by the Fund in the underlying security, since the Fund will not lose
any of its investment in such security if the price does not change.
The effective use of options also depends on a Fund's ability to terminate
option positions at times when the Adviser deems it desirable to do so. Although
the Fund will take an option position only if the Adviser believes there is a
liquid secondary market for the option, there is no assurance that the Fund will
be able to effect closing transactions at any particular time or at an
acceptable price.
If a secondary trading market in options were to become unavailable, a Fund
could no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events - such as volume in excess of trading or clearing capability - were to
interrupt its normal operations.
A market may at times find it necessary to impose restrictions on particular
types of options transactions, such as opening transactions. For example, if an
underlying security ceases to meet qualifications imposed by the market or the
Options Clearing Corporation, new series of options on that security will no
longer be opened to replace expiring series, and opening transactions in
existing series may be prohibited. If an options market were to become
unavailable, a Fund which holds an option would be able to realize profits or
limit losses only by exercising the option, and a Fund which acted as option
writer would remain obligated under the option until expiration or exercise.
Special risks are presented by internationally-traded options of the type
certain of the Equity Funds, Emerging Markets Income and Core Fixed Income may
acquire. Because of time differences between the United States and the various
foreign countries, and because different holidays are observed in different
countries, foreign options markets may be open for trading during hours or on
days when U.S. markets are closed. As a result, option premiums may not reflect
the current prices of the underlying interest in the United States.
Risks Associated With Lower Rated Securities
The Convertible Securities and High Yield Bond portfolios consist primarily of
below investment grade corporate securities that are commonly known as junk
bonds. In addition, the Equity Funds may invest in convertible securities and
Asia Pacific Equities, Core Fixed Income, Earnings Momentum, Aggressive Growth
Equities, Emerging Markets Equities, Emerging Markets Income, European Equities
and Latin America Equities may invest in debt instruments rated below investment
grade. Lower rated securities are traded in markets that may be relatively less
liquid and subject to greater changes in liquidity than the markets for higher
rated securities.
High yield/high risk securities can be classified into two categories: (a)
securities issued without an investment grade rating and (b) securities whose
credit ratings have been downgraded below investment grade because of declining
investment fundamentals. The first category includes securities issued by
"emerging credit" companies and companies which have experienced a leveraged
buyout or recapitalization. Although the small and medium size companies that
constitute emerging credit issuers typically have significant operating
histories, these companies generally do not have strong enough operating results
to secure investment grade ratings from the rating agencies. In addition, in
recent years there has been a substantial volume of high yield/high risk
securities issued by companies that have converted from public to private
ownership through leveraged buyout transactions and by companies that have
restructured their balance sheets through leveraged recapitalizations. High
yield/high risk securities issued in these situations are used primarily to pay
existing stockholders for their shares or to finance special dividend
distributions to shareholders. The indebtedness incurred in connection with
these transactions is often substantial and, as a result, often produces highly
leveraged capital structures which present special risks for the holders of such
securities. Also, the market price of such securities may be more volatile to
the extent that expected benefits from the restructuring do not materialize. The
second category of high yield/high risk securities consists of securities of
former investment grade companies that have experienced poor operating
performance due to such factors as cyclical downtrends in their industry, poor
management or increased foreign competition.
Generally, lower-rated debt securities provide a higher yield than higher rated
debt securities of similar maturity but are subject to greater risk of loss of
principal and interest ("credit risk") than higher rated securities of similar
maturity. They are generally considered to be subject to greater risk than
securities with higher ratings particularly in the event of a deterioration of
general economic conditions. The lower ratings of the high yield/high risk
securities which the Fund will purchase reflect a greater possibility that the
financial condition of the issuers, or adverse changes in general economic
conditions, or both, may impair the ability of the issuers to make payments of
principal and interest. The market value of a single lower-rated fixed income
security may fluctuate more than the market value of higher rated securities,
since changes in the creditworthiness of lower rated issuers and in market
perceptions of the issuers' creditworthiness tend to occur more frequently and
in a more pronounced manner than in the case of higher rated issuers. High
yield/high risk fixed income securities also tend to reflect individual
corporate developments to a greater extent than higher rated securities. The
securities in which the Fund invests are frequently subordinated to senior
indebtedness.
Since the high yield bond market is relatively new, its growth has paralleled a
long economic expansion, and it has not weathered a recession in its present
size and form. An economic downturn or increase in interest rates may result in
a higher incidence of high yield bond defaults and is likely to have a negative
effect on the high yield bond market and on the value of the high yield/high
risk bonds in the Fund's portfolio, as well as on the ability of the bonds'
issuers to repay principal and interest.
The economy and interest rates affect high yield/high risk securities
differently from other securities. The prices of high yield bonds have been
found to be less sensitive to interest rate changes than higher-rated
investments, but more sensitive to adverse economic changes or individual
corporate developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial stress
which would adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals, and to obtain
additional financing. If the issuer of a bond owned by the Fund defaults, the
Fund may incur additional expenses to seek recovery. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of high yield bonds and the Fund's asset value.
Furthermore, the market prices of high yield/high risk bonds structured as zero
coupon or pay-in-kind securities are affected to a greater extent by interest
rate changes and thereby tend to be more volatile than securities which pay
interest periodically and in cash.
To the extent there is a limited retail secondary market for particular high
yield bonds, these bonds may be thinly-traded and the Adviser's ability to
accurately value high yield bonds and the Fund's assets may be more difficult
because there is less reliable, objective data available. In addition, the
Fund's ability to acquire or dispose of the bonds may be negatively-impacted.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds, especially
in a thinly-traded market. To the extent the Fund owns or may acquire illiquid
or restricted high yield bonds, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
Special tax considerations are associated with investing in lower rated debt
securities structured as zero coupon or pay-in-kind securities. The Fund accrues
income on these securities prior to the receipt of cash payments. The Fund must
distribute substantially all of its income to its shareholders to qualify for
pass-through treatment under the tax laws and may, therefore, have to dispose of
its portfolio securities to satisfy distribution requirements.
Underwriting and dealer spreads associated with the purchase of lower rated
bonds are typically higher than those associated with the purchase of high grade
bonds.
Risks Associated With Mortgage-Backed Securities
Credit and Market Risks of Mortgage-Backed Securities. The investments by Core
Fixed Income, Total Return Mortgage-Backed Securities and Mortgage-Backed
Securities in fixed rate and floating rate mortgage-backed securities will
entail normal credit risks (i.e., the risk of non-payment of interest and
principal) and market risks (i.e., the risk that interest rates and other
factors will cause the value of the instrument to decline). Many issuers or
servicers of mortgage-backed securities guarantee timely payment of interest and
principal on the securities, whether or not payments are made when due on the
underlying mortgages. This kind of guarantee generally increases the quality of
a security, but does not mean that the security's market value and yield will
not change. Like bond investments, the value of fixed rate mortgage-backed
securities will tend to rise when interest rates fall, and fall when rates rise.
Floating rate mortgage-backed securities will generally tend to have minimal
changes in price when interest rates rise or fall. The value of all
mortgage-backed securities may also change because of changes in the market's
perception of the creditworthiness of the organization that issued or guarantees
them. In addition, the mortgage-backed securities market in general may be
adversely affected by changes in governmental legislation or regulation.
Fluctuations in the market value of mortgage-backed securities after their
acquisition usually do not affect cash income from such securities but are
reflected in each Fund's net asset value. The liquidity of mortgage-backed
securities varies by type of security; at certain times a Fund may encounter
difficulty in disposing of investments. Other factors that could affect the
value of a mortgage-backed security include, among other things, the types and
amounts of insurance which a mortgagor carries, the amount of time the mortgage
loan has been outstanding, the loan-to-value ratio of each mortgage and the
amount of overcollateralization of a mortgage pool.
Prepayment and Redemption Risk of Mortgage-Backed Securities. Mortgage-backed
securities reflect an interest in monthly payments made by the borrowers who
receive the underlying mortgage loans. Although the underlying mortgage loans
are for specified periods of time, such as 20 or 30 years, the borrowers can,
and typically do, pay them off sooner. In such an event, the mortgage-backed
security which represents an interest in such underlying mortgage loan will be
prepaid. A borrower is more likely to prepay a mortgage which bears a relatively
high rate of interest. This means that in times of declining interest rates, a
portion of the Fund's higher yielding securities are likely to be redeemed and
the Fund will probably be unable to replace them with securities having as great
a yield. Prepayments can result in lower yields to shareholders. The increased
likelihood of prepayment when interest rates decline also limits market price
appreciation of mortgage-backed securities. In addition, a mortgage-backed
security may be subject to redemption at the option of the issuer. If a
mortgage-backed security held by a Fund is called for redemption, the Fund will
be required to permit the issuer to redeem the security, which could have an
adverse effect on the Fund's ability to achieve its investment objective.
Collateralized Mortgage Obligations. There are certain risks associated
specifically with CMOs. CMOs issued by private entities are not obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities and are not guaranteed by any government agency, although the
securities underlying a CMO may be subject to a guarantee. Therefore, if the
collateral securing the CMO, as well as any third party credit support or
guarantees, is insufficient to make payment, the holder could sustain a loss. In
addition, the average life of CMOs is determined using mathematical models that
incorporate prepayment assumptions and other factors that involve estimates of
future economic and market conditions. These estimates may vary from actual
future results, particularly during periods of extreme market volatility.
Further, under certain market conditions, such as those that occurred in 1994,
the average weighted life of certain CMOs may not accurately reflect the price
volatility of such securities. For example, in periods of supply and demand
imbalances in the market for such securities and/or in periods of sharp interest
rate movements, the prices of CMOs may fluctuate to a greater extent than would
be expected from interest rate movements alone.
Stripped Mortgage Securities. Part of the investment strategy of Core Fixed
Income, Total Return Mortgage-Backed Securities and Mortgage-Backed Securities
involves interest-only Stripped Mortgage Securities. These investments are
highly sensitive to changes in interest and prepayment rates and tend to be less
liquid than other CMOs.
Inverse Floaters. Total Return Mortgage-Backed and Mortgage-Backed Securities
invest in inverse floaters, a class of CMOs with a coupon rate that resets in
the opposite direction from the market rate of interest to which it is indexed
such as LIBOR or COFI. Any rise in the index rate (as a consequence of an
increase in interest rates) causes a drop in the coupon rate of an inverse
floater while any drop in the index rate causes an increase in the coupon of an
inverse floater. An inverse floater may be considered to be leveraged to the
extent that its interest rate varies by a magnitude that exceeds the magnitude
of the change in the index rate of interest. The higher degree of leverage
inherent in inverse floaters is associated with greater volatility in their
market prices.
Adjustable Rate Mortgages. ARMs contain maximum and minimum rates beyond which
the mortgage interest rate may not vary over the lifetime of the security. In
addition, certain ARMs provide for additional limitations on the maximum amount
by which the mortgage interest rate may adjust for any single adjustment period.
Alternatively, certain ARMs contain limitations on changes in the required
monthly payment. In the event that a monthly payment is not sufficient to pay
the interest accruing on an ARM, any such excess interest is added to the
principal balance of the mortgage loan, which is repaid through future monthly
payments. If the monthly payment for such an instrument exceeds the sum of the
interest accrued at the applicable mortgage interest rate and the principal
payment required at such point to amortize the outstanding principal balance
over the remaining term of the loan, the excess is utilized to reduce the then
outstanding principal balance of the ARM.
Asset-Backed Securities. Certain asset-backed securities do not have the benefit
of the same security interest in the related collateral as do mortgage-backed
securities. Credit card receivables are generally unsecured, and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. In addition, some issuers
of automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables.
Rating Categories
A description of the rating categories as published by Moody's and S&P is set
forth in the Appendix to this Statement of Additional Information. Ratings
assigned by Moody's and/or S&P to securities acquired by a Fund reflect only the
views of those agencies as to the quality of the securities they have undertaken
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. There is no assurance that
a rating assigned initially will not change. A Fund may retain a security whose
rating has changed or has become unrated.
Restricted Securities
Each Fund may invest in securities which are subject to restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or which are otherwise not readily marketable.
These securities are generally referred to as private placements or restricted
securities. The Adviser, pursuant to procedures adopted by the Board of
Directors of the Company, will make a determination as to the liquidity of each
restricted security purchased by a Fund. If a restricted security is determined
to be "liquid," it will not be included within the category "illiquid
securities," which under each Bond Fund's and Equity Fund's current policies may
not exceed 15% of the Fund's net assets and which under Money Market's current
policies may not exceed 10% of the Fund's net assets.
Limitations on the resale of restricted securities may have an adverse effect on
their marketability, and may prevent a Fund from disposing of them promptly at
reasonable prices. A Fund may have to bear the expense of registering such
securities for resale and the risk of substantial delays in effecting such
registration. The Securities and Exchange Commission has recently adopted Rule
144A under the Securities Act, which permits each Fund to sell restricted
securities to qualified institutional buyers without limitation. The Rule 144A
marketplace of sellers and qualified institutional buyers is new and still
developing and may take a period of time to develop into a mature liquid market.
As such, the market for certain private placements purchased pursuant to Rule
144A may be initially small or may, subsequent to purchase, become illiquid.
Furthermore, the Adviser may not possess all the information concerning an issue
of securities that it wishes to purchase in a private placement to which it
would normally have had access, had the registration statement necessitated by a
public offering been filed with the Securities and Exchange Commission.
Options Transactions
The effective use of options also depends on a Fund's ability to terminate
option positions at times when the Adviser deems it desirable to do so. Prior to
exercise or expiration, an option position can only be terminated by entering
into a closing purchase or sale transaction. If a covered call option writer is
unable to effect a closing purchase transaction or to purchase an offsetting OTC
Option, it cannot sell the underlying security until the option expires or the
option is exercised. Accordingly, a covered call option writer may not be able
to sell an underlying security at a time when it might otherwise be advantageous
to do so. A secured put option writer who is unable to effect a closing purchase
transaction or to purchase an offsetting OTC Option would continue to bear the
risk of decline in the market price of the underlying security until the option
expires or is exercised. In addition, a secured put writer would be unable to
utilize the amount held in cash or U.S. Government Securities or other high
grade short-term obligations as security for the put option for other investment
purposes until the exercise or expiration of the option.
A Fund's ability to close out its position as a writer of an option is dependent
upon the existence of a liquid secondary market. There is no assurance that such
a market will exist, particularly in the case of OTC Options, as such options
will generally only be closed out by entering into a closing purchase
transaction with the purchasing dealer. However, the Fund may be able to
purchase an offsetting option which does not close out its position as a writer
but constitutes an asset of equal value to the obligation under the option
written. If the Fund is not able to either enter into a closing purchase
transaction or purchase an offsetting position, it will be required to maintain
the securities subject to the call, or the collateral underlying the put, even
though it might not be advantageous to do so, until a closing transaction can be
entered into (or the option is exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on an
exchange are: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an exchange; (e) inadequacy of the facilities of an exchange or
the OCC or other relevant clearing corporation to handle current trading volume;
or (f) a decision by one or more exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
relevant clearing corporation as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC Option purchased by a Fund, the
Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by a Fund only with brokers or financial
institutions deemed creditworthy by the Fund's management.
Each of the exchanges has established limitations governing the maximum number
of options on the same underlying security or futures contract (whether or not
covered) which may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or through
one or more brokers). An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which a Fund may write.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the option markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying markets that cannot be reflected in
the option markets.
Futures Contracts and Options on Futures
There are certain risks inherent in the use of futures contracts and options on
futures contracts. Successful use of futures contracts by a Fund is subject to
the ability of the Adviser to correctly predict movements in the direction of
interest rates or changes in market conditions. In addition, there can be no
assurance that there will be a correlation between price movements in the
underlying securities, currencies or index and the price movements in the
securities which are the subject of the hedge.
Positions in futures contracts and options on futures contracts may be closed
out only on the exchange or board of trade on which they were entered into, and
there can be no assurance that an active market will exist for a particular
contract or option at any particular time. If a Fund has hedged against the
possibility of an increase in interest rates or a decrease in the value of
portfolio securities and interest rates fall or the value of portfolio
securities increase instead, a Fund will lose part or all of the benefit of the
increased value of securities that it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. These sales of
securities may, but will not necessarily be at increased prices that reflect the
decline in interest rates. While utilization of futures contracts and options on
futures contracts may be advantageous to the Fund, if the Fund is not successful
in employing such instruments in managing the Fund's investments, the Fund's
performance will be worse than if the Fund did not make such investments.
Each Fund will enter into transactions in futures contracts for hedging purposes
only, including without limitation, futures contracts that are "bona fide
hedges" as defined by the CFTC. In connection with the purchase of sale of
futures contracts, a Fund will be required to either (i) segregate sufficient
cash or other liquid assets to cover the outstanding position or (ii) cover the
futures contract by either owning the instruments underlying the futures
contracts or by holding a portfolio of securities with characteristics
substantially similar to the underlying index or stock index comprising the
futures contracts or by holding a separate offsetting option permitting it to
purchase or sell the same futures contract. A call option is "covered" if
written against securities owned by the Fund writing the option or if written
against related securities the Fund holds. A put option is "covered" if the Fund
writing the option maintains at all time cash, short-term Treasury obligations
or other liquid assets with a value equal to the option exercise price in a
segregated account with the Fund's custodian, or if it has bought and holds a
put on the same security (and on the same amount of securities) where the
exercise price of the put held by the Fund is equal to or greater than the
exercise price of the put written by the Fund.
Exchanges limit the amount by which the price of a futures contract may move on
any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, a Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if a Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, a Fund may be required to
take or make delivery of the instruments underlying interest rate futures
contracts it holds at a time when it is disadvantageous to do so. The inability
to close out options and futures positions could also have an adverse impact on
a Fund's ability to effectively hedge its portfolio.
Futures contracts and options thereon which are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges. Brokerage commissions,
clearing costs and other transaction costs may be higher on foreign exchanges.
Greater margin requirements may limit a Fund's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may occasion delays in the
settlement of a Fund's transactions effected on foreign exchanges.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Similarly, in the event of the bankruptcy, of the writer of an OTC option
purchased by a Fund, the Fund could experience a loss of all or part of the
value of the option. Transactions are entered into by a Fund only with brokers
or financial institutions deemed creditworthy by the Adviser.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which a Fund may invest. In the event a liquid
market does not exist, it may not be possible to close out a futures position,
and in the event of adverse price movements, a Fund would continue to be
required to make daily cash payments of variation margin. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent a Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of a liquid
market in futures contracts might cause a Fund to make or take delivery of the
underlying securities (currencies) at a time when it may be disadvantageous to
do so.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on futures contracts involves less potential risk to a Fund because
the maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss to a Fund notwithstanding
that the purchase or sale of a futures contract would not result in a loss, as
in the instance where there is no movement in the prices of the futures contract
or underlying securities (currencies).
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, a Fund will
not purchase or write options on foreign currency futures contracts unless and
until, in the Adviser's opinion, the market for such options has developed
sufficiently that the risks in connection with such options are not greater than
the risks in connection with transactions in the underlying foreign currency
futures contracts.
Portfolio Turnover
The portfolio turnover rate is calculated by dividing the lesser of the value of
purchases or sales of portfolio securities for the year by the monthly average
value of portfolio securities. For example, a portfolio turnover rate of 100%
would occur if all of a Fund's securities that are included in the computation
of turnover were replaced once during a period of one year. Securities with
remaining maturities of one year or less at the date of acquisition are excluded
from the calculation.
Certain practices that may be employed by the Funds could result in high
portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the Adviser believes to be
a temporary disparity in the normal yield relationship between the two
securities. These yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply of, various
types of securities. High portfolio turnover can result in increased transaction
costs for shareholders. High turnover generally results from the Adviser's
effort to maximize return for a particular period.
Brokerage Practices
The Adviser is responsible for the placement of the Funds' portfolio
transactions and the negotiation of prices and commissions, if any, with respect
to such transactions. Fixed income and unlisted equity securities are generally
purchased from a primary market maker acting as principal on a net basis without
a stated commission but at prices generally reflecting a dealer spread. Listed
equity securities are normally purchased through brokers in transactions
executed on securities exchanges involving negotiated commissions. Both fixed
income and equity securities are also purchased in underwritten offerings at
fixed prices which include discounts to underwriters and/or concessions to
dealers. In placing a portfolio transaction, the Adviser seeks to obtain the
best execution for the Fund, taking into account such factors as price
(including the applicable dealer spread or commission, if any), size of order,
difficulty of execution and operational facilities of the firm involved and the
firm's risk in positioning a block of securities.
Consistent with its policy of securing best execution, in selecting
broker-dealers and negotiating any commissions or prices involved in Fund
transactions, the Adviser considers the range and quality of the professional
services provided by such firms. Brokerage services include the ability to most
effectively execute large orders without adversely impacting markets and
positioning securities in order to enable the Adviser to effect orderly
purchases or sales for a Fund. Accordingly, transactions will not always be
executed at the lowest available commission. Consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
the most favorable price and execution available and other such polices as the
Board of Directors may determine, the Adviser may consider sales of shares of a
Fund as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions. In addition, the Adviser may effect transactions which
cause a Fund to pay a commission or net price in excess of a commission or net
price which another broker-dealer would have charged if the Adviser first
determines that such commission or net price is reasonable in relation to the
value of the brokerage and research services provided by the broker-dealer to
the Fund.
Research services include such items as reports on industries and companies,
economic analyses and review of business conditions, portfolio strategy,
analytic computer software, account performance services, computer terminals and
various trading and/or quotation equipment. They also include advice from
broker-dealers as to the value of securities and availability of securities,
buyers, and sellers. In addition, they include recommendations as to purchase
and sale of individual securities and timing of transactions.
Fixed income securities are generally purchased from the issuer or a primary
market maker acting as principal on a net basis with no brokerage commission
paid by the client. Such securities, as well as equity securities, may also be
purchased from underwriters at prices which include underwriting fees.
The Adviser maintains an internal allocation procedure to identify those
broker-dealers who have provided it with research services and endeavors to
place sufficient transactions with them to ensure the continued receipt of
research services the Adviser believes are useful. When the Adviser receives
products or services that are used both for research and other purposes, it
makes a good faith allocation. While the non-research portion will be paid in
cash by the Adviser, the portion attributable to research may be paid through
brokerage commissions.
Research services furnished by broker-dealers may be used in providing services
for any or all of the clients of the Adviser, as well as clients of affiliated
companies, and may be used in connection with accounts other than those which
pay commissions to the broker-dealers providing the research services. During
the fiscal year ended October 31, 1999, Aggressive Growth Equities, Convertible
Securities, Earnings Momentum, Large Cap Growth, Large Cap Value, Select
Equities, Small Cap Growth, Value Opportunities, Asia Pacific Equities, Emerging
Markets Equities, European Equities, International Equities, Japanese Equities
and Latin American Equities paid $56,700, $5,760, $18,482, $17,712, $197,130,
$124,109, $36,670, $178,759, $108,322, $199,055, $371,228, $8,297, $627,925 and
$51,398, respectively, in brokerage commissions for research services.
For the fiscal year ended October 31, 1999, Aggressive Growth Equities,
Convertible Securities, Earnings Momentum, Large Cap Growth, Large Cap Value,
Select Equities, Small Cap Growth, Value Opportunities, Asia Pacific Equities,
Emerging Markets Equities, European Equities, International Equities, Japanese
Equities and Latin America Equities paid $372,463, $261,448, $220,249, $33,164,
$253,309, $326,907, $610,412, $233,315, $414,037, $211,626, $371,228, $8,297,
$656,897 and $54,510, respectively, in brokerage commissions.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 8 below have been adopted by the
Company with respect to the Funds as fundamental policies (except as otherwise
provided in 1). A fundamental policy affecting a particular Fund may not be
changed without the vote of a majority of the outstanding shares of the affected
Fund. Investment restrictions 9 and 10 with respect to a Fund may be changed by
vote of a majority of the Company's Board of Directors at any time.
Investment policies adopted by the Company are:
1. No Fund will borrow money, except that (a) a Fund may borrow from banks for
temporary or emergency (not leveraging) purposes including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, (b) Core Fixed Income, Mortgage-Backed Securities, Total
Return Mortgage-Backed Securities, Latin America Equities and Money Market
may each enter into reverse repurchase agreements, (c) Core Fixed Income,
Mortgage-Backed Securities and Total Return Mortgage-Backed Securities may
utilize mortgage dollar rolls, and (d) each Fund other than Money Market
may enter into futures contracts for hedging purposes subject to the
conditions set forth in paragraph 8 below. The total amount borrowed by a
Fund (including, for this purpose, reverse repurchase agreements and
mortgage dollar rolls) at any time will not exceed 30% (or, in the case of
Money Market, 10%) of the value of the Fund's total assets (including the
amount borrowed) valued at market less liabilities (not including the
amount borrowed) at the time the borrowing is made. As an operating policy,
whenever borrowings pursuant to (a) exceed 5% (or, in the case of Money
Market, 10%) of the value of a Fund's total assets, the Fund will not
purchase any securities.
2. No Fund will issue senior securities as defined in the 1940 Act, provided
that the Funds may (a) enter into repurchase agreements; (b) purchase
securities on a when-issued or delayed delivery basis; (c) purchase or sell
financial futures contracts or options thereon; and (d) borrow money in
accordance with the restrictions described in paragraph 1 above.
3. No Fund will underwrite securities of other companies, except insofar as
the Fund might be deemed to be an underwriter for purposes of the
Securities Act by virtue of disposing of portfolio securities.
4. No Fund will purchase any securities that would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in
the securities of any one particular industry or group of industries,
provided that this limitation shall not apply to any Fund's purchase of
U.S. Government Securities, and, in the case of Money Market, to the
purchase of obligations of domestic branches of United States banks. The
European Equities Fund may invest more than 25% of the value of its total
assets in a single European country, the International Equities Fund may
invest more than 25% of the value of its total assets in shares of
registered investment companies, the Japanese Equities Fund may invest more
than 25% of the value of its total assets in debt securities issued or
guaranteed by the Japanese government and the Emerging Markets Income Fund
may invest more than 25% of the value of its total assets in debt
securities issued or guaranteed by the governments of Emerging Markets
Countries. In determining industry classifications for foreign issuers,
each Fund will use reasonable classifications that are not so broad that
the primary economic characteristic of the companies in a single class are
materially different. Each Fund will determine such classifications of
foreign issuers based on the issuer's principal or major business
activities.
5. No Fund will invest in real estate, real estate mortgage loans, residual
interests in REMICs, oil, gas and other mineral leases (including other
universal exploration or development programs), or real estate limited
partnerships, except that a Fund may purchase securities backed by real
estate or interests therein, or issued by companies, including real estate
investment trusts, which invest in real estate or interests therein, and
except that Core Fixed Income, Total Return Mortgage-Backed Securities and
Mortgage-Backed Securities are not prohibited from investing in real estate
mortgage loans.
6. No Fund may make loans of cash except by purchasing qualified debt
obligations or entering into repurchase agreements.
7. Each Fund may effect short sales of securities or maintain a short position
only if the Fund at the time of sale either owns or has the right to
acquire at no additional cost securities equivalent in kind and amount to
those sold.
8. No Fund will invest in commodities or commodities contracts, except that
each Bond Fund or Equity Fund may enter into futures contracts or purchase
related options thereon if, immediately thereafter, the amount committed to
margin plus the amount paid for premiums for unexpired options on futures
contracts does not exceed 5% of the value of the Fund's total assets, after
taking into account unrealized gains and unrealized losses on such
contracts it has entered into, provided, however, that in the case of an
option that is in-the-money (the exercise price of the call (put) option is
less (more) than the market price of the underlying security) at the time
of purchase, the in-the-money amount may be excluded in calculating the 5%.
The entry into foreign currency forward contracts shall not be deemed to
involve investing in commodities.
9. No Fund will purchase securities on margin, except that a Fund may obtain
any short-term credits necessary for clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts and
related options will not be deemed to be a purchase of securities on
margin.
10. No Fund will purchase the securities of an issuer for the purpose of
acquiring control or management thereof except that Asia Pacific Equities,
Emerging Markets Equities and Latin America Equities may acquire the
securities of subsidiaries in order to facilitate investing in the
securities of foreign issuers.
The percentage limitations contained in the restrictions listed above apply,
with the exception of (1), at the time of purchase or initial investment and any
subsequent change in any applicable percentage resulting from market
fluctuations or other changes in total or net assets does not require
elimination of any security from the Fund.
DIRECTORS AND OFFICERS OF THE COMPANY
A board of five directors is responsible for overseeing the Fund's affairs. The
Fund has an executive committee, consisting of Marc I. Stern, Chairman, John C.
Argue and Thomas E. Larkin, which may act for the Board of Directors between
meetings, except where Board action is required by law. The directors and
officers of the Fund, and their business addresses and their principal
occupations for the last five years are set forth below.
Name and Address Principal Occupations and Other Affiliations
<TABLE>
<CAPTION>
<S> <C>
Marc I. Stern* (55) President and Director, The TCW Group, Inc. (formerly TCW Management
Chairman Company); Chairman, the Adviser; President and Vice Chairman, TCW
865 South Figueroa Street Asset Management Company; Chairman, TCW Americas Development, Inc.;
Los Angeles, California 90017 Chairman, TCW London International, Limited and Executive Vice
President, Trust Company of the West. Chairman, Apex Mortgage Capital,
Inc. (Since October 1997). Director of Qualcomm Incorporated (wireless
communications); formerly President of Sun America, Inc. (financial
services company).
Alvin R. Albe* (46) President and Director of the Adviser and Executive Vice President
Director and President and Director of TCW Asset Management Company and Trust Company of
865 South Figueroa Street the West. Mr. Albe is also Executive Vice President of the TCW
Los Angeles, California 90017 Group, Inc. Prior to joining The TCW Group, Inc. and its affiliates
and subsidiaries ("TCW") in 1991, Mr. Albe was President of Oakmont
Corporation, a privately held corporation which administers and manages
assets for several families and individuals.
Thomas E. Larkin, Jr.* (59) President and Director, Trust Company of the West; Vice Chairman and
Director Director, TCW Asset Management Company; Executive Vice President and
865 South Figueroa Street Director, The TCW Group, Inc.; Vice Chairman of the Adviser; Member
Los Angeles, California 90017 of the Board of Trustees of the University of Notre Dame; Director
of Orthopedic Hospital of Los Angeles; Senior Vice President, TCW
Convertible Securities Fund, Inc.
John C. Argue (67) Of Counsel, Argue Pearson Harbison & Myers (law firm); Director,
Director Avery Dennison Corporation (manufacturer of self-adhesive products
444 South Flower Street and office supplies), Apex Mortgage Capital, Inc. (real estate
Los Angeles, California 90071 investment trust); Nationwide Health Properties, Inc. (real estate
investment trust) and TCW Convertible Securities Fund, Inc.;
Advisory Director, LAACO Ltd. (owner and operator of private clubs
and real estate).
Norman Barker, Jr. (77) Former Chairman of the Board, First Interstate Bank of California
Director and former Vice Chairman of the Board, First Interstate Bancorp;
9601 Wilshire Blvd. Director, American Health Properties, Inc., Bank Plus Corp., ICN
Beverly Hills, CA 90210 Pharmaceuticals, Inc., TCW Convertible Securities Fund, Inc.
Richard W. Call (75) Former President, The Seaver Institute (a private foundation);
Director Director, TCW Convertible Securities Fund, Inc. and The Seaver
c/o Mayer, Brown & Platt Institute.
Counsel to the Independent Directors
1675 Broadway
New York, NY 10019
Matthew K. Fong (45) Since 1999 Mr. Fong has been Of Counsel to the Los Angeles based law
Director firm of Sheppard, Mullin, Richter & Hamilton. From 1995 to 1998,
333 South Hope Street Mr. Fong served as State Treasurer for the State of California.
Los Angeles, CA 90071 From 1991 to 1994, Mr. Fong was Vice Chairman of the California
State Board of Equalization, California's elected tax agency. Mr.
Fong is a director of ESS Technology, Inc. and American National
Title and serves as a Regent of Pepperdine University and the Los
Angeles Children's Hospital. Mr. Fong is also a Lt. Colonel in the
U.S. Air Force Reserves.
</TABLE>
- ----------------------
* Directors who are or may be deemed to be "interested persons" of the
Company as defined in the 1940 Act. Messrs. Stern Albe and Larkin are
officers of the Adviser.
<PAGE>
Compensation of Independent Directors
The Company pays each Independent Director an annual fee of $35,000 plus a per
meeting fee of $500 for meetings of the Board of Directors or Committees of the
Board of Directors attended by the Director prorated among the Funds. The
Company also reimburses such Directors for travel and other out-of-pocket
expenses incurred by them in connection with attending such meetings. Directors
and officers of the Company who are employed by the Adviser or an affiliated
company thereof receive no compensation nor expense reimbursement from the
Company.
The following table illustrates the compensation paid to the Company's
Independent Directors by the Company for the fiscal year ended October 31, 1999.
<PAGE>
Name of Independent Director Aggregate Compensation From the Company
- ---------------------------
John C. Argue $40,500
Norman Barker, Jr. $40,500
Richard W. Call $40,500
Matthew K. Fong $19,500
The following table illustrates the total compensation paid to Company's
Independent Directors for the calendar year ended December 31, 1999 by the TCW
Convertible Securities Fund, Inc. in the case of Messrs. Argue, Barker and Call,
as well as from the Company. TCW Convertible Securities Funds, Inc. is included
solely because the Company's Adviser, TCW Investment Management Company also
serves as its investment adviser.
For Service as Director
and Committee Member of Total Cash Compensation
the TCW Convertible from TCW Galileo Funds,
Name of Independent Securities Inc., and TCW Convertible
Director Fund, Inc. Securities Fund, Inc.
- ------------------- ----------------------- -------------------------
John C. Argue $11,250 $51,750
Norman Barker, Jr. $12,750 $53,250
Richard W. Call $12,750 $53,250
The officers of the Company who are not also directors of the Company are:
<TABLE>
<CAPTION>
<S> <C> <C>
Position(s) Held Principal Occupation(s)
Name and Address with Company During Past 5 Years(1)
---------------- ---------------- -----------------------
Michael E. Cahill (49)* Senior Vice Managing Director, General Counsel and Secretary,
President, the Adviser, The TCW Group, Inc., Trust Company of
General the West and TCW Asset Management Company; formerly
Counsel General Counsel and Senior Vice President
and Assistant of Act III Communications (media and entertainment
Secretary business).
Jeffrey Peterson (54)* Senior Vice President Managing Director, Trust Company of the West, TCW
Asset Management Company and the Adviser; President,
TCW Brokerage Services.
Philip K. Holl (50)* Secretary Senior Vice President and Associate General
Counsel, Trust Company of the West, TCW Asset
Management Company and the Adviser; Secretary to
TCW Convertible Securities Fund, Inc.
Peter C. DiBona (41) Treasurer Senior Vice President, Trust Company of the West,
TCW Asset Management Company and the Adviser.
</TABLE>
- ------------------------
(1) Positions with The TCW Group, Inc. and its affiliates may have changed over
time.
* Address is 865 South Figueroa Street, 18th Floor, Los Angeles, California
90017
In addition, Hilary G.D. Lord, Managing Director and Chief Compliance Officer of
Trust Company of the West, TCW Asset Management Company and the Adviser, is an
Assistant Secretary of the Company. The directors and officers of the Company
collectively own less than 1% of the outstanding shares of any Fund.
INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS
The Company and the Adviser are parties to an Investment Management and Advisory
Agreement ("Advisory Agreement"). The Adviser was organized in 1987 as a
wholly-owned subsidiary of The TCW Group, Inc. (formerly TCW Management
Company). Robert A. Day may be deemed to be a control person of the Adviser by
the virtue of the aggregate ownership of Mr. Day and his family of more than 25%
of the outstanding voting stock of The TCW Group, Inc. Under the Advisory
Agreement, the Company retains the Adviser to manage the investment of its
assets, to place orders for the purchase and sale of its portfolio securities,
to administer its day-to-day operations, and to be responsible for overall
management of the Company's business affairs subject to control by the Board of
Directors of the Company. The Adviser is responsible for obtaining and
evaluating economic, statistical, and financial data and for formulating and
implementing investment programs in furtherance of the Company's investment
objectives.
The Adviser has retained, at its sole expense, an affiliated company to act as
Sub-Adviser to certain of the Funds. TCW London International, Limited
(regulated by I.M.R.O.) is a Sub-Adviser to the Asia Pacific Equities, Emerging
Markets Equities, European Equities, Japanese Equities and International
Equities Funds. TCW London is a wholly-owned subsidiary of The TCW Group, Inc.
(the "Sub-Adviser"). The Sub-Adviser provides its respective Funds with
investment advice and portfolio management subject to the overall supervision of
the Adviser.
The Adviser furnishes to the Company office space at such places as are agreed
upon from time to time and all office facilities, business equipment, supplies,
utilities and telephone service necessary for managing the affairs and
investments and arranges for officers or employees of the Adviser to serve,
without compensation from the Company, as officers, directors or employees of
the Company if desired and reasonably required by the Company.
The fee allocable to each Fund is calculated daily by applying the annual
management fee percent for the Fund to the Fund's net asset value. The fee is
payable for each calendar month as soon as practicable after the end of that
month. In addition, prior to fiscal year ended October 31, 1998, each Bond and
Equity Fund and Emerging Markets Income reimbursed the Adviser for the costs of
providing accounting services to the Fund, including maintaining the Fund's
financial books and records, calculating its daily net asset value, and
preparing its financial statements, in an amount not exceeding $35,000 for the
applicable fiscal year (subject to any expense limit described below). Money
Market also reimbursed the Adviser for the Fund's accounting services, but in an
amount not exceeding 0.10% of the Fund's average daily net assets. The total
amounts paid, exclusive of any expense reimbursement by the Adviser and payment
of any accounting fees by the Funds, for the fiscal years ended October 31, 1997
and 1998 were: Money Market - $592,000 and $678,000; Core Fixed Income - $77,000
and $229,000; High Yield Bond - $1,612,000 and $1,530,000; Mortgage-Backed
Securities - $265,000 and $250,000; Total Return Mortgage-Backed Securities -
$512,000 and $439,000; Aggressive Growth Equities - $1,090,000 and $1,002,000;
Earnings Momentum - $828,000 and $594,000; Select Equities - $1,628,000 and
$1,150,000; Small Cap Growth - $1,290,000 and $1,313,000; Asia Pacific Equities
- - $457,000 and $112,000; Emerging Markets Equities - $623,000 and $327,000; and
Latin America Equities - $754,000 and $313,000. During the fiscal period January
2, 1997 to October 31, 1997 and fiscal year ended October 31, 1998, Convertible
Securities paid $198,000 and $237,000, respectively, in advisory fees. During
the fiscal period November 3, 1997 to October 31, 1998 Value Opportunities paid
$274,000 in advisory fees, European Equities paid $412,000 in advisory fees and
Japanese Equities paid $116,000 in advisory fees. During the fiscal period June
3, 1998 to October 31, 1998, Large Cap Growth paid $17,000 in advisory fees,
Large Cap Value paid $19,000 in advisory fees and Emerging Markets Income paid
$71,000 in advisory fees.
For the fiscal year ended October 31, 1999, the total amounts paid in advisory
fees, exclusive of any expense reimbursement by the Adviser, were: Money Market
- - $541,000; Core Fixed Income - $307,000; High Yield Bond - $1,553,000;
Mortgage-Backed Securities - $232,000; Total Return Mortgage-Backed Securities -
$470,000; Aggressive Growth Equities - $1,384,000; Aggressive Growth Equities -
$1,384,000; Convertible Securities - $330,000; Earnings Momentum - $280,000;
Large Cap Growth - $97,000; Large Cap Value - $330,000; Select Equities -
$1,824,000; Small Cap Growth - $1,706,000; Value Opportunities - $235,000; Asia
Pacific Equities - $143,000; Emerging Markets Equities - $212,000; Emerging
Markets Income - $464,000; European Equities - $593,000; Japanese Equities -
$371,000; and Latin America Equities - $70,000.
Except for expenses specifically assumed by the Adviser under the Advisory
Agreement, each Fund bears all expenses incurred in its operations. Fund
expenses include the fee of the Adviser; compensation and expenses of directors
of the Company who are not officers or employees of the Adviser; registration,
filing and other fees in connection with filings with regulatory authorities;
fees and expenses of independent accountants; the expenses of printing and
mailing proxy statements and shareholder reports; custodian and transfer and
dividend disbursing agent charges; brokerage fees and commissions and securities
transaction costs; taxes and corporate fees; legal fees; the fees of any trade
association; the cost of stock certificates, if any, representing shares of the
Fund; the organizational and offering expenses, whether or not advanced by the
Adviser; expenses of shareholder and director meetings; premiums for the
fidelity bond and any errors and omissions insurance; interest and taxes; and
any other ordinary or extraordinary expenses incurred in the course of the
Fund's business.
For the fiscal year ended October 31, 1999, the expenses (annualized) paid by
the Funds' Class I, as a percentage of their average daily net assets, were:
Money Market - 0.38%, Core Fixed Income - 0.58% (after expense reimbursement);
High Yield Bond - 0.90%; Mortgage-Backed Securities - 0.75% (after expense
reimbursement); Total Return Mortgage-Backed Securities - 0.69%; Aggressive
Growth Equities - 1.14%; Convertible Securities - 1.03%; Earnings Momentum -
1.46%; Large Cap Growth - 1.30%; Large Cap Value - 0.79%; Select Equities -
0.88%; Small Cap Growth - 1.14%; Value Opportunities - 1.18%; Asia Pacific
Equities - 2.03% (after expense reimbursement); Emerging Markets Equities -
2.02% (after expense reimbursement); Emerging Markets Income - 1.01%; European
Equities - 1.01%; International Equities - 0.18%; Japanese Equities - 1.04%; and
Latin America Equities - 2.20% (after expense reimbursement).
For the fiscal period March 1, 1999, to October 31, 1999, the expenses
(annualized) paid by the Funds Class N, as a percentage of their average daily
net assets (after expense reimbursement), were: Core Fixed Income - 1.00%; High
Yield Bond - 1.30%; Total Return Mortgage-Backed Securities - 1.02%; Aggressive
Growth Equities - 1.47%; Large Cap Growth - 1.46%; Large Cap Value - 1.46%;
Select Equities - 1.46%; Small Cap Growth - 1.53%; and European Equities -
1.69%.
The Advisory Agreement also provides that each Fund (except for Money Market)
will reimburse the Adviser for the Fund's organizational expenses. Such
organizational expenses will be amortized by each Fund over five years.
The Advisory Agreement was approved by each Fund's shareholders on February 10,
1999, and will continue in effect as to each Fund initially for two years and
thereafter from year to year if such continuance is specifically approved at
least annually by (a) the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the Fund, and (b) vote of a
majority of the directors who are not "interested persons" of the Company or the
Adviser (the Independent Directors), cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement may be terminated
without penalty at any time on 60 days' written notice, by vote of a majority of
the Board of Directors of the Company or by vote of a majority of the
outstanding voting securities of the Fund. The Advisory Agreement terminates
automatically in the event of assignment.
The Company has acknowledged that the name "TCW" is owned by The TCW Group, Inc.
(formerly, TCW Management Company) ("TCW"), the parent of the Adviser. The
Company has agreed to change its name and the name of the Funds at the request
of TCW if any advisory agreement into which TCW or any of its affiliates and the
Company may enter is terminated.
The Advisory Agreement and Sub-Advisory Agreements also provides that the
Adviser and Sub-Advisers shall not be liable to the Company for any actions or
omissions if it acted in good faith without gross negligence, willful
misfeasance, bad faith, or from reckless disregard of their duties.
DISTRIBUTION OF COMPANY SHARES
TCW Brokerage Services ("Distributor") serves as the nonexclusive distributor of
each class of the Company's shares pursuant to an Amended and Restated
Distribution Agreement ("Distribution Agreement") with the Company which is
subject to approval by the Board. The Distribution Agreement is terminable
without penalty, on not less than 60 days' notice, by the Company's Board of
Directors, by vote of holders of a majority of the Company's shares, or by the
Distributor.
The Company offers two classes of shares: Institutional Class I shares and Class
N shares. Shares of the Institutional Class are offered primarily for direct
investment by investors such as pension and profit sharing plans, employee
benefit trusts, endowment, foundations, corporations and high net individuals.
Class N shares are offered through firms which are members of the National
Association of Securities Dealers, Inc. ("NASD"), and which have dealer
agreements with the Distributor and other financial intermediaries.
The Company has adopted a Plan Pursuant to Rule 18f-3 under the 1940 Act (" Rule
18f-3 Plan"). Under the Rule 18f-3 Plan, shares of each class of each Fund
represent an equal pro rata interest in such Fund and, generally, have identical
voting, dividend, liquidation, and other rights, preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except that:
(a) each class has a different designation; (b) each class of shares bears any
class-specific expenses allocated to it; and (c) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
distribution or service arrangements, and each class has separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class. In addition, each class may have a
differing sales charge structure, and differing exchange and conversion
features.
The Company also has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act ("Distribution Plan") with respect to the Class N shares of each
Fund. Under the terms of the Distribution Plan, each Fund compensates the
Distributor at a rate equal to 0.25% of the average daily net assets of the Fund
attributable to its Class N shares for distribution and related services. The
Distributor may pay any or all of the fee payable to it for distribution and
related services to the firms that are members of the NASD, subject to
compliance by the firms with the terms of the dealer agreement between the firm
and the Distributor. Under the terms of the Distribution Plan, services which a
firm will provide may include, but are not limited to, the following functions:
providing facilities to answer questions from prospective investors about a
Fund; receiving and answering correspondence, including requests for
prospectuses and statements of additional information; preparing, printing and
delivering prospectuses and shareholder reports to prospective shareholders;
complying with federal and state securities laws pertaining to the sale of Class
N shares; and assisting investors in completing application forms and selecting
dividend and other account options.
For the fiscal period March 1, 1999, to October 31, 1999, the Funds' Class N
made the following payments pursuant to the Distribution Plan: Core Fixed Income
- - $88; High Yield Bond - $252; Total Return Mortgage-Backed Securities- $17;
Aggressive Growth Equities - $2,143; Large Cap Growth - $31; Large Cap Value -
$73; Select Equities - $7,658; Small Cap Growth - $347; and European Equities -
$224.
The Distribution Plan provides that it may not be amended to materially increase
the costs which Class N shareholders may bear under the Plan without the
approval of a majority of the outstanding voting securities of Class N, and by
vote of a majority of both (i) the Board of Directors of the Company, and (ii)
those Directors of the Company who are not "interested persons" of the Company
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plan or any agreements related to it cast in
person at a meeting called for the purpose of voting on the Plan and any related
amendments.
The Distribution Plan was approved by the Company's Board of Directors on
December 17, 1998 and provides that it shall continue in effect so long as such
continuance is specifically approved at least annually by the by a vote of a
majority of both (i) the Board of Directors of the Company, and (ii) those
Directors of the Company who are not "interested persons" of the Company (as
defined in the 1940 Act) and who have no direct or indirect financial interest
in the operation of the Plan or any agreements related to it cast in person at a
meeting called for the purpose of voting on the Plan and any related amendments.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of January 31, 2000, the following owned 5% or more of the outstanding shares
of Class I of the following Funds:
Aggressive Growth Equities -- Tifkat, L.P. (8.88%) and Wachovia Bank of NC TTEE
Freedom Communications Inc. (6.04%); Convertible Securities -- BNY Western Trust
Company Cust. TCW Profit Sharing Trust (5.51%), Buck Foundation (7.91%), Daniel
J. Donohue Living Trust (7.91%), Kings College (9.06%), Maine State Retirement
System (10.35%), Seaver Institute (5.65%), City of Tallahassee (6.02%),
Transition Zone Horticultural Institute Inc. (5.22%) and Yasuda Fire & Marine
Insurance Company of America (8.91%); Earnings Momentum -- State Street Bank
TTEE Goldman Sachs Pension Plan (91.17%); Large Cap Growth -- Carpenters Health
& Welfare Trust for Southern California (39.16%), G.W. and E.G. Mead Foundation
(25.30%), Rosenblatt Family Trust (6.55%) and TCW Capital Investment Corporation
(8.31%); Large Cap Value -- Mac & Co. Mutual Fund Operations (15.20%) and Salk
Institute (39.14%); Select Equities -- Egleston Children's Hospital (6.93%),
Salk Institute (5.36%) and Charles Schwab & Co. Inc. Reinvestment Account
(8.76%); Small Cap Growth -- Mac & Co. Mutual Fund Operations (11.09%) and The
University of Tennessee (8.18%); Value Opportunities -- BNY Western Trust
Company Cust. TCW Profit Sharing Plan (5.43%), G. Fulton Collins III (9.25%),
Harold R. Frank Trust (6.00%), Henry Kravis TTEE Raymond & Bessie Kravis
Foundation (5.63%), G.W. and E.G. Mead Foundation (6.41%), Norred 1987 Trust
(5.96%), Edward D. Robson Trust (7.88%) and Tifkat, L.P. (21.38%); Money Market
- -- BNY Western Trust Company Cust. TCW Profit Sharing Trust (5.62%), Saxon and
Co. (32.82%) and TCW Capital Investment Corporation (11.12%); Core Fixed Income
- -- Bank of America Cust. Hilton Charitable Remainder Trust (28.84%),
Cedars-Sinai Medical Center (10.34%), The Christ Child Society (5.63%), Joseph
B. Gould Foundation (7.58%), G.W. and E.G. Mead Foundation (8.16%) and Saint
Johns Health Center Foundation (9.87%); High Yield Bond -- Collins Investments
Inc. (5.84%), Maine State Retirement System (23.84%) and City of Tallahassee
(10.47%); Mortgage-Backed Securities -- Mac & Co. Mutual Funds Operations
(72.45%), The College Fund/UNCF Endowed Scholarship Fund (9.22%) and United
Negro College Fund (5.49%); Total Return Mortgage-Backed Securities -- Bost &
Co. Mutual Funds Operations (22.17%), Cedars Sinai Medical Center Defined
Benefit Pension Plan (6.13%), Mac & Co. Mutual Funds Operations (33.91%) and St.
Vincents Medical Center Foundation (16.49%); Asia Pacific Equities -- Steven
Heller (12.20%), Sobrato Development Company (63.38%) and TCW Galileo
International Equities Fund (8.99%); Emerging Markets Equities -- Bankers Trust
Company TTEE Cravath Swaine & Moore Retirement Plan (5.97%), Bank of America
Cust. Hilton Charitable Remainder Trust (20.34%), City of Bay City Police & Fire
Retirement System (5.92%), Chase Manhattan Bank Cust. Via Health Pension Plan
(8.08%), Fleet National Bank Cust. University of Massachusetts (7.69%), Salk
Institute (10.60%), City of Southfield Fire and Police Retirement System (9.89%)
and Worcester Polytechnic Institute (12.02%); Emerging Markets Income -- Bank of
America Cust. Hilton Charitable Remainder Trust (13.42%), Claremont McKenna
College (20.10%), Kresge Foundation (5.91%), Maine State Retirement System
(29.18%), University of Pittsburgh (9.33%) and City of Tallahassee (13.23%);
European Equities -- Northern Trust Co. Cust. Modern Woodmen of America
(15.60%), Salk Institute (5.93%) and TCW Galileo International Equities Fund
(57.95%); International Equities -- Barlow Group (7.95%), First Insurance
Company of Hawaii (32.56%), Institute of the Americas (6.34%), Northern Trust
Co. Cust. Kathleen McCarthy (13.88%) and Salk Institute (32.09%); Japanese
Equities -- Bank of America Cust. Hilton Charitable Reminder Trust (41.67%),
Ralph C. Stayer (9.67%), TCW Galileo International Equities Fund (25.92%) and
Tifkat, L.P. (12.88%); and Latin America Equities -- John Estrada MD Pension
Plan Trust (5.34%), Gibson Company Profit Sharing Plan (9.84%), Carla Hills
(10.10%), Henry Kravis TTEE Raymond & Bessie Kravis Foundation (21.86%), Charles
Schwab & Co. Inc. Reinvestment Account (6.22%), TCW Galileo International
Equities Fund (16.24%) and Consuelo Zobel Alger Foundation (8.87%). All
communications to these shareholders can be addressed to TCW Investment
Management Company, 865 South Figueroa Street, 18th Floor, Los Angeles,
California 90017, Attention: Investor Relations Department.
As of January 31, 2000, the following owned 5% or more of the outstanding shares
of Class N of the following Funds: Aggressive Growth Equities -- National
Financial Services Corp FBO Customers, 200 Liberty Street, New York, New York
10281 (18.33%) and Charles Schwab & Co. Reinvestment Account, 101 Montgomery
Street, San Francisco, California 94104 (55.98%); Large Cap Growth -- Martin and
Muriel Jacob, 549 Charles Ave., Kingston, Pennsylvania 18704 (5.62%), D. Jane
Rush, P.O. Box 573, Spicewood, Texas 78669 (10.57%), Charles Schwab & Co. Inc.
Reinvestment Account, 101 Montgomery Street, San Francisco, California 94104
(26.17%), Tucker Anthony Inc., 35306 Pabst Road, Oconomowoc Wisconsin 53066
(30.77%), Jeffrey Kelley IRA, 44630 Albert Drive, Plymouth, Michigan 48170
(10.74%) and John McGrath IRA, 15575 Falcon Ridge Court, Colorado Springs,
Colorado 80921 (10.16%); Large Cap Value -- Douglas and Lynn Allen, 1240 Lorain
Road, San Marino, California 91108 (13.93%) and Charles Schwab & Co. Inc.
Reinvestment Account, 101 Montgomery Street, San Francisco, California 94104
(82.96%); Select Equities -- Resources Trust Company FBO Customers, P.O. Box
3865, Englewood, Colorado 80155 (17.10%) and Charles Schwab & Co. Inc.
Reinvestment Account, 101 Montgomery Street, San Francisco, California 94104
(65.05%); Small Cap Growth -- National Financial Services Corp. FBO Customers,
200 Liberty Street, New York, New York 10281 (11.76%), Resources Trust Company
FBO Customers, P.O. Box 3865 Englewood, Colorado 80155 (18.99%), Charles Schwab
& Co., Inc. Reinvestment Account, 101 Montgomery Street, San Francisco,
California 94104 (42.15%) and Sterling Trust Company FBO Shook National Corp.
Retirement Plan, 1380 Lawrence Street, Denver, Colorado 80204 (5.16%); Core
Fixed Income -- Laurence and Esperanza Mahan, 50 W. Portal Avenue, San
Francisco, California 94127 (10.80%) and Charles Schwab & Co. Inc. Reinvestment
Account, 101 Montgomery Street, San Francisco, California 94014 (89.19%); High
Yield Bond -- Charles Schwab & Co. Inc. Reinvestment Account 101 Montgomery
Street, San Francisco, California 94104 (99.24%); Total Return Mortgage-Backed
Securities -- Robert Horst, 12 Oaktree Lane, Williamsport, Maryland 21795
(27.94%) and Charles Schwab & Co. Inc. Reinvestment Account, 101 Montgomery
Street, San Francisco, California 94104 (72.03%); and European Equities -- Helen
Kilpatrick, 11 Chester Street, London, United Kingdom and Charles Schwab & Co.
Inc. 101 Montgomery Street, San Francisco, California 94104 (17.21%).
ADMINISTRATION AGREEMENT
Investors Bank & Trust Company ("Administrator") serves as the administrator of
the Company pursuant to an Administration Agreement. Under the Administration
Agreement, the Administrator will provide certain administrative services to the
Company, including: fund accounting; calculation of the daily net asset value of
each Fund; monitoring the Company's expense accruals; calculating monthly total
return and yield figures; prospectus and statement of additional information
compliance monitoring; preparing certain financial statements of the Company;
and preparing the Company's Form N-SAR.
CODE OF ETHICS
The Adviser is subject to the Code of Ethics with respect to investment
transactions in which the Adviser's officers, directors and certain other
persons have a beneficial interest to avoid any actual or potential conflict or
abuse of their fiduciary position. The Code of Ethics contains several
restrictions and procedures designed to eliminate conflicts of interest
including: (a) pre-clearance of non-exempt personal investment transactions; (b)
quarterly reporting of personal securities transactions; (c) a prohibition
against personally acquiring securities in an initial public offering, entering
into uncovered short sales and writing uncovered options; (d) a seven day "black
out period" prior or subsequent to a Fund transaction during which portfolio
managers are prohibited from making certain transactions in securities which are
being purchased or sold by a client of such manager; (e) a prohibition, with
respect to certain investment personnel, from profiting in the purchase and
sale, or sale and purchase, of the same (or equivalent) securities within 60
calendar days; and (f) a prohibition against acquiring any security which is
subject to firm wide or, if applicable, a department restriction of the Adviser.
The Code of Ethics provides that exemptive relief may be given from certain of
its requirements, upon application.
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus, the Company will not calculate the net asset
value of the Funds on certain holidays, weekends and when there is no activity
in a Fund's shares. On those days, securities held by a Fund may nevertheless be
actively traded, and the value of the Fund's shares could be significantly
affected.
A Fund determines its net asset value per share by subtracting its liabilities
(including accrued expenses and dividends payable) from its total assets (the
market value of the securities the Fund holds plus cash and other assets,
including income accrued but not yet received) and dividing the result by the
total number of shares outstanding.
HOW TO BUY AND REDEEM SHARES
Shares in a Fund may be purchased and redeemed in the manner described in the
Prospectus and in this Statement of Additional Information.
Use of Sub-Transfer Agency Accounting or Administrative Services
Certain financial intermediaries have contracted with the Distributor to perform
certain sub-transfer agent accounting or administrative services for certain
clients or retirement plan investors who have invested in the Company. In
consideration of the provision of these sub-transfer agency accounting or
administrative services, the financial intermediaries will receive sub-transfer
agency accounting or administrative fees.
Computation of Public Offering Prices
The Funds offer their shares to the public on a continuous basis. The public
offering price per share of each Fund is equal to its net asset value per share
next computed after receipt of a purchase order. See "Determination of Net Asset
Value", above.
Distributions in Kind
If the Board of Directors determines that it would be detrimental to the best
interests of the remaining shareholders of a Fund to make a redemption payment
wholly in cash, the Fund may pay, in accordance with SEC rules, any portion of a
redemption in excess of the lesser of $250,000 or 1% of the Fund's net assets by
distribution in kind of portfolio securities in lieu of cash. Shareholders
receiving distributions in kind may incur brokerage commissions or other costs
when subsequently disposing of shares of those securities.
HOW TO EXCHANGE SHARES
A shareholder may exchange all or part of its shares of one Fund for shares of
another Fund (subject to receipt of any required state securities law clearances
with respect to certain Funds in the shareholder's state of residence). An
exchange of shares is treated for federal income tax purposes as a redemption
(sale) of shares given in exchange by the shareholder, and an exchanging
shareholder may, therefore, realize a taxable gain or loss in connection with
the exchange. See "Distributions and Taxes" below.
The exchange privilege enables a shareholder to acquire shares in a Fund with
different investment objectives or policies when the shareholder believes that a
shift between Funds is an appropriate investment decision.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds are immediately invested, at a price as described above, in
shares of the Fund being acquired. The Company reserves the right to reject any
exchange request.
As described in the Prospectus, the exchange privilege may be terminated or
revised by the Company.
PURCHASES-IN-KIND
The Funds may, at the sole discretion of the Adviser, accept securities in
exchange for shares of a Fund. Securities which may be accepted in exchange for
shares of any Fund must: (1) meet the investment objectives and policies of the
Fund; (2) be acquired for investment and not for resale; (3) be liquid
securities which are not restricted as to transfer either by law or liquidity of
market (determined by reference to liquidity policies established by the Board
of Directors); and (4) have a value which is readily ascertainable as evidenced
by, for example, a listing on a recognized stock exchange.
DISTRIBUTIONS AND TAXES
Each of the Funds intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). A
Fund that is a regulated investment company and distributes to its shareholders
at least 90% of its taxable net investment income (including, for this purpose,
its net realized short-term capital gains) and 90% of its tax-exempt interest
income (reduced by certain expenses), will not be liable for federal income
taxes to the extent its taxable net investment income and its net realized
long-term and short-term capital gains, if any, are distributed to its
shareholders. However, a Fund will be taxed on that portion of taxable net
investment income and long-term and short-term capital gains that it retains.
Furthermore, a Fund will be subject to United States corporate income tax (and
possibly state or local income or franchise tax) with respect to such
distributed amounts in any year that it fails to qualify as a regulated
investment company or fails to meet the 90% distribution requirement.
To qualify as a regulated investment company, in addition to the 90%
distribution requirement described above, a Fund must: (a) derive at least 90%
of its gross income from dividends, interest, certain payments with respect to
securities loans and gains from the sale or other disposition of stock or
securities or foreign currencies or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business in investing in such stock, securities or currencies, and (b) diversify
its holdings so that at the end of each fiscal quarter, (i) at least 50% of the
value of the Fund's assets is represented by cash items, U.S. Government
Securities and other securities, limited in respect of any one issuer, to an
amount not greater than 5% of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government Securities) or in the securities of two or more issuers (other than
U.S. Government Securities) which the Fund controls (i.e., holds at least 20% of
the combined voting power) and which are engaged in the same or similar trades
or businesses or related trades or businesses.
With respect to the Equity Funds that invest in foreign currency or forward
foreign exchange contracts, Core Fixed Income and Emerging Markets Income, gains
from such foreign currency and forward foreign exchange contracts relating to
investments in stocks, securities or foreign currencies are considered to be
qualifying income for purposes of the 90% gross income test described in clause
(a) above, provided such gains are directly related to the Fund's principal
business of investing in stock or securities. It is currently unclear, however,
who will be treated as the issuer of certain foreign currency instruments or how
foreign currency contracts will be valued for purposes of the asset
diversification requirements applicable to the Fund described in clause (c)
above. Until such time as these uncertainties are resolved, each Fund will
utilize the more conservative, or limited, definition or approach with respect
to determining permissible investments in its portfolio.
Investments in foreign currencies, forward contracts, options, futures contracts
and options thereon may subject a Fund to special provisions of the Internal
Revenue Code that may affect the character of gains and losses realized by the
Fund (i.e., may affect whether gains or losses are ordinary or capital), may
accelerate recognition of income to a Fund, and may defer Fund losses. These
rules also (a) could require a Fund to mark-to-market certain types of the
positions in its portfolio (i.e., treat them as if they had been closed out in a
fully taxable transaction) and (b) may cause the Fund to recognize income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes.
As a general rule, a Fund's gain or loss on a sale or exchange of an investment
will be a long-term capital gain or loss if the Fund has held the investment for
more than one year and will be a short-term capital gain or loss if it has held
the investment for one year or less. Furthermore, as a general rule, a
shareholder's gain or loss on a sale or redemption of Fund shares will be a
long-term capital gain or loss if the shareholder has held his or her Fund
shares for more than one year and will be a short-term capital gain or loss if
he or she has held his or her Fund shares for one year or less. For federal,
state and local income tax purposes, an exchange by a shareholder of shares in
one Fund or securities for shares in a Fund will be treated as a taxable sale
for a purchase price equal to the fair market value of the shares received.
Any loss realized on the disposition by a shareholder of its shares in a Fund
will be disallowed to the extent the shares disposed of are replaced with other
Fund shares, including replacement through the reinvesting of dividends and
capital gains distributions in the Fund, within a period (of 61 days) beginning
30 days before and ending 30 days after the disposition of the shares. In such a
case, the basis of the shares acquired will be increased to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of a Fund share
held by the shareholder for six months or less will be treated as a long-term
capital loss to the extent of any distributions of capital gain dividends (as
defined below) received by the shareholder with respect to such share.
While only the Equity Funds expect to realize a significant amount of net
long-term capital gains, any such realized gains will be distributed as
described in the Prospectus. See "Dividends, Distributions and Taxes" in the
Prospectus. Such distributions ("capital gain dividends"), if any, will be
taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held Fund shares, and will be designated as capital gain
dividends in a written notice mailed to the shareholder after the close of the
Fund's prior taxable year. A Fund may be subject to taxes in foreign countries
in which each invests. If such a Fund invests in an entity which is classified
as a "passive foreign investment company" ("PFIC") for U.S. tax purposes, the
application of certain technical tax provisions applying to such companies could
result in the imposition of federal income tax with respect to such investments
at the Fund level which could not be eliminated by distributions to the
shareholders of the Fund. It is not anticipated that any taxes at the Fund level
with respect to investments in PFICs will be significant.
In computing its net taxable (and distributable) income and/or gains, a Fund may
choose to take a dividend paid deduction for a portion of the proceeds paid to
redeeming shareholders. This method (sometimes referred to as "equalization")
would permit the Fund to avoid distributing to continuing shareholders taxable
dividends representing earnings included in the net asset value of shares
redeemed. Using this method will not affect the Fund's total return. Since there
are some unresolved technical tax issues relating to use of equalization by a
fund, there can be no assurance that the Internal Revenue Service will agree
with the Fund's methodology and/or calculations which could possibly result in
the imposition of tax, interest or penalties on the Fund. It should also be
noted that a recent proposal submitted to Congress as part of President
Clinton's proposed Budget would (if enacted) limit the use of equalization for
taxable years beginning after the date of enactment.
Under the Internal Revenue Code, a nondeductible excise tax of 4% is imposed on
a Fund to the extent the Fund does not distribute by the end of any calendar
year at least 98% of its ordinary income for that calendar year and at least 98%
of the net amount of its capital gains (both long-term and short-term) for the
one-year period ending on October 31 of such calendar year (or December 31 if
the Fund so elects), plus any undistributed amounts of taxable income for prior
years. For this purpose, however, any income or gain retained by the Fund that
is subject to corporate income tax will be considered to have been distributed
by year-end. Each Fund intends to meet these distribution requirements to avoid
the excise tax liability.
Dividends generally are taxable to shareholders at the time they are paid.
However, dividends declared in October, November and December and made to
shareholders of record in such a month are treated as paid and are taxable as of
December 31, provided that the Fund pays the dividend during January of the
following year.
If a shareholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income, or fails to certify that it
has provided a correct taxpayer identification number and that it is not subject
to "backup withholding," then the shareholder may be subject to a 31% "backup
withholding" tax with respect to: (a) taxable dividends and distributions, and,
(b) the proceeds of any redemptions of Fund shares. An individual's taxpayer
identification number is his social security number. The 31% "backup
withholding" tax is not an additional tax and may be credited against a
taxpayer's regular federal income tax liability.
Dividends to shareholders who are non-resident aliens may be subject to a 30%
United States withholding tax under provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Non-resident shareholders
should consult their own tax advisers.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Internal Revenue Code and Treasury Regulations presently in effect. For
the complete provisions, reference should be made to the pertinent Internal
Revenue Code sections and the Treasury Regulations promulgated thereunder. The
Internal Revenue Code and these Regulations are subject to change by legislative
or administrative action.
Each shareholder will receive annual information from its Fund regarding the tax
status of Fund distributions. Shareholders are urged to consult their attorneys
or tax advisers with respect to the applicability of federal, state, local,
estate and gift taxes and non-U.S. taxes to their investment in the Fund.
INVESTMENT RESULTS
From time to time, the Company may quote the performance of a Fund in terms of
yield, actual distributions, total return or capital appreciation in reports or
other communications to shareholders or in other published material.
The Bond Funds may quote a 30-day yield figures which is calculated according to
a formula prescribed by the SEC. The formula can be expressed as follows:
YIELD = 2[(a-b) + 1)6 - 1]
---
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by one of the Bond Funds at a discount
or premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
The yield of Money Market is its net income expressed in annualized terms. The
SEC requires by rule that a yield quotation set forth in an advertisement for a
"money market" fund be computed by a standardized method based on a historical
seven calendar day period. The standardized yield is computed by determining the
net change (exclusive of realized gains and losses and unrealized appreciation
and depreciation) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period
return by 365/7. The determination of net change in account value reflects the
value of additional shares purchased with dividends from the original share,
dividends declared on both the original share and such additional shares, and
all fees that are charged to all shareholder accounts, in proportion to the
length of the base period and the Fund's average account size. Money Market may
also calculate its effective yield by compounding the unannualized base period
return (calculated as described above) by adding 1 to the base period return,
raising the sum to a power equal to 365 divided by 7, and subtracting one.
The yield quoted at any time represents the amount being earned on a current
basis for the indicated period and is a function of the types of instruments in
Money Market, their quality and length of maturity, and the Fund's operating
expenses. The length of maturity for the Fund is the average dollar weighted
maturity of the Fund. This means that the Fund has an average maturity of a
stated number of days for all of its issues. The calculation is weighted by the
relative value of the investment.
Each Bond Fund's and Equity Fund's total return may be calculated on an "average
annual total return" basis, and may also be calculated on an "aggregate total
return" basis, for various periods. Average annual total return reflects the
average annual percentage change in the value of an investment in a Fund over
the particular measuring period. Aggregate total return reflects the cumulative
percentage change in value over the measuring period. Average annual total
return figures provided for the Bond Funds and Equity Funds will be computed
according to a formula prescribed by the SEC. The formula for an average annual
total return can be expressed as follows:
P(1+T)n `ERV
Where:
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV Ending Redeemable Value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year (or other) periods or
the life of the Fund
The formula for calculating aggregate total return can be expressed as follows:
Aggregate Total Return [( ERV ) - 1 ]
---
P
The calculation of average annual total return and aggregate total return
assumes reinvestment of all income dividends and capital gain distributions on
the reinvestment dates during the period and includes all recurring fees charged
to all shareholder accounts.
The ERV assumes complete redemption of the hypothetical investment at the end of
the measuring period and reflects deduction of all nonrecurring charges at the
end of the measuring period covered by the computation. A Fund's net investment
income changes in response to fluctuations in interest rates and the expenses of
the Fund.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in a Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
Investors should recognize that, because the Bond Funds will have a high
component of fixed-income securities, in periods of declining interest rates the
yields of the Bond Funds will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates yields will tend to be somewhat
lower. In addition, when interest rates are falling, the inflow of net new money
to the Bond Funds from the continuous sale of shares will likely be invested in
portfolio instruments producing lower yields than the balance of the Bond Funds'
securities, thereby reducing the current yields of the Bond Funds. In periods of
rising interest rates, the opposite can be expected to occur.
Comparative performance information may be used from time to time in publishing
information about the Company's shares, including data from Lipper Analytical
Services, Inc., CDA Technologies, Inc., or similar independent services which
monitor the performance of mutual funds or with other appropriate indexes of
investment securities. The performance information may also include evaluations
of the Funds published by nationally recognized ranking services and by
financial publications that are nationally recognized, such as Business Week,
Forbes, Fortune, Institutional Investor, Money and The Wall Street Journal. A
Fund may compare its performance to other investments or relevant indexes
including, but not limited to, the following: High Yield Bond -- First Boston
High Yield Index, Salomon Brothers High Yield Cash Pay Index and Lehman Brothers
Government/Corporate Bond Index; High Yield Bond and Core Fixed Income -- Lehman
Brothers Aggregate Bond Index; Core Fixed Income and Total Return
Mortgage-Backed Securities -- Salomon Brothers Broad Investment Grade Index;
Total Return Mortgage-Backed Securities -- Lehman Brothers Mortgage-Backed
Securities Index; Mortgage-Backed Securities -- Salomon Brothers Three Month
Treasury Bill Benchmark and Salomon Brothers One Year U.S. Treasury Bill Index;
Convertible Securities -- First Boston Convertible Index, NASDAQ Composite and
Standard & Poor's 500 w/income; Select Equities -- Standard & Poor's 500; Large
Cap Growth -- S&P/BARRA Growth Index; Large Cap Value -- S&P/BARRA Value Index;
Small Cap Growth - National Association of Securities Dealers Automated
Quotations System, Lipper Small Company Gross Average and Russell 2000; Small
Cap Value -- Value Line Index and Russell 2000; Earnings Momentum -- Standard &
Poor's 500, Standard & Poor's Midcap 400, and the Russell 2000; Aggressive
Growth Equities -- Standard & Poor's Midcap 400, Russell Midcap Index, and the
Wilshire Midcap Index; Asia Pacific Equities -Morgan Stanley Combined Far East
ex Japan Index; Emerging Markets Equities - International Finance Corporation
Emerging Markets Equities Total Return Investable Index; Emerging Markets Income
- -- Emerging Markets Bond Index Plus; European Equities -- Morgan Stanley Capital
International European Equities Index; International Equities -- Morgan Stanley
Capital International EAFE Index; Japanese Equities -- Morgan Stanley Capital
International Japanese Equities Index; Tokyo Stock Exchange First Section Index;
Latin America Equities -- Baring Securities Emerging Markets Equities Index,
International Finance Corporation Total Return Latin America Investable Index,
and Morgan Stanley Capital International Latin America Index; and Money Market
- -- Donoghue's Money Fund Average and the average yields reported by the Bank
Rate Monitor for money market deposit accounts offered by the 50 leading banks
and thrift institutions in the top five standard metropolitan statistical areas.
ORGANIZATION, SHARES AND VOTING RIGHTS
The Company was incorporated as a Maryland corporation on September 15, 1992 and
is registered with the Securities and Exchange Commission as an open-end,
management investment company. The Company has acknowledged that the name "TCW"
is owned by The TCW Group, Inc. ("TCW"), the parent of the Adviser. The Company
has agreed to change its name and the name of the Funds at the request of TCW if
any advisory agreement into which TCW or any of its affiliates and the Company
may enter is terminated.
The Fund offers two classes of shares: the Institutional Class shares and the
Class N shares. The Institutional Class shares are offered at the current net
asset value. The Class N shares are also offered at the current net asset value,
but will be subject to distribution or service fees imposed under the
Distribution Plan. Shares of each class of a Fund represents an equal
proportionate share in the assets, liabilities, income and expenses of that Fund
and, generally, have identical voting, dividend, liquidation, and other rights,
other than the payment of distribution fees imposed under the Distribution Plan.
All shares issued will be fully paid and nonassessable and will have no
preemptive or conversion rights. Each share has one vote and fractional shares
have fractional votes. As a Maryland corporation, the Company is not required to
hold an annual shareholder meeting in any year in which the selection of
directors is not required to be acted on under the 1940 Act. Shareholder
approval will be sought only for certain changes in the operation of the Funds
and for the election of directors under certain circumstances. Directors may be
removed by a majority of all votes entitled to be cast by shareholders at a
meeting. A special meeting of the shareholders will be called to elect or remove
directors if requested by the holders of ten percent of the Company's
outstanding shares. All shareholders of the Funds will vote together with all
other shareholders of the Funds and with all shareholders of all other funds
that the Company may form in the future on all matters affecting the Company,
including the election or removal of directors. For matters where the interests
of separate Funds or classes of a Fund are not identical, the matter will be
voted on separately by each affected Fund or class. For matters affecting only
one Fund or class of a Fund, only the shareholders of that Fund or class will be
entitled to vote thereon. Voting is not cumulative. Upon request in writing by
ten or more shareholders who have been shareholders of record for at least six
months and hold at least the lesser of shares having a net asset value of
$25,000 or one percent of all outstanding shares, the Company will provide the
requesting shareholders either access to the names and addresses of all
shareholders of record or information as to the approximate number of
shareholders of record and the approximate cost of mailing any proposed
communication to them. If the Company elects the latter procedure, and the
requesting shareholders tender material for mailing together with the reasonable
expenses of the mailing, the Company will either mail the material as requested
or submit the material to the Securities and Exchange Commission for a
determination that the mailing of the material would be inappropriate.
TRANSFER AGENT AND CUSTODIANS
DST Systems, Inc., P.O. Box 419951, Kansas City, MO 64141-6951, serves as
transfer agent for the Fund. Investors Bank & Trust Company, 200 Clarendon
Street, Boston, Massachusetts 02117, serves as custodian for the Company. Chase
Manhattan Bank, 4 New York Plaza, New York, New York 10004; Morgan Guaranty
Trust Company, 60 Wall Street, New York, New York 10260; and The Bank of New
York, 90 Washington Street, New York, New York 10286 act as limited custodians
under the terms of certain repurchase and futures agreements.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 1000 Wilshire Boulevard, Los Angeles, California 90017
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006-2401
FINANCIAL STATEMENTS
The unaudited and audited financial statements for the period ended April 30,
1999 and October 31, 1999, respectively, including the financial highlights,
appearing in the Company's Semi-Annual Report and Annual Report to shareholders
are incorporated by reference and made a part of this document.
<PAGE>
APPENDIX A
Description of S&P and Moody's Ratings
S&P
AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Fixed income securities rated AAA, AA, A and BBB are considered investment
grade.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- Rating.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
Moody's
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured, interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Fixed income securities which are rated Aaa, Aa, A and Baa are considered
investment grade.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes 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.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the issue ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
