Cline, Williams, Wright, Johnson & Oldfather
1900 FirsTier Bank Building
Lincoln, Nebraska 68508-2095
(402) 474-6900
FAX (402) 474-5393
July 26, 1996
Securities and Exchange Commission
450 Fifth Avenue, N.W.
Judiciary Plaza
Washington, D.C. 20549
RE: Capital Value Fund, Inc.
POST EFFECTIVE AMENDMENT TO FORM N-1A REGISTRATION
STATEMENT (FILE NOS. 33-54202 & 811-7334)
Ladies and Gentlemen:
On behalf of the above referenced Registrant, we herewith submit, pursuant
to Regulation S-T and Rule 485(b), the requisite electronic transmission of data
constituting Post-Effective Amendment No. 4 under the 33 Act and Post-Effective
Amendment No. 7 under the 40 Act to Form N-1A Registration Statement (with
Exhibits).
The undersigned is of the opinion that the enclosed filing does not contain
disclosures which would render it ineligible to become effective pursuant to
Rule 485(b).
Any questions or comments concerning this filing should be directed to the
undersigned at 402/474-6900 or fax 402/474-5393.
Very truly yours,
JOHN C. MILES
For the Firm
Enclosure
<PAGE>
Registration No. 33-54202
811-7334
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 4 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 7 [x]
(Check appropriate box or boxes.)
CAPITAL VALUE FUND, INC.
(Exact Name of Registrant as Specified in Charter)
2203 Grand Avenue
Des Moines, Iowa 50312-5338
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (515) 244-5426
DAVID W. MILES, President
Capital Value Fund, Inc.
2203 Grand Avenue
Des Moines, Iowa 50312-5338
(Name and Address of Agent for Service)
Copies of all Communications to:
JOHN C. MILES, ESQ.
Cline, Williams, Wright, Johnson & Oldfather
1900 FirsTier Bank Building
Lincoln, Nebraska 68508
Approximate Date of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective.
It is proposed that this filing will become effective on July 29, 1996 pursuant
to paragraph (b) of Rule 485 under the Securities Act of 1933.
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, and the Rule 24f-2 Notice for the fiscal year ended March 31, 1996 was
filed on or about May 22, 1996.
<PAGE>
CAPITAL VALUE FUND, INC.
Cross-Reference Sheet
Required by Rule 404(c)
N-1A ITEM NO. LOCATION IN EQUITY PORTFOLIO,
TOTAL RETURN PORTFOLIO, FIXED
INCOME PORTFOLIO AND SHORT-TERM
GOVERNMENT PORTFOLIO PROSPECTUS
PART A
1. Cover Page.................................COVER PAGE
2. Synopsis...................................SUMMARY
3. Financial Highlights.......................FINANCIAL HIGHLIGHTS
4. General Description of Registrant..........INVESTMENT OBJECTIVES AND
POLICIES; CAPITAL STOCK
5. Management of the Fund.....................MANAGEMENT
6. Capital Stock and Other Securities.........COVER PAGE; DISTRIBUTIONS AND
TAXES; CAPITAL STOCK
7. Purchase of Securities Being Offered.......HOW TO INVEST
8. Redemption or Repurchase...................HOW TO REDEEM SHARES
9. Legal Proceedings..........................NOT APPLICABLE
LOCATION IN PRIME MONEY MARKET
PORTFOLIO PROSPECTUS
PART A
1. Cover Page.................................COVER PAGE
2. Synopsis...................................SUMMARY
3. Financial Highlights.......................FINANCIAL HIGHLIGHTS
4. General Description of Registrant..........INVESTMENT OBJECTIVES AND
POLICIES; CAPITAL STOCK
5. Management of the Fund.....................MANAGEMENT
6. Capital Stock and Other Securities.........COVER PAGE; DISTRIBUTIONS AND
TAXES; CAPITAL STOCK
7. Purchase of Securities Being Offered.......HOW TO INVEST
8. Redemption or Repurchase...................HOW TO REDEEM SHARES
9. Legal Proceedings..........................NOT APPLICABLE
PART B
LOCATION IN STATEMENT
OF ADDITIONAL INFORMATION
10. Cover Page.................................COVER PAGE
11. Table of Contents..........................TABLE OF CONTENTS
12. General Information and History............NOT APPLICABLE
13. Investment Objective and Policies..........INVESTMENT POLICIES AND
TECHNIQUES; INVESTMENT
RESTRICTIONS
14. Management of the Fund.....................DIRECTORS AND OFFICERS OF THE
FUND
15. Control Persons and Principal Holders of
Securities.................................MANAGEMENT OF THE FUND;
PRINCIPAL SHAREHOLDERS
16. Investment Advisory and Other Services.....MANAGEMENT OF THE FUND
17. Brokerage Allocation.......................PORTFOLIO TRANSACTIONS AND
BROKERAGE
18. Purchase, Redemption and Pricing
of Securities Being Offered................DETERMINATION OF NET ASSET VALUE
19. Tax Status.................................TAXES
20. Underwriters...............................MANAGEMENT OF THE FUND
21. Calculation of Performance Data............PERFORMANCE INFORMATION
22. Financial Statements.......................FINANCIAL STATEMENTS
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered in Part C to this Registration Statement.
<PAGE>
CAPITAL VALUE FUND, INC.
PROSPECTUS
EQUITY PORTFOLIO
FIXED INCOME PORTFOLIO
TOTAL RETURN PORTFOLIO
SHORT-TERM GOVERNMENT PORTFOLIO
<PAGE>
TABLE OF CONTENTS
Summary......................................................................5
Expenses.....................................................................7
Financial Highlights........................................................10
Investment Objectives and Policies..........................................14
Equity Securities......................................................14
Fixed Income Securities................................................14
Equity Portfolio.......................................................16
Total Return Portfolio.................................................17
Fixed Income Portfolio.................................................18
Short-Term Government Portfolio........................................19
Implementation of Policies and Risks........................................20
Investment Restrictions.....................................................29
Retirement Plans............................................................30
Management..................................................................30
How to Invest...............................................................34
Additional Investment Information...........................................37
How to Redeem Shares........................................................40
Shareholder Services........................................................43
Distributions and Taxes.....................................................46
Capital Stock...............................................................47
Shareholder Reports and Meetings............................................48
Custodian, Fund Accountant, Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent............................................49
Performance Information.....................................................49
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT
OF ADDITIONAL INFORMATION, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE OR
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
Capital Value Fund, Inc.
IMG Financial Services, Inc.
2203 Grand Avenue
Des Moines, IA 50312-5338
1-800-798-1819
Capital Value Fund, Inc. (the "Fund") is a Maryland corporation organized as an
open-end management investment company issuing its shares in series, with each
series representing a diversified portfolio of investments with its own
investment objectives and policies. The four Portfolios offered by this
Prospectus are designed for long-term investors, especially for funding tax
qualified investment plans such as employer-sponsored employee benefit plans,
IRAs or other retirement plans. The four Portfolios are: Equity Portfolio, Total
Return Portfolio, Fixed Income Portfolio and Short-Term Government Portfolio
("Portfolio" or collectively as "Portfolios"). The investment objectives are
described on the inside of the front cover of this Prospectus.
This Prospectus contains information you should be aware of before investing in
the Fund. Please read this Prospectus carefully and keep it for future
reference. A Statement of Additional Information as of the date of this
Prospectus for the Fund has been filed with the Securities and Exchange
Commission. This Statement, which may be revised from time to time, contains
further information about the Fund and is incorporated by reference in this
Prospectus. Upon request, at the address and telephone number indicated above,
the Fund will provide a copy of the Statement of Additional Information without
charge to each person to whom a Prospectus is delivered.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is July 29, 1996.
<PAGE>
EQUITY PORTFOLIO seeks capital appreciation in a manner consistent with the
preservation of capital through a diversified portfolio of common stocks and
other equity-type securities.
TOTAL RETURN PORTFOLIO seeks a high total return from capital appreciation and
current income, consistent with the preservation of capital, through a
diversified portfolio of common stocks, other equity-type securities, bonds and
money market instruments.
FIXED INCOME PORTFOLIO seeks to provide a high level of income consistent with
the preservation of capital and prudent investment risk through a diversified
portfolio of marketable U.S. government and corporate debt securities.
SHORT-TERM GOVERNMENT PORTFOLIO seeks a high level of current income, consistent
with minimum fluctuations in principal value, from investments primarily in U.S.
government securities.
The Fund also offers a fifth Portfolio called the Prime Money Market Portfolio,
which is designed for investors seeking professional investment management of
their short-term investment dollars. For more information about any of the
Fund's Portfolios call IMG Financial Services, Inc. ("IFS"), the Distributor of
the Fund's shares at 1-800-798-1819. Please read any Prospectus carefully before
investing or sending money.
For a more detailed discussion of the investment objectives and policies of each
of the Portfolios, see "INVESTMENT OBJECTIVES AND POLICIES", "IMPLEMENTATION OF
POLICIES AND RISKS" and "INVESTMENT RESTRICTIONS".
<PAGE>
SUMMARY
INVESTMENT OBJECTIVES & POLICIES
The Portfolios are each managed as separate diversified open-end management
investment companies, with distinct investment objectives and policies.
The investment objective of the Equity Portfolio is to seek capital appreciation
in a manner consistent with the preservation of capital. Realization of income
is not a significant investment consideration and any income realized on the
Portfolio's investments will be incidental to the Portfolio's objective. The
Equity Portfolio will seek to achieve its investment objective by investing
primarily in Equity Securities. (See "INVESTMENT OBJECTIVES AND POLICIES".) The
Equity Portfolio is intended to be an investment alternative for that part of an
investor's capital which can appropriately be exposed to above average risk in
anticipation of greater rewards. It is not designed to offer a complete or
balanced investment program suitable for all investors.
The investment objective of the Total Return Portfolio is a high total return
from capital appreciation and current income, consistent with preservation of
capital. The Portfolio attempts to achieve its objective by investing in Equity
Securities and Fixed Income Securities. (See "INVESTMENT OBJECTIVES AND
POLICIES".) The Total Return Portfolio is intended for those investors seeking
to balance the potential appreciation of common stocks with the income and
principal stability of bonds over the long term. For retirement or other
long-term investment dollars, the Portfolio offers a well balanced investment
program which seeks to combine attractive returns with the benefits of broad
diversification.
The investment objective of the Fixed Income Portfolio is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk. The Portfolio invests primarily in Investment Grade Fixed
Income Securities. (See "INVESTMENT OBJECTIVES AND POLICIES".) The Fixed Income
Portfolio is designed for the investor whose primary goal is a level of income
higher than money market or short- and intermediate-term bond funds usually
provide.
The investment objective of the Short-Term Government Portfolio is to provide as
high a level of current income as is consistent with minimum fluctuations in
principal value. The Portfolio invests primarily in U.S. government securities,
with an average dollar-weighted portfolio maturity of not more than three years.
(See "INVESTMENT OBJECTIVES AND POLICIES".)
RISKS AND INVESTMENT PRACTICES
The Portfolios may use a variety of hedging techniques to, among other things,
minimize adverse price movements or fluctuations and hedge against unfavorable
fluctuations in interest rates. Such techniques may include the use of options,
futures and options on futures, purchasing put and selling call options on
portfolio securities. The Portfolios may also invest in repurchase agreements;
illiquid securities; foreign securities; mortgage- and asset-backed securities;
zero coupon, deferred interest and PIK bonds; collateralized mortgage
obligations and multiclass pass-through securities; stripped mortgage-backed
securities; loan participations; delayed delivery transactions; variable- or
floating-rate securities; and warrants; and may loan their portfolio securities.
However, in the last year the Portfolios have not engaged in the use of options,
futures and options on futures; purchased put or sold call options on
securities; or invested in deferred interest and PIK bonds, loan participations
or warrants; and have not loaned securities. As a result, the Portfolios will
not, as a nonfundamental policy, engage in any of these techniques or invest in
any of these securities if such technique or security results in more than 5
percent of a Portfolio's net assets at risk. The Fixed Income Portfolio may also
invest up to 25 percent of its assets in below Investment Grade ("junk") bonds.
Each Portfolio may engage in short-term trading. These investment practices and
techniques involve risks that are different in some respects from those
associated with similar funds that do not use them. (See "IMPLEMENTATION OF
POLICIES AND RISKS" and "INVESTMENT POLICIES AND TECHNIQUES" in the Statement of
Additional Information.)
MANAGEMENT
The Fund's advisor is Capital Value Corporation ("CVC" or the "Advisor"), an
Iowa corporation. CVC is a wholly-owned, indirect subsidiary of IASD Health
Services Corp., which does business in the state of Iowa as Blue Cross and Blue
Shield of Iowa and in the state of South Dakota as Blue Cross of South Dakota.
CVC oversees and monitors the services provided to the Fund by the Sub-Advisor.
CVC was organized as a registered investment advisor in 1993. CVC and the Fund
have contracted with Investors Management Group ("IMG" or the "Sub-Advisor"), to
provide ongoing investment advisory services for the Portfolios. IMG is a
registered investment advisor providing investment management services to five
money market mutual funds, financial institutions, insurance companies, public
agencies and individuals, with over $1.4 billion presently under management.
IMG's portfolio managers are responsible for the day-to-day management of the
Portfolios' investments. (See "MANAGEMENT".)
PURCHASE AND REDEMPTION OF SHARES
Shares of a Portfolio are available through selected financial services firms at
the net asset value per share of the Portfolio. One hundred percent of the
dollars invested in the Fund are used to purchase shares of one or more of the
Portfolios without any deduction or initial sales charge. Shares of a Portfolio
are redeemable at any time at the next-determined net asset value per share,
subject to a contingent deferred sales charge ("CDSC") upon the redemption of
shares during the first six years after purchase (unless waived in certain
cases), ranging from 4 percent the first year to 0 percent after six years. The
CDSC will be waived in certain situations. Shares of Portfolios offered in this
Prospectus may be exchanged without imposition of the CDSC. The net asset value
per share changes daily with the value of each Portfolio's holdings. (See "HOW
TO INVEST" and "HOW TO REDEEM SHARES".)
CONVERSION FEATURE
The shares of each Portfolio are divided into "Initial Shares" and "Select
Shares". Generally, only Initial Shares of a Portfolio may be purchased
directly. Select Shares can only be purchased directly by certain persons and in
certain situations. (See "ADDITIONAL INVESTMENT INFORMATION".) Initial Shares of
a Portfolio automatically convert to Select Shares of the same Portfolio eight
years after issuance of the Initial Shares. Initial Shares of a Portfolio pay
distribution fees based upon average daily net assets of that Portfolio. Select
Shares of a Portfolio do not pay distribution fees. The purpose of the
conversion feature is to relieve shareholders of the distribution fees when
shares have been outstanding long enough for the Fund's distributor to have been
compensated for distribution related expenses. Shares purchased through
reinvestment of dividends on Initial Shares will be converted to Select Shares
on a pro rata basis as Initial Shares are converted. Each share of a Portfolio,
whether Initial or Select, represents an identical interest in the investment
portfolio of that Portfolio and has the same rights, except Select Shares (i) do
not pay the distribution fees, (ii) are not subject to the CDSC, (iii) have a
lower expense ratio, (iv) do not vote on the adoption of or changes to the
Fund's Distribution Plan, and (v) have no conversion feature. As a result,
Select Shares pay higher dividends than Initial Shares. (See "ADDITIONAL
INVESTMENT INFORMATION -- Conversion Feature".)
SHAREHOLDER SERVICES
Services offered include mail or telephone purchase, exchange and redemption; an
automatic investment plan; and automatic dividend reinvestment. The Portfolios
also offer an easy and effective way for sponsors and participants of employee
retirement plans to invest in a professionally managed pool of securities. There
may be further restrictions and/or fees for transactions placed through employee
retirement plans. (See "SHAREHOLDER SERVICES" and "RETIREMENT PLANS".)
DIVIDENDS AND DISTRIBUTIONS
The policy of the Fund is to distribute substantially all of the net investment
income of each Portfolio, if any, on a regular basis. Any dividends from the net
income of the Fixed Income and Short-Term Government Portfolios normally will be
distributed monthly, and any dividends from the net income of the Total Return
and Equity Portfolios will normally be distributed quarterly. Dividends paid by
Initial and Select Shares, to the extent paid, are calculated in the same
manner, at the same time, on the same day, and will be in the same amounts,
except to the extent that Initial Shares will bear Rule 12b-1 Plan distribution
fees and any Rule 12b-1 Plan meeting expenses. Any net realized capital gains
for each of the Portfolios will be distributed at least annually. (See
"DISTRIBUTIONS AND TAXES".)
EXPENSES
The following information is provided in order to assist you in understanding
the various costs and expenses that, as an investor in the Fund, you will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Initial Select
Shares Shares
------ ------
Maximum Sales Charge Imposed on Purchases....... None None
Maximum Sales Charge on Reinvested Dividends.... None None
Exchange Fee.................................... None None
Redemption Fee.................................. None None
Maximum Contingent Deferred Sales Charge
(as a percent of original purchase price)...... Per Following Table None
Year of Redemption
After Purchase
--------------
First................................... 4.0%
Second.................................. 3.7%
Third................................... 3.4%
Fourth.................................. 3.1%
Fifth................................... 2.8%
Sixth................................... 2.5%
Seventh and Following................... 0%
There is a $10 charge associated with final redemptions from retirement plan
accounts and redemptions payable by wire transfer. The CDSC may be waived in
certain situations. (See "HOW TO REDEEM SHARES".)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
INITIAL SHARES
TOTAL
MANAGEMENT 12B-1 OTHER OPERATING
PORTFOLIO EXPENSES FEES FEES EXPENSES EXPENSES
- --------------------------------------------------------------------------------
Equity Portfolio 0.53% 0.50% 0.54% 1.57%
Total Return Portfolio 0.53% 0.50% 0.54% 1.57%
Fixed Income Portfolio 0.53% 0.50% 0.49% 1.52%
Short-Term Government Portfolio 0.53% 0.50% 0.49% 1.52%
SELECT SHARES
TOTAL
MANAGEMENT 12B-1 OTHER OPERATING
PORTFOLIO FEES FEES EXPENSES EXPENSES
- --------------------------------------------------------------------------------
Equity Portfolio 0.53% None 0.54% 1.07%
Total Return Portfolio 0.53% None 0.54% 1.07%
Fixed Income Portfolio 0.53% None 0.49% 1.02%
Short-Term Government Portfolio 0.53% None 0.50% 1.03%
Under the Fund Accounting Agreement, IMG has agreed to limit its annual fees for
such services to the lesser of .15 percent of the average annual net assets for
each of the Equity Portfolio and Total Return Portfolio or $24,000 each and .10
percent of the average annual net assets of each of the other Portfolios or
$24,000 each. Fund Accounting Expenses are included in other expenses in the
above table.
From time to time, the Fund's Advisor and/or Sub-Advisor, may also voluntarily
waive the management fee and/or absorb certain expenses for a Portfolio.
Investors should be aware that the above table is not intended to reflect in
detail the fees and expenses associated with an investment in the Fund. The
table has been provided only to assist investors in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, investors should refer to the appropriate sections of the
Prospectus.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amount of expenses on a $1,000
investment assuming (1) a 5 percent annual rate of return and (2) redemption at
the end of each time period. Only Initial Shares incur a CDSC at redemption
which declines to zero after six years.
1 year 3 years 5 years 10 years1
---------------------------------------
Initial Shares:
Equity Portfolio $56 $84 $114 $173
Total Return Portfolio $56 $84 $114 $173
Fixed Income Portfolio $55 $82 $111 $168
Short-Term Government Portfolio $55 $82 $111 $168
1 year 3 years 5 years 10 years
--------------------------------------
Select Shares:
Equity Portfolio $11 $34 $59 $131
Total Return Portfolio $11 $34 $59 $131
Fixed Income Portfolio $10 $32 $56 $125
Short-Term Government Portfolio $11 $33 $57 $126
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of each period.
1 year 3 years 5 years 10 years1
---------------------------------------
Initial Shares
Equity Portfolio $16 $50 $86 $173
Total Return Portfolio $16 $50 $86 $173
Fixed Income Portfolio $15 $48 $83 $168
Short-Term Government Portfolio $15 $48 $83 $168
1 year 3 years 5 years 10 years
--------------------------------------
Select Shares:
Equity Portfolio $11 $34 $59 $131
Total Return Portfolio $11 $34 $59 $131
Fixed Income Portfolio $10 $32 $56 $125
Short-Term Government Portfolio $11 $33 $57 $126
1Eight years after purchase, Initial Shares will be automatically converted into
Select Shares. The example above assumes conversion of Initial Shares at the end
of year eight. (See "ADDITIONAL INVESTMENT INFORMATION -- Conversion Feature".)
As a result, years nine and ten reflect Select Share expenses. The conversion
will constitute a tax-free exchange for federal income tax purposes. (See
"DISTRIBUTIONS AND TAXES.")
PLEASE REMEMBER THAT THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF
PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN. FOR MORE COMPLETE DESCRIPTIONS OF THE EXPENSES OF EACH PORTFOLIO,
PLEASE SEE THE FOLLOWING SECTIONS: "HOW TO REDEEM SHARES"; AND "MANAGEMENT".
FINANCIAL HIGHLIGHTS
The tables on the following pages give you each Portfolio's financial history.
The information has been audited by KPMG Peat Marwick LLP, independent auditors,
whose audit report on the financial statement appears in the Fund's annual
report. A Statement of Additional Information, as well as a copy of the Annual
Report, which contains further information regarding the Fund and each
Portfolio's performance, may be obtained from the Fund upon request to the
address and telephone number on page 3 of this Prospectus at no charge. The
tables on the following pages use the Fund's fiscal year (which ends March 31)
and express investment and distribution information for a single Initial and
Select Share as indicated outstanding throughout each period.
PER SHARE DATA AND RATIOS FOR AN INITIAL SHARE OUTSTANDING THROUGH EACH PERIOD
ENDING MARCH 31.
<TABLE>
<CAPTION>
SHORT-TERM
EQUITY TOTAL RETURN FIXED INCOME GOVERNMENT
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
1996 1995 1994* 1996 1995 1994* 1996 1995 1994* 1996 1995 1994**
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.615 $10.280 $10.000 $10.113 $10.131 $10.000 $ 9.654 $ 9.769 $10.000 $ 9.649 $ 9.765 $10.000
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.305 0.227 0.067 0.454 0.364 0.129 0.571 0.534 0.323 0.522 0.452 0.211
Net Gains or Losses on
Securities (both realized
and unrealized) 2.214 0.758 0.353 1.263 0.233 0.223 0.417 (0.092) (0.131) 0.172 (0.098) (0.248)
----------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 2.519 0.985 0.420 1.717 0.597 0.352 0.988 0.442 0.192 0.693 0.354 (0.037)
----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends (from Net
Investment Income) 0.301 0.234 0.113 0.446 0.364 0.192 0.560 0.547 0.373 0.526 0.460 0.188
Distributions (from
Capital Gains 0.274 0.416 0.270 0.098 0.251 0.029 0.000 0.010 0.050 0.000 0.010 0.010
----------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS 0.575 0.650 0.140 0.544 0.615 0.221 0.560 0.557 0.423 0.526 0.470 0.198
----------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $12.559 $10.615 $10.280 $11.285 $10.113 $10.131 $10.081 $ 9.654 $ 9.769 $ 9.816 $ 9.649 $ 9.765
==========================================================================================================
Total Return 23.90% 9.78% 3.59% 17.12% 6.16% 2.72% 10.28% 4.59% 1.23% 7.27% 3.73% -0.10%
Net Assets,
End of Period
(000 omitted) $ 6,372 $ 4,393 $ 388 $ 3,436 $ 3,728 $ 1,081 $ 1,855 $ 1,289 $ 181 $ 238 $ 212 $ 62
Ratio of Expenses to
Average Net Assets 1.57% 1.57% 1.52% 1.57% 1.57% 1.52% 1.52% 1.52% 1.47% 1.52% 1.52% 1.48%
Ratio of Net Income
to Average Net Assets 2.56% 2.31% 1.28% 4.13% 4.04% 2.25% 5.52% 6.10% 4.21% 5.26% 4.87% 3.50%
Portfolio Turnover Rate 35.91% 55.19% 12.52% 52.11% 67.00% 38.74% 57.15% 60.36% 70.83% 145.86% 79.19% 69.79%
Average Commission
Rate Paid 0.27% 0.00% 0.00% 0.27% 0.00% 0.00% -- -- -- -- -- --
* From inception of the Fund May 20, 1993.
** First purchase of Initial Shares occurred subsequent to May 20, 1993.
Note for all Portfolios: Ratios have been determined on an annualized basis.
Total return is not annualized for periods less than a full year and does not
reflect the effect of any deferred sales charges.
<PAGE>
PER SHARE DATA AND RATIOS FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH PERIOD
ENDING MARCH 31.
<CAPTION>
EQUITY TOTAL RETURN
PORTFOLIO PORTFOLIO
1996 1995 1994* 1996 1995 1994*
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.603 $ 10.266 $ 10.000 $ 9.932 $ 9.966 $ 10.000
---------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.359 0.271 0.146 0.500 0.418 0.225
Net Gains or Losses on Securities
(both realized and unrealized) 2.219 0.750 0.291 1.241 0.215 (0.007)
---------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.578 1.021 0.437 1.741 0.633 0.218
---------------------------------------------------------
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) 0.359 0.268 0.144 0.500 0.416 0.223
Distributions (from Capital Gains) 0.274 0.416 0.027 0.098 0.251 0.029
---------------------------------------------------------
TOTAL DISTRIBUTIONS 0.633 0.684 0.171 0.598 0.667 0.252
---------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.548 $ 10.603 $ 10.266 $ 11.075 $ 9.932 $ 9.966
==========================================================
Total Return 24.52% 10.31% 4.38% 17.70% 6.69% 2.18%
Net Assets, End of Period (000 omitted) $ 18,083 $ 13,207 $ 10,602 $ 17,528 $ 13,983 $ 12,459
Ratio of Expenses to Average Net Assets 1.07% 1.07% 1.03% 1.07% 1.07% 1.03%
Ratio of Net Income to Average Net Assets 3.06% 2.68% 1.76% 4.63% 4.30% 2.63%
Portfolio Turnover Rate 35.91% 55.19% 12.52% 52.11% 67.00% 38.74%
Average Commission Rate Paid 0.27% 0.00% 0.00% 0.27% 0.00% 0.00%
*From inception of the Fund May 20, 1993.
Note for all Portfolios: Ratios have been determined on an annualized basis.
Total return is not annualized for periods less than a full year and does not
reflect the effect of any deferred sales charges.
<PAGE>
Per share data and ratios for a Select Share outstanding throughout each period
ending March 31.
<CAPTION>
FIXED INCOME SHORT-TERM GOVERNMENT
PORTFOLIO PORTFOLIO
1996 1995 1994* 1996 1995 1994*
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.566 $ 9.682 $ 10.000 $ 9.776 $ 9.886 $ 10.000
----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.611 0.580 0.414 0.578 0.507 0.309
Net Gains or Losses on Securities
(both realized and unrealized) 0.419 (0.109) (0.269) 0.175 (0.101) (0.105)
----------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.030 0.471 0.145 0.753 0.406 0.204
----------------------------------------------------------
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) 0.609 0.577 0.413 0.574 0.506 0.308
Distributions (from Capital Gains) 0.000 0.010 0.050 0.000 0.010 0.010
----------------------------------------------------------
TOTAL DISTRIBUTIONS 0.609 0.587 0.463 0.574 0.516 0.318
----------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.987 $ 9.566 $ 9.682 $ 9.954 $ 9.776 $ 9.886
==========================================================
Total Return 10.84% 5.12% 1.20% 7.81% 4.25% 2.05%
Net Assets, End of Period (000 omitted) $ 7,707 $ 6,704 $ 6,261 $ 4,283 $ 3,781 $ 3,530
Ratio of Expenses to Average Net Assets 1.02% 1.02% 0.98% 1.03% 1.02% 0.98%
Ratio of Net Income to Average Net Assets 6.03% 6.14% 4.73% 5.76% 5.21% 3.62%
Portfolio Turnover Rate 57.15% 60.36% 70.83% 145.86% 79.19% 69.79%
*From inception of the Fund May 20, 1993.
Note for all Portfolios: Ratios have been determined on an annualized basis.
Total return is not annualized for periods less than a full year and does not
reflect the effect of any deferred sales charges.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLicies
The descriptions of the Portfolios' investment objectives and policies that
follow are designed to help you choose the Portfolio that best fits your
investment objective. You may want to pursue more than one objective by
investing in more than one of the Portfolios. Each Portfolio's investment
objectives are discussed below in connection with the Portfolio's investment
policies.
Each Portfolio may invest in a diversified portfolio of securities without
regard to criteria, such as size, exchange listing, earnings history or other
objective factors. The Sub-Advisor will be limited by its best judgment as to
what will help achieve each Portfolio's investment objective and the policies
and restrictions described below. Because of the risks inherent in all
investments there can be no assurance that the objectives of these Portfolios
will be met.
EQUITY SECURITIES
Subject to certain restrictions explained more fully below, the Equity and Total
Return Portfolios may invest in "Equity Securities". Equity Securities consist
of (i) common stocks, (ii) preferred stocks, (iii) warrants to purchase common
stocks or preferred stocks, (iv) securities convertible to common or preferred
stocks, such as convertible bonds and debentures, (v) shares of publicly traded
limited partnerships, and (vi) foreign securities -- equity securities issued by
foreign issuers traded either in foreign markets or in domestic markets through
depository receipts.
FIXED INCOME SECURITIES
Each Portfolio may invest in the fixed income investments described below
(collectively "Fixed Income Securities"). A Portfolio's authority to invest in
certain types of Fixed Income Securities may be restricted or subject to
objective investment criteria. For complete information on these restrictions
see the description of each Portfolio's investment objectives and policies in
this section.
Fixed Income Securities consist of (i) corporate debt securities, including
bonds, debentures, and notes; (ii) bank obligations, such as certificates of
deposit, bankers' acceptances, and time deposits of domestic banks, foreign
branches and subsidiaries of domestic banks, and domestic and foreign branches
of foreign banks and domestic savings and loan associations (in amounts in
excess of the insurance coverage (currently $100,000 per account) provided by
the Federal Deposit Insurance Corporation); (iii) commercial paper; (iv)
variable and floating rate securities (including variable account master demand
notes); (v) repurchase agreements; (vi) illiquid debt securities (such as
private placements, restricted securities and repurchase agreements maturing in
more than seven days); (vii) foreign securities -- debt securities issued by
foreign issuers traded either in foreign markets or in domestic markets through
depository receipts; (viii) convertible securities -- debt securities of
corporations convertible into or exchangeable for equity securities or debt
securities that carry with them the right to acquire equity securities, as
evidenced by warrants attached to such securities, or acquired as part of units
of the securities; (ix) preferred stocks -- securities that represent an
ownership interest in a corporation and that give the owner a prior claim over
common stock on the company's earnings or assets; (x) U.S. government
securities, (xi) mortgage-backed securities, collateralized mortgage obligations
and similar securities (including corporate asset-backed securities), and (xii)
when issued or delayed delivery securities.
Fixed Income Securities consist of fixed rate securities and variable- or
floating-rate securities (income producing debt instruments with interest rates
which change at stated intervals or in relation to a specified interest rate
index). (See "IMPLEMENTATION OF POLICIES AND RISKS -- Variable or Floating Rate
Securities".)
Corporate debt securities, including bonds, debentures, and notes, may be
unsecured or secured by the issuer's assets. They may be senior or subordinate
in right of payment to other creditors of the issuer and may be listed on a
national securities exchange or traded in the over-the-counter market. Each
Portfolio may invest in the obligations of banks and savings and loan
associations. However, a Portfolio will only invest in obligations of banks and
savings and loan associations which present minimal credit risks.
"U.S. government securities" include bills, notes, bonds, and other debt
securities differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or issued or guaranteed by U.S.
government agencies or instrumentalities. U.S. government agency securities
include securities issued by (a) the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States; (b)
the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, whose securities are
supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, the Interamerican Development Bank, and the International
Bank for Reconstruction and Development, whose securities are supported only by
the credit of such agencies. While the U.S. government provides financial
support to such U.S. government sponsored agencies or instrumentalities, no
assurance can be given that it always will do so. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of their
securities and consequently, the value of such securities may fluctuate.
Fixed income securities in which the Portfolios may invest will primarily be
"Investment-Grade Fixed Income Securities." Investment-Grade Fixed Income
Securities are considered to be (i) corporate debt securities rated in the four
highest categories by Moody's Investors Service ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc. ("D&P"), Fitch Investors Services, Inc.
("Fitch"), or of similar quality as determined by another Nationally Recognized
Statistical Rating Organization ("NRSRO") as that term is used in applicable
rules of the Securities and Exchange Commission; (ii) U.S. government securities
(as defined above); bank obligations (certificates of deposit, bankers'
acceptances, and time deposits) issued by banks with a long-term CD rating in
one of the four highest categories of an NRSRO, with respect to obligations
purchased by a Portfolio and maturing in more than one year (e.g., BBB or higher
by S&P), and in one of the three highest categories, with respect to obligations
purchased by a Portfolio and maturing in one year or less (e.g., A-3 or higher
by S&P); (iii) preferred stock rated in one of the four highest categories by an
NRSRO (e.g., BBB or higher by S&P); (iv) commercial paper rated in the two
highest categories by S&P, Moody's, D&P, Fitch or another NRSRO (e.g., A-2 or
higher by S&P); (v) repurchase agreements involving these securities; and (vi)
unrated securities which, in the opinion of the Sub-Advisor, are of a quality
comparable to the foregoing. See Appendix B of the Statement of Additional
Information for descriptions of the rating services' bond ratings.
A Portfolio's average maturity represents an average based on the stated
maturity dates of the portfolio securities, except that (i) variable-rate
securities are deemed to mature at the next interest rate adjustment date, (ii)
debt securities with put features are deemed to mature at the next put exercise
date, and (iii) the maturity of mortgage-backed securities is determined on an
"expected life" basis.
The investment objective for each Portfolio is described below. Because of the
risks involved in all investments there can, of course, be no assurance that the
objectives of the Portfolio will be met. Except for the investment objectives of
each Portfolio, and certain additional limitations listed under "INVESTMENT
RESTRICTIONS" and in the Statement of Additional Information, the investment
policies of each Portfolio are not fundamental. Accordingly, they may be changed
by the Board of Directors of the Fund without an affirmative vote of a majority
of each Portfolio's outstanding voting shares.
EQUITY PORTFOLIO
The Equity Portfolio's investment objective is to seek capital appreciation in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration and any income realized on the
Portfolio's investments, therefore, will be incidental to the Portfolio's
objective. The Equity Portfolio is intended to be an investment vehicle for that
part of an investor's capital which can appropriately be exposed to above
average risk in anticipation of greater rewards. It is not designed to offer a
complete or balanced investment program suitable for all investors.
The Equity Portfolio will seek to achieve its investment objective by investing
primarily (at least 65 percent and up to 100 percent of its assets under normal
conditions) in Equity Securities. However, the percentage of the Equity
Portfolio's assets that may be invested in Equity Securities, Fixed Income
Securities and/or short-term cash equivalents at any time is not fixed. For
temporary defensive purposes, when market conditions dictate a more conservative
approach to investing, the Portfolio may be up to 100 percent invested in cash
equivalents.
Investments will be selected principally through a "top down" approach, under
which the macroeconomic environment is first analyzed in two key areas: the
market's valuation risk (based on fundamental valuation measures such as
price/earnings, price/book and price/dividend ratios), and the underlying
inflation environment. The analysis of these two factors strongly affects the
Portfolio's desired equity/cash mix and degree of aggressiveness.
This "top down" analysis further suggests certain market sectors for emphasis or
deemphasis based upon their correlation to the major market forces examined.
However, sector exposures are monitored closely and excessive concentrations are
avoided to reduce risk.
Individual stocks are selected on the basis of an evaluation of factors which
indicate the fundamental investment value of the security, such as sustainable
earning's yield, dividend yield, cash flow, price/book value, and price/sales
ratio. The primary goal is to select securities which are fundamentally
undervalued. This approach favors financially strong companies with ample
liquidity and debt capacity.
The Portfolio will also invest in "special situations" from time to time, when
the securities of a particular company exhibit independent signs of
undervaluation. A "special situation" arises when, in the opinion of the
Sub-Advisor, the securities of a particular company will be accorded market
recognition at an appreciated value solely by reason of a development
particularly or uniquely applicable to that company and regardless of general
business conditions or movements of the stock market as a whole. Developments
creating special situations might involve, among others, the following:
"workouts" such as liquidations, reorganizations, recapitalizations or mergers;
material litigation; technological breakthroughs; and new management or
management policies. Special situations may involve a different type of risk
than is inherent in ordinary investment securities; that is, a risk involving
the likelihood or timing of specific events rather than general economic, market
or industry risks. As with any securities transaction, investment in special
situations may involve the risk of decline or total loss of the value of the
investment. However, the Sub-Advisor will not invest in special situations
unless, in its judgment, the risk involved is reasonable in light of the
Portfolio's investment objective, the amount to be invested and the expected
investment results.
Although the Portfolio's assets normally will be invested primarily in Equity
Securities, the Portfolio may hold Fixed Income Securities (as defined above),
and cash equivalents, when a defensive position is warranted or so that the
Portfolio may receive a return on its idle cash. A defensive position may occur
when investment opportunities with desirable risk/reward characteristics are
unavailable. While the Portfolio maintains a defensive position, investment
income will increase and may constitute a large portion of the return on the
Portfolio, and the Portfolio probably will not participate in market advances or
declines to the extent it would if it were fully invested. However, except when
the Advisor or Sub-Advisor determines that adverse market conditions warrant a
temporary defensive position, the Portfolio will limit the investments in Fixed
Income Securities to 35 percent of its total assets.
Since the Equity Portfolio's assets will normally consist primarily of common
stocks, the Equity Portfolio's net asset value may be subject to greater
principal fluctuation than a Portfolio containing a substantial amount of fixed
income securities. (See "IMPLEMENTATION OF POLICIES AND RISKS -- Portfolio
Turnover".)
TOTAL RETURN PORTFOLIO
The investment objective of the Total Return Portfolio is a high total return
from capital appreciation and current income, consistent with preservation of
capital. The Total Return Portfolio is intended for those investors seeking to
balance the potential appreciation of common stocks with the income and
principal stability of bonds over the long term. The Portfolio's investment in
common stocks is intended to provide sufficient capital growth to offset the
erosive effects of inflation. The balanced approach to achieving a combination
of growth, income and stability is a strategy used by many large pension funds
because of its conservative long-term focus. For retirement or other long-term
investment dollars, the Portfolio offers a well balanced investment program
which seeks to combine attractive returns with the benefits of broad
diversification.
The Portfolio attempts to achieve its objective by investing in Equity
Securities and Fixed Income Securities (including short-term cash equivalents).
Equity Securities may be either growth- or income-oriented. Growth-oriented
Equity Securities are those which the Sub-Advisor believes offer primarily
capital appreciation potential. Income-oriented Equity Securities are those
which the Sub-Advisor believes offer higher income potential through the payment
of dividends, but may also include a potential for capital appreciation.
The Total Return Portfolio's assets are allocated using what is sometimes
referred to as a "top down" approach. (See "Equity Portfolio" above.)
Under normal investing conditions, the assets of the Total Return Portfolio are
allocated between the asset groups within the following parameters: 35
percent-65 percent in Equity Securities, and 35 percent-65 percent in Fixed
Income Securities. However, the percentage of assets the Portfolio will invest
in Equity or Fixed Income Securities at any particular time will depend on the
Sub-Advisor's economic outlook. During favorable investment periods, the Total
Return Portfolio seeks to generate real (inflation plus) growth. During
uncertain periods, income and capital preservation are emphasized. At times, the
Portfolio may emphasize interest income by investing in Fixed Income Securities,
both short- and long-term. It may also purchase intermediate- or long-term Fixed
Income Securities (those having maturities of more than five years) with a view
toward capital appreciation.
FIXED INCOME PORTFOLIO
The investment objective of the Fixed Income Portfolio is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk. The Fixed Income Portfolio is designed for the investor whose
primary goal is a level of income higher than money market or short-and
intermediate-term bond funds usually provide. Unlike a money market fund, the
Portfolio's net asset value will rise and fall in inverse relationship to
changes in interest rates.
The Portfolio invests at least 75 percent of its total assets in Fixed Income
Securities (including short-term cash equivalents). Investments will be made
generally upon a long-term basis, but the Portfolio may make short-term
investments from time to time. Longer maturities typically provide better yields
but will subject the Portfolio to a greater possibility of substantial changes
in the values of its securities as interest rates change.
To meet the objectives of the Portfolio and to seek additional stability of
principal, the Portfolio will be managed to adjust the average maturity based on
the interest rate outlook. During periods of rising interest rates and falling
prices, a shorter average maturity may be adopted to cushion the effect of price
declines on the Portfolio's net asset value. When rates are falling and prices
are rising, a longer average maturity for the Portfolio may be considered.
Under normal circumstances, the Portfolio will invest at least 75 percent of its
total assets in Fixed Income Securities which are considered to be of Investment
Grade. Up to 25 percent of the Portfolio's total assets could be invested in
below-Investment Grade securities (commonly known as "junk bonds"). Currently,
the Portfolio does not expect to invest in (i) securities rated lower than "Ba"
by Moody's or "BB" by S&P, Fitch, D&P, or of similar quality by another NRSRO;
and (ii) unrated debt securities of similar quality. Securities of "BBB/Baa" or
lower quality may have speculative characteristics and poor credit protection.
The ratings services' descriptions of the below-Investment Grade securities
ratings categories in which the Portfolio may invest are as follows:
Moody's Investors Service, Inc. Bond Ratings -- Ba: Bonds which are rated "Ba"
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
Standard and Poor's Corporation Bond Ratings -- BB, B, CCC, CC: Debt rated "BB",
"B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Fitch Investors Services, Inc. Bond Ratings -- BB: Bonds which are rated "BB"
are considered speculative and of low investment grade. The obligor's ability to
pay interest and repay principal is not strong and is considered likely to be
affected over time by adverse economic changes.
Duff & Phelps, Inc. Long Term Ratings -- BB+, BB, BB-: Bonds which are rated
"BB+", "BB", and "BB-", are below-investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
See "IMPLEMENTATION OF POLICIES AND RISKS -- Lower Rated Securities" for
information concerning risks associated with investing in below-investment grade
bonds.
The Portfolio's assets may be invested in all types of Fixed Income Securities
in any proportion, including corporate debt securities, bank obligations,
commercial paper, repurchase agreements, private placements, foreign securities,
convertible securities, preferred stocks, U.S. government securities, and
mortgage-backed and similar securities. (See "Fixed Income Securities" above.)
Common stocks acquired through exercise of conversion rights or warrants or
acceptance of exchange or similar offers will not be retained by the Portfolio,
but will be disposed of in an orderly fashion consistent with the best
obtainable price. There is no maximum or anticipated average maturity for the
Fixed Income Portfolio. The maturities selected will vary depending on the
interest rate outlook.
SHORT-TERM GOVERNMENT PORTFOLIO
The investment objective of the Short-Term Government Portfolio is to provide as
high a level of current income as is consistent with minimum fluctuation in
principal value. The Short-Term Government Portfolio is designed primarily for
investors who seek higher returns than money market funds generally offer and
who are willing to accept some risk of principal fluctuation to achieve that
objective.
To achieve its objective, the Portfolio invests primarily in U.S. government
securities. Under normal circumstances the Portfolio will invest at least 75
percent of its total assets in U.S. government securities, including repurchase
agreements secured by U.S. government securities. The balance of its total
assets may be invested in other Investment-Grade Fixed Income Securities.
The Short-Term Government Portfolio seeks to maintain a dollar-weighted average
portfolio maturity of between one and three years.
The Short-Term Government Portfolio seeks higher yields than money market mutual
funds generally offer by investing in a combination of securities with longer
maturities than money market funds may invest in.
The longer a security's maturity, typically the greater its price volatility.
Consequently, unlike a money fund which seeks to maintain a stable net asset
value, the Short-Term Government Portfolio's share price will fluctuate and as a
result may not be able to provide the investor a dollar-for-dollar return of the
money invested. However, the Portfolio will be actively managed to attempt to
minimize variations in the net asset value per share. The Short-Term Government
Portfolio is not an appropriate investment for those whose primary objective is
absolute principal stability.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to certain
restrictions described herein), the Portfolios may invest in some or all of the
following securities and employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of these securities and investment techniques and their
associated risks is contained in the Statement of Additional Information.
REPURCHASE OBLIGATIONS
Each Portfolio may enter into repurchase agreements with member banks of the
Federal Reserve System or dealers registered under the Securities and Exchange
Act of 1934. In a repurchase agreement, the Portfolio buys a security at one
price and, at the time of sale, the seller agrees to repurchase the obligation
at an agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Under each repurchase agreement, the selling institution
will be required to maintain the value of the securities subject to the
repurchase agreement at not less than the repurchase price plus accrued
interest. Repurchase agreements could involve certain risks in the event of
default or insolvency of the other party to the agreement, including possible
delays or restrictions upon a Portfolio's ability to dispose of the underlying
securities. The Portfolios may not enter into repurchase agreements if, as a
result, more than 10 percent of a Portfolio's total asset value at the time of
the transaction would be invested in the aggregate in repurchase agreements
maturing in more than seven days and other securities which are not readily
marketable. (See "Illiquid Securities" below.)
FIXED INCOME SECURITIES
The net asset value of the shares of open-end investment companies, such as the
Fixed Income Portfolio and Short-Term Government Portfolio, which invest in
Fixed Income Securities, changes as the general levels of interest rates
fluctuate. When interest rates decline, the value of a fixed income portfolio
can be expected to rise. Conversely, when interest rates rise, the value of a
fixed income portfolio can be expected to decline.
Although changes in the value of securities subsequent to their acquisition are
reflected in the net asset value of shares of a Portfolio, such changes will not
affect the income received by that Portfolio from such securities. However, the
dividends paid by a Portfolio, if any, will increase or decrease in relation to
the income received by that Portfolio from its investments, which would in any
case be reduced by that Portfolio's expenses before it is distributed to
shareholders.
When and if available, the Portfolios may purchase Fixed Income Securities at a
discount from face value. However, the Portfolios do not intend to hold such
securities to maturity for the purpose of achieving potential capital
appreciation, unless current yields on these securities remain attractive.
LOWER RATED SECURITIES
Investments in below-Investment Grade Fixed Income Securities by the Fixed
Income Portfolio, while generally providing greater income and opportunity for
gain than investments in higher rated securities, usually entail greater risk of
principal and income (including the possibility of default or bankruptcy of the
issuers of such securities), and involve greater volatility of price (especially
during periods of economic uncertainty or change) than investments in higher
rated securities and because yields may vary over time, no specific level of
income can ever be assured. In particular, securities rated lower than "Baa" by
Moody's or "BBB" by S&P or comparable securities either rated by another NRSRO
or unrated (commonly known as "junk bonds") are considered speculative. These
lower rated, higher yielding fixed income securities generally tend to reflect
economic changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have under certain circumstances caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on the Portfolio's lower rated, high yielding fixed
income securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility of
default or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, the Portfolio may continue to earn the same level
of interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Portfolio's yield despite the actual
loss of principal.
The prices for these securities may be affected by legislative and regulatory
developments. For example, federal rules require that savings and loan
associations gradually reduce their holdings of high-yield securities. An effect
of such legislation may be to depress the prices of outstanding lower rated,
high yielding fixed income securities.
Changes in the value of securities subsequent to their acquisition will not
affect cash income or yield to maturity of the Portfolio, but will be reflected
in the net asset value of shares of the Portfolio. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit quality.
Therefore, the Sub-Advisor's judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities, and it also may be more difficult during times of certain adverse
market conditions to sell these lower rated securities at their fair market
value to meet redemption requests or to respond to changes in the market.
As noted above, the Portfolio may invest up to 25 percent of its total assets in
fixed income securities that are rated lower than Investment Grade. For the year
ended March 31, 1996, the Portfolio had not invested in any income securities
that are rated lower than Investment Grade. See "Fixed Income Securities" above.
To the extent the Portfolio invests in these lower rated fixed income
securities, the achievement of its investment objective may be more dependent on
the Sub-Advisor's own credit analysis than in the case of a fund investing in
higher quality bonds. While the Sub-Advisor will refer to ratings issued by
established ratings agencies, it is not a policy of the Portfolio to rely
exclusively on ratings issued by these agencies, but rather to supplement such
ratings with the Sub-Advisor's own independent and ongoing review of credit
quality.
The Portfolios may also invest in fixed income securities rated in the fourth
highest category by one or more NRSROs (e.g., "Baa" by Moody's), and comparable
unrated securities. These securities, while normally exhibiting adequate
protection parameters, may have speculative characteristics and changes in
economic conditions and other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than in the case of
higher grade fixed income securities.
For further discussion, see "INVESTMENT POLICIES AND TECHNIQUES -- Low-Rated and
Comparable Unrated Fixed Income Securities" in the Statement of Additional
Information.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES
The Fund has adopted a nonfundamental investment policy regarding investing
defensively during abnormal market conditions. During periods of abnormal market
conditions when the Sub-Advisor believes that investing for defensive purposes
is appropriate, a large portion or all of the assets of one or more of the
Portfolios may be invested in cash or cash equivalents including, but not
limited to, obligations of banks (including certificates of deposit, bankers'
acceptances and repurchase agreements), high quality commercial paper and
short-term notes (rated in the two highest categories by S&P and/or Moody's or
any other NRSRO or determined to be of comparable quality by the Sub-Advisor),
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities and related repurchase agreements, without regard to the
Portfolio's fundamental and nonfundamental investment policies and objectives.
ILLIQUID SECURITIES
Each Portfolio may invest up to 10 percent of its net assets in illiquid
securities. For purposes of this restriction, illiquid securities include
restricted securities (securities the disposition of which is restricted under
the federal securities laws, such as private placements), other securities
without readily available market quotations (including options traded in the
over-the-counter market, and interest-only and principal-only stripped
mortgage-backed securities), and repurchase agreements maturing in more than
seven days. Risks associated with restricted securities include the potential
obligation to pay all or part of the registration expenses in order to sell
certain restricted securities. A considerable period of time may elapse between
the time of the decision to sell a security and the time a Portfolio may be
permitted to sell it under an effective registration statement. If, during such
a period, adverse conditions were to develop, the Portfolio might obtain a less
favorable price than prevailing when it decided to sell. (See "Futures and
Options Activities" and "Stripped Mortgage-Backed Securities" below.) A complete
description of these investment practices and their associated risks is
contained in the Statement of Additional Information.
FUTURES AND OPTIONS ACTIVITIES
The Portfolios may, subject to certain restrictions, invest in interest rate
futures contracts and index futures contracts. Interest rate futures contracts
are contracts for the future delivery of debt securities, such as U.S. Treasury
bonds, U.S. Treasury bills, U.S. Treasury notes, Government National Mortgage
Association modified pass-through mortgage-backed securities, 90-day commercial
paper, bank certificates of deposit, and Eurodollar certificates of deposit.
Index futures contracts are contracts in which the parties agree to take or make
delivery of an amount of cash equal to the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the futures contract was originally written.
The Portfolios may also (i) purchase covered spread options which give each
Portfolio the right to sell a security that it owns at a fixed dollar spread or
yield spread in relationship to another security that the Portfolio does not
own, but which is used as a benchmark (up to 5 percent of the Portfolio's total
net assets); (ii) write call options and purchase put options on interest rate
and index futures contracts; (iii) write covered call options on its portfolio
securities and purchase covered put options on its portfolio securities; and
(iv) enter into closing transactions with respect to these options. The
Portfolios may enter into futures transactions and options on futures contracts
and portfolio securities only for traditional hedging purposes. These investment
practices will primarily be used to attempt to minimize adverse principal or
price fluctuations and unfavorable fluctuations in interest rates. Premiums may
be generated through the use of call options. However, the premiums which may be
generated are not the primary reason for writing covered call options. A
complete description of futures and options investment practices and their
associated risks is contained in the Statement of Additional Information. Each
Portfolio's transactions in futures, options on futures, and options on
portfolio securities are subject to certain restrictions. (See "INVESTMENT
RESTRICTIONS.")
WARRANTS
The Equity and Total Return Portfolios may invest in warrants; however, not more
than 5 percent of each Portfolio's total assets (at the time of purchase) will
be invested in warrants other than warrants acquired in units or attached to
other securities. Of such 5 percent, not more than 2 percent of total assets at
the time of purchase may be invested in warrants that are not listed on the New
York or American Stock Exchange. (See "INVESTMENT POLICIES AND TECHNIQUES" in
the Statement of Additional Information.)
VARIABLE OR FLOATING RATE SECURITIES
Each Portfolio may invest in Fixed Income securities which offer a variable or
floating rate of interest. Variable rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semiannually, etc.). Floating rate securities provide for automatic adjustment
of the interest rate whenever some specified interest rate index changes. The
interest rate on variable or floating rate securities is ordinarily determined
by reference to or is a percentage of a bank's prime rate, the 90-day U.S.
Treasury bill rate, the rate of return on commercial paper or bank certificates
of deposit, an index of short-term interest rates, or some other objective
measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on seven days' notice; in other
cases, the demand feature is exercisable at any time on 30 days' notice or on
similar notice at intervals of not more than one year. Securities with a demand
feature exercisable over a period in excess of seven days are considered to be
illiquid. (See "Illiquid Securities" above.) Some securities which do not have
variable or floating interest rates may be accompanied by puts producing similar
results and price characteristics.
Variable rate demand notes include master demand notes which are obligations
that permit a Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations normally has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders of such obligations. The interest rate on a floating rate
demand obligation is based on a known lending rate, such as a bank's prime rate,
and is adjusted automatically each time such rate is adjusted.
The interest rate on a variable rate demand obligation is adjusted automatically
at specified intervals. Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by banks. Because these
obligations are direct lending arrangements between the lender and borrower, it
is not contemplated that such instruments will generally be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value. Accordingly, where these obligations are not
secured by letters of credit or other credit support arrangements, the
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies. If not so rated, a Portfolio may invest in them only if
the Sub-Advisor determines that at the time of investment the obligations are of
comparable quality to the other obligations in which the Portfolio may invest.
The Sub-Advisor, on behalf of the Portfolio, will consider on an ongoing basis
the creditworthiness of the issuers of the floating and variable rate demand
obligations owned by the Portfolio.
MORTGAGE-BACKED SECURITIES
Mortgage loans made by banks, savings and loan institutions, and other lenders
are often assembled into pools which are issued and guaranteed by an agency or
instrumentality of the U.S. government, though not necessarily backed by the
full faith and credit of the U.S. government itself, or collateralized by U.S.
Treasury obligations or by U.S. government agency securities. Interests in such
pools are described in the Prospectus as "Mortgage-Backed Securities". These
include securities issued by the Government National Mortgage Association
("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), and the Federal
National Mortgage Association ("FNMA"). Each Portfolio may invest in
Mortgage-Backed Securities representing undivided ownership interests in pools
of mortgage loans, including GNMA, FHLMC, and FNMA Certificates and so-called
"CMOs" (i.e., collateralized mortgage obligations which are issued by
nongovernmental entities but which are collateralized by U.S. Treasury
obligations or by U.S. Government agency securities). The Portfolios may also
invest in REMIC Certificates issued by FNMA. Investors may purchase beneficial
interest in REMICs, which are known as "regular" interests or "residual"
interests. The Portfolios are not presently permitted to invest in "residual"
interests.
GNMA Certificates are Mortgage-Backed Securities which evidence an undivided
interest in a pool of mortgage loans. GNMA Certificates differ from bonds in
that principal is paid monthly by the borrowers over the term of the loan rather
than returned in a lump sum at maturity. GNMA Certificates that the Portfolios
may purchase are the "modified pass-through" type. "Modified pass-through" GNMA
Certificates entitle the holder to receive a share of all interest and principal
payments paid and owed on the mortgage pool, net of fees paid to the "issuer"
and GNMA, regardless of whether or not the mortgagor actually makes the payment.
GNMA Certificates are backed as to the timely payment of principal and interest
by the full faith and credit of the U.S. government.
FHLMC issues two types of mortgage pass-through securities: mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. The FHLMC guarantees timely payments of interest on PCs and the full
return of principal. GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semiannually and return
principal once a year in guaranteed minimum payments. This type of security is
guaranteed by FHLMC as to timely payment of principal and interest but it is not
guaranteed by the full faith and credit of the U.S. government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. The principal and the timely payment of interest on FNMA
Certificates are guaranteed only by FNMA itself, not by the full faith and
credit of the U.S. government. FNMA also issues REMIC Certificates, which
represent an interest in a trust funded with FNMA Certificates. REMIC
Certificates are guaranteed by FNMA and not by the full faith and credit of the
U.S. government.
Each of the mortgage-backed securities described above is characterized by
periodic payments to the holder, reflecting the monthly payments made by the
borrowers who received the underlying mortgage loans. The payments to the
security holders (such as a Portfolio), like the payments on the underlying
loans, represent both principal and interest. 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. Thus, the security holders
frequently receive prepayments of principal in addition to the principal which
is part of the regular payments. 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, some of a Portfolio's higher-yielding mortgage-backed
securities might be converted to cash, and the Portfolio will be forced to
accept lower interest rates when that cash is used to purchase additional
securities in the mortgage-backed securities sector or in other investment
sectors. In addition to the foregoing, each Portfolio may invest in similar
asset-backed securities which are backed not by mortgages but other assets such
as receivables.
ASSET-BACKED SECURITIES
The Portfolios may invest in corporate asset-backed securities. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. 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 sell off certain amounts owed on the credit cards, thereby reducing the
balance due. Most 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. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (i.e., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
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 ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. 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. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS, AND PIK BONDS
Each of the Portfolios may invest in zero coupon bonds, deferred interest bonds
and PIK bonds. Zero coupon bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. (See "INVESTMENT POLICIES AND TECHNIQUES" in the
Statement of Additional Information.)
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
Each of the Portfolios may invest a portion of its assets in Collateralized
Mortgage Obligations ("CMOs"), which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically CMOs are
collateralized by certificates issued by GNMA, FNMA or FHLMC but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets"). Each of
the Portfolios may also invest a portion of its net assets in multiclass
pass-through securities which are interests in a trust composed of Mortgage
Assets. CMOs (which include multiclass pass-through securities) may be issued by
agencies, authorities or instrumentalities of the U.S. government or by private
originators or investors in mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Payments of principal and interest on
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. In a CMO, a series of bonds or certificates is usually
issued in multiple classes with different maturities. 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 repayments
on the Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates, resulting in a loss of
all or part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semi-annual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a series of a CMO in innumerable ways. In a common structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of the series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
Certain CMOs may be stripped (securities which provide only the principal or
interest factor of the underlying security). See "Stripped Mortgage-Backed
Securities" in the Statement of Additional Information for a discussion of the
risks of investing in classes consisting primarily of interest payments or
principal payments.
The Portfolios may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES
Each of the Portfolios may invest a portion of its assets in stripped
mortgage-backed securities ("SMBS"), which are derivative multiclass mortgage
securities usually structured with two classes that receive different
proportions of interest and principal distributions from an underlying pool of
mortgage assets. For a further description of SMBS and the risks related to
transactions therein, see the Statement of Additional Information.
LOAN PARTICIPATIONS
Each of the Portfolios may invest a portion of its assets in "loan
participations". By purchasing a loan participation, each Portfolio acquires
some or all of the interest of a bank or other lending institution in a loan to
a corporate borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. (See "INVESTMENT POLICIES AND
TECHNIQUES" in the Statement of Additional Information.)
FOREIGN SECURITIES
Each Portfolio may invest up to 15 percent of its total assets directly in U.S.
dollar denominated securities of foreign issuers, including the securities of
foreign branches and foreign subsidiaries of domestic banks and domestic and
foreign branches of foreign banks. The Portfolios may also invest in foreign
securities in domestic markets through depository receipts without regard to
this limitation. Foreign investments may involve risks which are in addition to
the risks inherent in domestic investments. In many countries, there is less
publicly available information about issuers than is available in the reports
and ratings published about companies in the United States.
Foreign companies may not be subject to uniform accounting, auditing, and
financial reporting standards. The value of foreign investments may rise or fall
because of changes in currency exchange rates, and a Portfolio may incur certain
costs in converting securities denominated in foreign currencies to U.S.
dollars. Dividends and interest on foreign securities may be subject to foreign
withholding taxes, which would reduce a Portfolio's income without providing a
tax credit for the Portfolio's shareholders. Obtaining judgments, when
necessary, in foreign countries may be more difficult and more expensive than in
the United States. Although each Portfolio intends to invest in securities of
foreign issuers located in developed countries which are considered as having
stable and friendly governments, there is the possibility of expropriation,
confiscatory taxation, nationalization, currency blockage, or political or
social instability which could affect investments in those nations.
In addition, the net asset values of the Portfolios are determined and shares of
the Portfolios can be redeemed only on days the New York Stock Exchange ("NYSE")
is open for business. However, foreign securities held by a Portfolio may be
traded on days and at times when the NYSE is closed. Accordingly the net asset
value of a Portfolio may be significantly affected on days when the investor is
unable to purchase or redeem shares.
DELAYED DELIVERY SECURITIES
Each Portfolio may invest up to 15 percent of its total assets, measured at the
time of purchase, in securities purchased on a when-issued or delayed delivery
basis ("Delayed Delivery" or "When-Issued" Securities). Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days. Purchasing securities on a when-issued
basis allows the Portfolio to lock in a fixed price or yield on a security it
intends to purchase. At the time a Portfolio purchases a When-Issued Security,
it records the transaction and reflects the value of the security in determining
its net asset value (although the Portfolio will not accrue interest income
prior to actual delivery).
The Portfolios may also sell securities on a delayed delivery basis. When a
Portfolio has sold a security on a delayed delivery basis, the Portfolio does
not participate in further gains or losses with respect to the security.
Delayed Delivery Securities are subject to changes in value based on the market
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Delayed Delivery Securities may
expose a Portfolio to this risk because they may experience such fluctuation
prior to actual delivery. The greater the Portfolio's outstanding commitments to
purchase these securities, the greater the Portfolio's exposure to possible
fluctuations in its net asset value. Purchasing (or selling) Delayed Delivery
Securities may involve the additional risk that the yield available in the
market when delivery occurs may be higher (or lower) than that obtained at the
time of commitment. Although the Portfolio may be able to sell Delayed Delivery
Securities prior to the delivery date, a Portfolio will only purchase Delayed
Delivery Securities for the purpose of actually acquiring the securities, unless
after entering into the commitment a sale appears desirable for investment
reasons. Each Portfolio will segregate and maintain cash, cash-equivalents, or
other high-quality, liquid debt securities in an amount at least equal to the
amount of outstanding commitments for Delayed Delivery Securities at all times.
See the Statement of Additional Information for further discussion of Delayed
Delivery Transactions.
PORTFOLIO TURNOVER
The Portfolios attempt to increase return by trading to take advantage of
short-term market variations. This policy may lead to higher annual portfolio
turnover rates. It is anticipated that under normal market conditions the rate
of portfolio turnover for the Equity Portfolio will generally not exceed 100
percent; however, during periods when it is advisable to engage in substantial
short-term trading, the portfolio turnover rate could exceed 200 percent. The
rates of portfolio turnover for the Total Return, Fixed Income and Short-Term
Government Portfolios are estimated to fall between 100 percent and 300 percent.
These rates should not be considered as limiting factors.
The annual portfolio turnover rate indicates changes in a Portfolio's
securities' positions. The turnover rate may vary from year to year, as well as
within a year. It may also be affected by sales of Portfolio securities
necessary to meet cash requirements for redemptions of shares. High turnover in
any year will result in the payment by a Portfolio of above average amounts of
brokerage commissions and could result in the payment by shareholders of above
average amounts of taxes on realized investment gains. However, to the extent
the Portfolios purchase Fixed Income Securities, it is not anticipated that high
turnover will produce a negative effect, because Fixed Income Securities will
normally be purchased on a principal basis.
The Portfolios intend to limit their turnover so that realized short-term gains
on securities held for less than three months do not exceed 30 percent of gross
income. This enables the Portfolios to derive the benefits of favorable tax
treatment available under the Internal Revenue Code. (See "DISTRIBUTIONS AND
TAXES".)
INVESTMENT RESTRICTIONS
The Portfolios have adopted certain investment restrictions. Each Portfolio's
"fundamental" investment restrictions cannot be changed without approval by
holders of a majority of the respective Portfolio's outstanding voting shares.
As defined in the Investment Company Act of 1940 ("1940 Act"), this means the
lesser of (a) 67 percent of the shares of the Portfolio at a meeting where more
than 50 percent of the outstanding shares are present in person or by proxy, or
(b) more than 50 percent of the outstanding shares of the Portfolio. However,
except where expressly stated to be fundamental, the Portfolios' investment
restrictions are not fundamental and may be changed without shareholder
approval. Please refer to the Statement of Additional Information for a complete
list of investment restrictions adopted by the Portfolios.
The investment restrictions provide, among other things, that each Portfolio may
not:
1. Purchase securities of any company having less than three years of
continuous operation (including operations of any predecessors) if the
purchase would cause the value of a Portfolio's investments in all such
companies to exceed 5 percent of the value of its net assets.
2. Purchase the securities of any issuer if such purchase would cause more
than 5 percent of the value of 75 percent of the Portfolio's total assets
to be invested in securities of any one issuer (except securities of the
U.S. government or any instrumentality thereof), or purchase more than 10
percent of the outstanding voting securities of any one issuer, or more
than 10 percent of the outstanding securities of any class.
3. Borrow money except for temporary or emergency purposes (but not for the
purpose of purchasing investments) and then, only in an amount not to
exceed 25 percent of the value of a Portfolio's net assets at the time the
borrowing is incurred; provided, however, that a Portfolio may enter into
transactions in options, futures, and options on futures. A Portfolio may
borrow from a bank or by engaging in a reverse repurchase agreement. A
Portfolio will not purchase securities when borrowings exceed 5 percent of
its total assets. If a Portfolio borrows money, its share price may be
subject to greater fluctuation until the borrowing is paid off. To this
extent, purchasing securities when borrowings are outstanding may involve
an element of leverage. See the Statement of Additional Information for an
explanation of reverse repurchase agreements.
4. Enter into futures contracts or related options if more than 30 percent of
a Portfolio's net assets would be represented by futures contracts or more
than 5 percent of a Portfolio's total assets would be committed to initial
margin and premiums on futures and related options.
5. Invest in options (options on futures, indexes and securities) if portfolio
securities covering these options exceed 25 percent of a Portfolio's net
assets or the premiums paid for such options exceed 5 percent of a
Portfolio's net assets.
RETIREMENT PLANS
CVC provides retirement plan services and documents and can establish investor
accounts in any of the following types of retirement plans:
o Prototype money purchase pension and profit-sharing plans including
401(k) plans.
o Individual Retirement Accounts (IRAs). This includes Simplified
Employee Pension Plan (SEP) IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to
employees of most non-profit organizations.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, and Section 457 plans and materials for establishing them
are available from CVC upon request. Investors should consult with their own tax
advisors before establishing a retirement plan.
MANAGEMENT
Under the laws of the State of Maryland, the property, affairs and business of
the Fund are managed by the Board of Directors. The Directors elect officers who
are charged with the responsibility for the day-to-day operation of the
Portfolios and the execution of policies formulated by the Directors. The
Directors and Officers of the Fund are:
* Robert G. Millen, Chairman of the Board and Director of the Fund.
Chief Development Officer, IASD Health Services Corp. (Blue Cross and
Blue Shield of Iowa), 1990 to Present; President and Chief Executive
Officer, First Interstate Bank, 1981 to 1990.
William C. Knapp, II, Director of the Fund.
President, AmerUs Properties, Inc. (real estate development, construction
and management) 1992 to Present; Corporate Counsel/Secretary/Sr. Vice
President, Iowa Realty, Co., Inc. (real estate brokerage), 1978 to 1992.
* Richard C. Anderson, Director of the Fund.
Senior Vice President, Finance, IASD Health Services Corp. (Blue Cross
and Blue Shield of Iowa).
James S. Cownie, Director of the Fund.
Chairman and President, New Heritage Associates (Cable TV Operations).
Thomas K. Koehn, Director of the Fund.
President, The Waldinger Corporation (mechanical contractor).
Marvin J. Walter, Director of the Fund.
President, Dayton Road Development Corporation/W & G Marketing Company,
Inc. (real estate development and meat processing and distribution).
* David W. Miles, President and Director of the Fund.
Senior Managing Director, Investors Management Group (registered
investment advisor).
Carole E. Sours, Vice President and Treasurer of the Fund.
Director, Financial Services, IASD Health Services Corp. (Blue Cross and
Blue Shield of Iowa).
Ruth L. Prochaska, Secretary of the Fund.
Controller/Compliance Officer, Investors Management Group (registered
investment advisor).
Each Director who is deemed an "interested person," as defined in the 1940 Act,
is indicated by an asterisk.
THE ADVISOR
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Capital Value Corporation ("CVC" or the "Advisor"), an Iowa
corporation located at 636 Grand Avenue, Des Moines, Iowa, 50309. Under the
terms of the Advisory Agreement, CVC oversees the activities of the Sub-Advisor
and establishes and monitors general criteria and policies for the operation of
the Fund, subject to the supervision of the Fund's Board of Directors. CVC, a
wholly-owned indirect subsidiary of IASD Health Services Corp., does business in
the state of Iowa as Blue Cross and Blue Shield of Iowa and in the state of
South Dakota as Blue Cross of South Dakota.
THE SUB-ADVISOR
The Fund and CVC have entered into a sub-investment advisory agreement (the
"Sub-Advisory Agreement") with Investors Management Group ("IMG" or the
"Sub-Advisor"), 2203 Grand Avenue, Des Moines, Iowa 50312-5338, to serve as each
Portfolio's sub-investment advisor. IMG is a registered investment advisor
organized in 1982. IMG's principal business is providing continuous investment
management to pension and profit-sharing plans, insurance companies, public
agencies, banks, endowments and charitable institutions, other mutual funds,
individuals and others. IMG has approximately $1.4 billion in equity, fixed
income, and money market assets under management. David W. Miles, Mark A.
McClurg, and James W. Paulsen are principal shareholders of IMG.
Pursuant to the Sub-Advisory Agreement with the Fund and CVC, IMG provides
investment advisory assistance and the day-to-day management of each Portfolio's
investments, subject to the supervision of CVC and the overall authority of the
Board of Directors of the Fund.
The Equity Portfolio is co-managed by James W. Paulsen, Ph.D. and Douglas R.
Ramsey. The Total Return Portfolio is co-managed by James W. Paulsen, Ph.D.,
Douglas R. Ramsey, Jeffrey D. Lorenzen, CFA, and Kathryn D. Beyer, CFA. The
Fixed Income and Short-Term Government Portfolios are co-managed by James W.
Paulsen, Ph.D., Jeffrey D. Lorenzen, CFA, and Kathryn D. Beyer, CFA. All of the
foregoing have managed their respective portfolios since inception. The
following is certain biographical information concerning the co-managers:
JAMES W. PAULSEN, PH.D., SENIOR MANAGING DIRECTOR. Dr. Paulsen is the
firm's chief portfolio strategist and chairs IMG's Investment Policy
Committee. Prior to joining IMG in 1991, Dr. Paulsen served as
president of a Cedar Rapids, Iowa investment firm managing over $700
million from 1983 to 1991. Dr. Paulsen received his Bachelor of Science
degree in economics and his Doctorate in economics from Iowa State
University.
DOUGLAS R. RAMSEY, SENIOR EQUITY ANALYST. Mr. Ramsey serves as IMG's
senior equity analyst and is a member of IMG's Investment Policy
Committee. Prior to joining IMG in 1996, he was a securities analyst at
a Minneapolis based regional brokerage firm from 1995 to 1996. He was
an economist at a Cedar Rapids, Iowa based investment firm from 1990 to
1995. Mr. Ramsey received his B.A. degree in business administration
and economics from Coe College and his M.A. degree in economics from
Ohio State University.
JEFFREY D. LORENZEN, CFA, MANAGING DIRECTOR. Mr. Lorenzen is a fixed
income strategist and is a member of IMG's Investment Policy Committee.
Prior to joining IMG in 1992, his experience includes serving as a
securities analyst and corporate fixed income analyst for The Statesman
Group from 1989 to 1992. He received his Masters of Business
Administration from Drake University and his Bachelor of Business
Administration degree from the University of Iowa.
KATHRYN D. BEYER, CFA, MANAGING DIRECTOR. Ms. Beyer is a fixed income
strategist and is a member of IMG's Investment Policy Committee. Prior
to joining IMG in 1993, her experience includes serving as a securities
analyst and director of mortgage-backed securities for Central Life
Assurance Company from 1988 to 1993. Ms. Beyer received her Masters of
Business Administration from Drake University and her Bachelor of
Science degree in agricultural engineering from Iowa State University.
INVESTMENT ADVISORY FEES PAID TO CVC AND IMG
Under the terms of the Advisory Agreement, each Portfolio has agreed to pay CVC
a monthly management fee. Under the Sub-Advisory Agreement, the Fund also agrees
to pay IMG a monthly sub-advisory fee. CVC receives from each Portfolio a
management fee computed and paid monthly equal to, on an annual basis, 0.10
percent of each Portfolio's average daily net assets. The Fund pays IMG a
management fee computed and paid monthly equal to, on an annual basis, 0.43
percent of each Portfolio's average daily net assets. During the fiscal year
ended March 31, 1996, CVC received advisory fees of $21,498; $19,412; $9,229 and
$4,300 for Equity Portfolio, Total Return Portfolio, Fixed Income Portfolio and
Short-Term Government Portfolio respectively. IMG received sub-advisory fees of
$92,443; $83,473; $39,685 and $18,494 for the Equity Portfolio, Total Return
Portfolio, Fixed Income Portfolio and Short-Term Government Portfolio
respectively.
At its expense, IMG provides office space and all necessary office facilities,
equipment, and personnel for servicing the investments of the Fund.
Except for the expenses expressly assumed by IMG as set forth above or as
described below with respect to the distribution of the Fund's shares, the Fund
is responsible for all its other expenses, including, without limitation,
governmental fees, interest charges, taxes, membership dues in the Investment
Company Institute allocable to the Fund, brokerage commissions, and other
expenses connected with the execution, recording and settlement of portfolio
security transactions, expenses of repurchasing and redeeming shares and
expenses of servicing shareholder accounts; expenses of registering or
qualifying shares for sale; expenses for preparing, printing and distributing
periodic reports, notices and proxy statements to shareholders and to
governmental officers and commissions; insurance premiums; fees and expenses of
the Fund's custodian, including safekeeping of funds and securities and
maintaining required books and accounting; expenses of calculating the net asset
value of shares of the Fund; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
the Fund; compensation and expenses of Directors who are not "interested
persons" of the Advisor or Sub-Advisor; and expenses of shareholder meetings.
Expenses relating to the issuance, registration and qualification of shares of
the Fund and the preparation, printing and mailing of prospectuses are borne by
the Fund except that the Fund's Distribution Agreement with IFS requires IFS to
pay for prospectuses that are to be used for sales purposes.
From time to time, CVC and IMG may voluntarily waive all or a portion of the
management fee and/or absorb certain expenses of a Portfolio without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for a
Portfolio and increasing the Portfolio's overall yield to investors at the time
any such amounts are waived and/or absorbed.
Except as voluntarily absorbed by CVC and IMG, all expenses incurred in the
operation of the Fund will be borne by the Fund. Expenses attributable to a
particular Portfolio are charged against the assets of that Portfolio; other
expenses of the Fund are allocated among the Portfolios on a reasonable basis
determined by the Board of Directors, including, but not limited to,
proportionately in relation to the net assets of each Portfolio.
FEES FOR SHAREHOLDER SERVICES
CVC also provides information and administrative services for Fund shareholders
pursuant to an Administrative Services Agreement ("Administrative Services
Agreement") under a "Shareholder Services Plan" adopted by the Board of
Directors and reviewed at least annually. Under the Shareholder Services Plan,
CVC may enter into related arrangements with various financial services firms,
such as broker-dealer firms or banks ("Firms"), that provide services and
facilities for their customers or clients who are shareholders of the Fund. Such
administrative services and assistance may include, but are not limited to,
establishing and maintaining shareholder accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding the
Fund and its special features and such other services as may be agreed upon from
time to time and permitted by applicable statute, rule or regulation. CVC bears
all its expenses of providing services pursuant to the Administrative Services
Agreement, including the payment of any services fees. For services under the
Administrative Services Agreement, the Fund pays CVC a fee, payable monthly, at
the annual rate of up to 0.25 percent of average daily net assets of each
Portfolio (regardless of Initial Share and Select Share classification). CVC may
then pay each Firm a service fee at an annual rate of up to 0.25 percent of net
assets of those accounts in the Fund that it maintains and services. A Firm
becomes eligible for the service fee based on assets in the accounts in the
month following the month of purchase and the fee continues until terminated by
CVC or the Fund. The fees are calculated monthly and paid quarterly.
CVC also may provide some of the above services and may retain any portion of
the fee under the Administrative Services Agreement not paid to Firms to
compensate itself for administrative functions performed for the Fund.
FUND ACCOUNTING
IMG provides fund accounting services pursuant to a Fund Accounting Agreement.
The Fund pays IMG, fees equal to the lesser of an annual rate of .15 percent of
average daily net assets or $24,000 for the Equity Portfolio and Total Return
Portfolio and the lesser of an annual rate of .10 percent of average daily net
assets or $24,000 for the Fixed Income Portfolio and the Short-Term Government
Portfolio.
DISTRIBUTOR
IFS serves as distributor for the Fund pursuant to a Distribution Agreement and
a Rule 12b-1 Plan. IFS bears all its expenses of providing services pursuant to
the agreement, including the payment of any commissions. IFS provides for the
preparation of advertising or sales literature and bears the cost of printing
and mailing prospectuses to persons other than shareholders. The Fund bears the
cost of qualifying and maintaining the qualification of Fund shares for sale
under the securities laws of the various states and the expense of registering
its shares with the Securities and Exchange Commission. For its services under
the Distribution Agreement, IFS receives a fee, payable monthly, at the annual
rate of 0.50 percent of average daily net assets of the Initial Shares of a
Portfolio. This fee is accrued daily as an expense of the Fund. Select Shares do
not pay a distribution services fee. IFS receives any CDSC that may be imposed
on redemption of shares. (See "ADDITIONAL INVESTMENT INFORMATION".)
IFS may enter into related selling group agreements with various broker-dealer
firms that provide distribution services to investors. IFS currently compensates
firms solely from its assets for sales of Initial Shares at a commission rate of
up to 3.5 percent. IFS may, from time to time, pay additional commissions or
promotional incentives to firms that sell shares of the Fund. In some instances,
such additional commissions, fees or other incentives may be offered only to
certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or of other funds distributed by
IFS.
Banks and other financial services firms may provide administrative services to
facilitate transactions in shares of the Fund for their clients, and IFS may pay
them a transaction fee up to the level of the commission allowable to dealers as
described above. Banks currently are prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. If the
Glass-Steagall Act should prevent banking firms from acting in any capacity or
providing any of the described services, management will consider what action,
if any, is appropriate in order to provide efficient services for the Fund.
Banks or other financial services firms may be subject to various state laws
regarding the services described above and may be required to register as
dealers pursuant to state law. The Fund does not believe that a termination of a
relationship with a bank would result in any material adverse consequence to the
Fund.
Since the Distribution Agreement provides for fees that are used by IFS to pay
for distribution services, that agreement along with the related selling group
agreements (collectively, the "Plan") is approved and reviewed in accordance
with the Fund's Rule 12b-1 Plan under the 1940 Act, which regulates the manner
in which an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
For further information, see "MANAGEMENT OF THE FUND" in the Statement of
Additional Information.
HOW TO INVEST
You can purchase shares of the Portfolios in several ways, each of which is
described below, from IFS as distributor of the Fund's shares. You may also
purchase (or redeem) shares of a Portfolio through dealers or others who may
charge a service or transaction fee. (See "Financial Services Firms" below.)
Please review the information regarding CDSC and other information under
"ADDITIONAL INVESTMENT INFORMATION -- Conversion Feature", and "HOW TO REDEEM
SHARES -- Contingent Deferred Sales Charge." All purchases are subject to
acceptance by the Fund and the Fund may decline to accept a purchase order upon
receipt when it would not be in the best interest of existing shareholders to
accept the order. The purchase price of your shares will be the net asset value
next determined after IFS receives your investment in proper form. (See
ADDITIONAL INVESTMENT INFORMATION -- Determining Your Share Price".)
BY MAIL
You can purchase shares of the Portfolios by sending an application and a check
or money order payable to "Capital Value Fund" to the address on the cover of
this Prospectus. To make additional purchases, enclose a check payable to
Capital Value Fund along with the Additional Investment Form provided with your
account statement. Or, you may send a check along with an indication of which
account it should be deposited in. Please note the minimum investment
requirements for each Portfolio. (See "ADDITIONAL INVESTMENT INFORMATION --
Minimum Investments".) If your check does not clear, you will be charged a $20
service fee. You will also be responsible for any losses suffered by a Portfolio
as a result. All your purchases must be made by checks payable to Capital Value
Fund drawn on U.S. banks. Third-party checks are not accepted.
BY WIRE
You may purchase additional shares by wire. Please call 1-800-798-1819 for
complete wire instructions. The Portfolios will not be responsible for the
consequences of delays resulting from the banking or Federal Reserve wire
systems.
BY EXCHANGE
You can open a new account by exchanging from one Portfolio account to another.
Exchanges may only be made between identically registered accounts. There is no
charge for this service. No CDSC is imposed on exchanges between the Portfolios
described in this Prospectus; however, to the extent that shares exchanged are
still subject to a CDSC at the date of the exchange, the CDSC will carry over to
the new shares. For purposes of calculating the CDSC upon redemption of shares
acquired in an exchange, the purchase of shares acquired in one or more
exchanges is deemed to have occurred at the time of the original purchase of the
exchanged shares. You may request an exchange by calling or writing IFS. Your
purchase price will be the offering price next determined after your exchange
request is received in proper form. The telephone exchange minimum is the lesser
of $50 or the balance of your account, with no minimum for written exchanges.
Check the minimum initial investment requirements for the Portfolio you are
investing in under "ADDITIONAL INVESTMENT INFORMATION - Minimum Investments".
Please review the information about this privilege under "SHAREHOLDER SERVICES -
Telephone Exchange and Redemption Privilege".
BY TELEPHONE PURCHASE
You can make additional investments from $50 to $25,000 in your Capital Value
Fund account by telephone. Upon your authorization, money from your bank
checking or NOW account will be withdrawn to make the investment. The price you
receive will be the price next computed after IFS receives your investment from
your bank in proper form, which is normally two banking days after initiated
through IFS. To establish the telephone purchase privilege, request a form by
calling 1-800-798-1819. Neither the Fund nor its transfer agent will be
responsible for the authenticity of purchase instructions received by telephone.
Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
NO MINIMUM INVESTMENT PROGRAM
The Fund will waive the minimum initial investment for investors using the
Automatic Investment Plan or Automatic Exchange. To establish these options,
call 1-800-798-1819 for an application. If the Automatic Investment Plan or
Automatic Exchange is discontinued before the investor reaches the minimum
investment that would otherwise be required, a Portfolio reserves the right to
close an investor's account. Prior to closing any account for failure to reach
the minimum initial investment, however, the Portfolio will give the investor
written notice and 60 days in which to reinstate the Automatic Investment Plan
or Automatic Exchange or otherwise reach the minimum initial investment. Since
each Portfolio has the right to redeem an investor's account for failure to
reach the minimum initial investment, you should consider your financial ability
to continue in this Plan until the minimum initial investment amount is met,
since such a redemption may occur in periods of declining share prices.
Involuntary redemptions will not occur where the investor's account value falls
below the minimum as a result of market activity. (See "SHAREHOLDER SERVICES
- -Automatic Investment Plan" and "-- Automatic Exchange Plan".)
FINANCIAL SERVICES FIRMS
Shares of the Portfolios are available through selected financial services firms
such as broker-dealer firms and banks ("Firms"). The purchase price for shares
of a Portfolio purchased through such Firms will be the net asset value next
determined after receipt of the order to purchase by the Firm. Such Firms are
responsible for the prompt transmission of purchase and redemption orders.
Firms provide varying arrangements for their clients to purchase and redeem
Portfolio shares. Some may establish higher minimum investment requirements than
set forth above. They may arrange with their clients for other investment or
administrative services. Such Firms may independently establish and charge
additional amounts to their clients for such services, which charges would
reduce the clients' yield or return. Firms may also hold Portfolio shares
positions in nominee or street name as agent for and on behalf of their
customers. In such instances, the Portfolio's transfer agent will have no
information with respect to or control over accounts of specific shareholders.
Such shareholders may obtain access to their accounts and information about
their accounts only from their Firms. Some of the Firms may receive compensation
from the Fund's Shareholder Service Agent for recordkeeping and other expenses
related to these nominee accounts. In addition, certain privileges with respect
to the purchase and redemption of shares or the reinvestment of dividends may
not be available through such Firms. Some Firms may participate in a program
allowing them access to their clients' accounts for servicing including, without
limitation, transfers of registration and dividend payee changes; and may
perform functions such as generation of confirmation statements and disbursement
of cash dividends. This Prospectus should be read in connection with such Firms'
material regarding their fees and services.
IFS compensates Firms for sales of Portfolio shares at a rate of up to 3.5
percent of the amount of Initial Shares purchased. IFS is compensated by the
Fund for services as distributor. A salesperson for a Firm or for IFS or any
other person entitled to receive compensation for selling or servicing Fund
shares may receive different compensation for such sales depending on the class
of the shares sold.
ADDITIONAL INVESTMENT INFORMATION
The shares of each Portfolio may be purchased at the net asset value of that
Portfolio's shares next determined after the Fund receives the order for such
purchase. Each Portfolio reserves the right to cease offering its shares for
sale at any time.
CLASSES OF SHARES AND CONVERSION FEATURES
The shares of each Portfolio are divided into "Initial Shares" and "Select
Shares." Only Initial Shares of a Portfolio may be purchased directly (except
for limited direct sales of Select Shares). Initial Shares of a Portfolio will
automatically convert to Select Shares of the same Portfolio eight years after
issuance of the Initial Shares. Initial Shares of a Portfolio will convert to
Select Shares of that Portfolio on the basis of the relative net asset value per
share.
Initial Shares of a Portfolio pay the ongoing distribution services fee
described under "MANAGEMENT -- Distributor" based upon average daily net assets
of the Portfolio attributable to the Initial Shares of the Portfolio and any
incremental transfer agency fee related to the CDSC as well as expenses related
to any meetings of the shareholders of the Initial Shares to consider issues
related to the distribution services fee ("Initial Share Meeting Expenses").
Select Shares of a Portfolio do not pay a distribution services fee. The purpose
of the conversion feature is to relieve holders of the Initial Shares from the
distribution services fee when they have been outstanding long enough for IFS to
have been compensated for distribution related expenses. Each share of a
Portfolio, whether Initial or Select, represents an identical interest in the
investment portfolio of that Portfolio and has the same rights, except that,
since Select Shares do not pay the distribution services fees and are not
subject to the incremental transfer agency fees related to the CDSC or Initial
Share Meeting Expenses, they will have a lower expense ratio and pay higher
dividends than Initial Shares.
For purposes of conversion to Select Shares, shares purchased through the
reinvestment of dividends and other distributions paid with respect to Initial
Shares in a shareholder's Fund account will be converted to Select Shares on a
pro rata basis.
The conversion of Initial Shares to Select Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (i) the
assessment of the distribution services fee with respect to Initial Shares and
not Select Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) that the conversion of Initial Shares to Select Shares
does not constitute a taxable event under the Code. The conversion of Initial
Shares to Select Shares may be suspended if such assurance is not available. In
that event, no further conversions of Initial Shares would occur, and shares
might continue to be subject to the distribution services fee for an indefinite
period that may extend beyond the proposed conversion date as described above.
DIRECT PURCHASE OF SELECT SHARES
Currently, it is intended that Select Shares will only be available through
conversion from Initial Shares except for the following limited situations.
Select Shares may be sold directly to officers, trustees, directors, employees
(including retirees) of the Fund, CVC, IMG, IFS, IASD and any subsidiary of IASD
or certain affiliated companies, for themselves or their spouses, children or
parents, to registered representatives and employees of broker-dealers having
selling group agreements with IFS, or to any trust, pension, profit-sharing or
other benefit plan for only such persons in any amount; officers, directors and
employees of service agents of the Fund, for themselves or their spouses or
dependent children; employees (including their spouses and dependent children)
of banks and other financial services firms that provide administrative services
related to order placement and payment to facilitate transactions in shares of
the Fund for their clients pursuant to an agreement with IFS; to investment
advisory clients of CVC or IMG; to any trust or pension profit sharing plan or
other benefit plan for any of such foregoing pensions; in connection with the
acquisition of the assets of or merger or consolidation with another investment
company; and to shareholders in connection with the investment or reinvestment
of income and capital gain dividends with respect to Select Shares. All persons
eligible to purchase Select Shares will only be sold Select Shares. Select
Shares may be issued in the future directly to certain other investors on such
terms and conditions as are determined by the Board of Directors of the Fund,
subject to compliance with applicable regulations. No commission is payable by
IFS for Select Shares sold directly pursuant to this paragraph.
SIGNATURE GUARANTEES
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. A signature guarantee is required for all
persons registered on an account. Some instances in which you will need a
signature guarantee include:
1. when you add the telephone redemption option to your existing account;
2. if you transfer the ownership of your account to another individual
or organization;
3. for a written redemption request over $25,000;
4. when you want redemption proceeds sent to a different name or address
than is registered on your account;
5. if you add/change your name or add/remove an owner on your account; and
6. if you add/change the beneficiary on your retirement account.
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the Securities and Exchange Commission. These institutions include
banks, savings and loan associations, credit unions, brokerage firms, and
others. The words "SIGNATURE GUARANTEED" must be stamped or typed near each
person's signature and appear with the printed name, title, and signature of an
officer and the name of the guarantor institution. PLEASE NOTE THAT A NOTARY
PUBLIC STAMP OR SEAL IS NOT A SIGNATURE GUARANTEE.
POWER OF ATTORNEY -- ATTORNEY-IN-FACT
If you are investing as attorney-in-fact for another person, please complete the
account application in the name of such person. You should sign the back of the
application in the following form: "[person's name] by [your name],
attorney-in-fact". An affidavit for the Power of Attorney document must be
submitted with the application if you wish to establish telephone or check
writing privileges for the account. You will also be required to provide an
affidavit of the Power of Attorney document to process all redemption requests
from the attorney-in-fact.
The following form of affidavit typed on the Power of Attorney document and
signed is acceptable:
I hereby certify that this affidavit is a true and complete copy of the
original Power of Attorney, still in full force and effect, and that
the maker is still alive and competent.
BY:_________________________________________________________
(Attorney-in-Fact) (Date)
_______________________________
(Print Name and Title) (Notary Seal)
This affidavit must be notarized and dated within two weeks of the date it is
received by the Fund.
CORPORATIONS AND TRUSTS
If you are investing for a corporation, please include with your account
application a certified copy of your corporate resolution indicating which
officers are authorized to act on behalf of your account. Corporate resolutions
may need to be updated annually. As an alternative, you may complete a
Certification of Authorized Individuals form, which can be obtained from the
Fund. Until a valid corporate resolution or Certification of Authorized
Individuals is received by the Fund, services such as telephone redemption and
wire redemption will not be established. If you are investing as a trustee,
please include the date of the trust and attach a copy of the title and
signature pages of the trust agreement, as well as any pages indicating which
signatures are required to execute transactions. All trustees must sign the
application. If not, then services such as telephone redemptions, wire
redemptions, and check writing (if available) will not be established. All
trustees must sign redemption requests unless proper documentation to the
contrary is provided to the Fund. Failure to provide these documents, or
signatures as required, when you invest may result in delays in processing
redemption requests.
MINIMUM INVESTMENTS
Except as provided below, the minimum initial investment for each Portfolio is
$500. Subsequent investments for all Portfolios must be at least $50. For IRA
accounts and Uniform Gifts/Transfers to Minors accounts, the minimum initial
investment is $250. Minimum investments are waived for employee benefit plans
qualified under Section 401, 403(b)(7), or 457 of the Internal Revenue Code.
These minimums can be changed by the Fund at any time. Shareholders will be
given at least 30 days' notice of any increase in the minimums. The Fund will
waive the minimum initial investment for shareholders using the Automatic
Investment Plan or Automatic Exchange. (See "HOW TO INVEST -- No Minimum
Investment Program".)
DETERMINING YOUR SHARE PRICE
Except as provided herein, when you make investments in a Portfolio, the
purchase price of your shares will be the net asset value next determined after
IFS's receipt of an order, or exchange request in proper form. Except as
provided below, if IFS receives your order prior to the close of the NYSE on a
day in which the NYSE is open, your price will be the net asset value determined
that day. The method used to calculate the net asset value is described below
under "Calculation of Net Asset Value".
CALCULATION OF NET ASSET VALUE
The net asset value per share of each Portfolio and class thereof is determined
as of the close of trading on the NYSE, currently 3:00 p.m. Central Time, on
days the NYSE is open for business. However, net asset values will not be
determined on days during which the Fund receives no orders to purchase shares
and no shares are tendered for redemption. Net asset value is calculated by
deducting the amount of the liabilities attributable to the class from the value
of the assets attributable to that class and dividing the difference by the
number of shares of the class outstanding. Expenses are accrued daily and
applied when determining the net asset value. Equity Securities are valued at
the last sales price on the national securities exchange or NASDAQ on which such
securities are primarily traded; however, securities traded on NASDAQ for which
there were no transactions on a given day or securities not listed on an
exchange or NASDAQ are valued at the average of the most recent bid and asked
prices. Fixed Income Securities are valued on the basis of valuations furnished
by a pricing service that utilizes electronic data processing techniques to
determine valuations for normal institutional sized trading units of Fixed
Income Securities without regard to sale or bid prices when such valuations are
believed to more accurately reflect the fair market value of such institutional
securities. Otherwise sale or bid prices are used. Any securities or other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by the Board of Directors. Fixed Income
Securities in a Portfolio having maturities of 60 days or less are valued by the
amortized cost method unless the Board of Directors believes unusual
circumstances indicate another method of determining fair value should be used.
Under this method of valuation, a security is initially valued at its
acquisition cost, and thereafter, amortization of any discount or premium is
assumed each day regardless of the impact of fluctuating interest rates on the
market value of the security.
HOW TO REDEEM SHARES
You may request redemption of your shares at any time. The price you receive
will be the net asset value next determined after the Fund receives your request
in proper form. (See "ADDITIONAL INVESTMENT INFORMATION -- Calculation of Net
Asset Value".) Proceeds payable on redemption will be reduced by the amount of
any applicable CDSC. Once your redemption request is received in proper form,
each of the Portfolios will normally mail you the proceeds the next business
day. Proceeds will ordinarily be mailed no later than seven days after receipt
of a redemption request in proper form. However, the Portfolios may withhold
payment until investments which were made by check, telephone, or the Automatic
Investment Plan have been collected. (This is a security precaution only and
does not affect your investment. Your money is invested the day your purchase
order is accepted.) Checks generally are collected in 10 calendar days.
The right of redemption may be suspended during any period, when: (a) trading on
the NYSE is restricted, as determined by the Commission, or such NYSE is closed
for other than weekends and holidays; (b) the Commission has permitted such
suspension by order; or (c) an emergency as determined by the Commission exists,
making disposal of portfolio securities or valuation of net assets of a
Portfolio not reasonably practicable.
If you are exchanging into another Portfolio, see "SHAREHOLDER SERVICES --
Telephone Exchange and Redemption Privilege" for a discussion of procedures and
certain tax consequences. Redemptions may also be made through broker-dealers or
others who may charge a commission or other transaction fee. Requests for
transfers of shares of a Portfolio from or between broker-dealer street name
accounts must be made by the broker-dealer. You should contact the broker in
whose account your shares are held if you want to transfer these shares.
You may redeem shares in nay of the following ways:
WRITTEN REDEMPTION
To make a written redemption, please send your request to Capital Value Fund,
Inc., 2203 Grand Avenue, Des Moines, Iowa 50312-5338, and include:
1. your account number,
2. the number of shares or dollar amount you want to redeem,
3. each owner's name as registered on the account,
4. your street address as registered on the account, and
5. the signature of each owner as the name appears on the account.
Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. In addition,
redemptions over $25,000 require a signature guarantee. (See "ADDITIONAL
INVESTMENT INFORMATION -Signature Guarantees".)
RETIREMENT PLAN REDEMPTION
To redeem from an Individual Retirement Account (IRA), you may either use the
distribution form which you may request by calling 1-800-798-1819, or you may
send your request which includes the information described under "Written
Redemption" above.
In addition, you must:
1. indicate whether (a) 10 percent or more of the redemption proceeds
should be withheld for taxes, or (b) no portion of the proceeds should
be withheld for taxes;
2. include the type of distribution (e.g., a normal distribution or a
premature distribution); and
3. write that you certify under penalties of perjury that your social
security number is correct and that you are not subject to backup
withholding.
For redemptions from any other retirement plan, please call IFS for the
appropriate distribution form. There is a $10.00 fee for closing out an IRA or
other retirement account.
TELEPHONE REDEMPTION
Telephone redemption privileges are only available to those shareholders who
have elected to use the privilege.
Once you authorize the telephone redemption option on your application, you may
redeem shares in amounts of $500 (or the balance of your account) or more by
telephone. If you would like to add the option to your account, you may request
a telephone redemption form from IFS. Each owner's signature must be guaranteed
in order to add the option to existing accounts. (See "ADDITIONAL INVESTMENT
INFORMATION -- Signature Guarantees".)
To place a redemption request by telephone, call IFS at 1-800-798-1819.
Redemption proceeds can be directly deposited by Electronic Funds Transfer
("EFT") or wired only to a commercial bank that you have authorized on your
account application or telephone redemption form. They may also be mailed to the
registered address on your account. Once you place your telephone redemption
request, it cannot be canceled or modified. The Fund and its Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, including refusing a telephone redemption if they believe
it advisable to do so. The Fund will tape record all telephone redemption
requests and will ask the social security number or other personal identifying
information of the shareholder and will only send redemption proceeds to the
shareholder of record at their address or to a financial account which has been
established by the shareholder pursuant to written authorization. Failure to
follow reasonable procedures may result in the Fund and/or its Transfer Agent
being liable for losses due to unauthorized or fraudulent transactions. IFS does
not charge a fee for redemptions directly deposited to your bank account by EFT.
However, a $10.00 fee is applicable to each wire redemption. Further
documentation may be requested from corporations, executors, administrators,
trustees, guardians, agents, or attorneys-in-fact. Shareholders may experience
difficulty in implementing a telephone redemption during periods of drastic
economic or market changes.
CONTINGENT DEFERRED SALES CHARGE
A CDSC may be imposed against the original purchase price of all Initial Shares
issued, except Initial Shares acquired by reinvestment of dividends. There is no
charge upon redemption of any share appreciation or reinvested dividends on
Initial Shares, or redemption of any Select Shares. The charge is computed at
the following rates and is applied to the value of the shares redeemed excluding
amounts not subject to the charge:
Year of Redemption Contingent Deferred
After Purchase Sales Charge
-------------- ------------
First.................................. 4.00%
Second................................. 3.70%
Third.................................. 3.40%
Fourth................................. 3.10%
Fifth.................................. 2.80%
Sixth.................................. 2.50%
Seventh and following.................. 0%
The rate of the CDSC under the schedule above is determined by the length of the
period of ownership. Investment age yearly based on the anniversary date of
purchase.
Unless instructed by the shareholder otherwise, determination of whether a CDSC
is payable will be made as follows: redemptions will be made first from any
Select Shares, then from any Initial Shares representing reinvested dividends
and capital gains distributions, and then from the earliest purchase of Initial
Shares. IFS receives payment for all CDSCs, if any, directly from redemption
proceeds at the time of redemption.
DEFERRING AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES -- The CDSC will be
deferred for exchanges to shares of other Portfolios offered in this Prospectus.
The CDSC will be waived:
(1) in the event of the total disability (as evidenced by a determination
by the Federal Social Security Administration) of the shareholder
occurring after the purchase of the shares being redeemed;
(2) in the event of the death of the shareholder (including a registered
joint owner);
(3) for redemptions made pursuant to a systematic withdrawal plan. (See
"SHAREHOLDER SERVICES-- Systematic Withdrawal Plan.");
(4) as to all employee benefit plans, for redemptions (a) to satisfy
participant loan advances (note that loan repayments constitute new
purchases for purposes of the CDSC), (b) in connection with transfers
to any other Portfolio managed by IMG (limited in any one year to 10
percent of the total value of plan assets invested in the Fund), (c) in
connection with retirement distributions as defined in the employer's
plan (limited at any one time to 10 percent of the total value of plan
assets invested in the Fund), (d) in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code,
(e) representing returns of excess contributions to such plans or to
satisfy anti-discrimination tests, and (f) in connection with
participant terminations upon certification from the Trustee or its
representative(s). In addition, each participant of an employee benefit
plan will be considered a shareholder for purposes of the general
waiver of Contingent Deferred Sales Charge. Redemptions under this
provision will reduce the otherwise available redemptions under the
Systematic Withdrawal Plan. (See "SHAREHOLDER SERVICES -- Systematic
Withdrawal Plan.");
(5) for redemptions from an employee benefit plan having more than 200
eligible employees or a minimum of $1,000,000 invested in a combination
of the Portfolios of the Fund; and
(6) for redemptions from an insurance company separate account used to fund
annuity contracts purchased by employee benefit plans which in the
aggregate have more than 200 eligible employees or $1,000,000 invested
in the Fund.
Qualification for CDSC waivers must be cleared through IFS in advance of
redemption.
SHAREHOLDER SERVICES
As a Capital Value Fund shareholder, you will enjoy the advantages of:
o Automatic Dividend Reinvestment
o Telephone Purchase Privilege
o Telephone Exchange and Redemption Privilege
o Automatic Investment Plan
o Payroll Direct Deposit Plan
o Automatic Exchange Plan
o Dollar Cost Averaging
o Systematic Withdrawal Plan
o No Minimum Investment Program
AUTOMATIC DIVIDEND REINVESTMENT
You can automatically reinvest all dividends and capital gains distributions,
have them directly deposited by EFT to your bank account, or receive them in the
form of a check. If you elect to have them reinvested, your dividends and
capital gains distributions will purchase additional shares at the net asset
value determined on the dividend or capital gains distribution payment date (no
sales charges). You may change your election at any time by writing IFS. IFS
must receive any such change seven days (15 days for EFT) prior to a dividend or
capital gains distribution payment date in order for the change to be effective
for that payment.
Shares purchased through reinvestment of dividends and other distributions paid
with respect to Initial Shares shall be reinvested in Initial Shares.
TELEPHONE PURCHASE PRIVILEGE
The Fund offers free telephone purchase privileges. (See "HOW TO INVEST -- By
Telephone Purchase".)
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
You may exchange shares between identically registered Portfolio accounts either
in writing or by telephone. Shares are exchanged on the basis of each
Portfolio's relative net asset value per share next computed following receipt
of a properly executed exchange request. Shares may only be exchanged for
like-class shares of another Portfolio. For purposes of the CDSC and conversion
to Select Shares, if applicable, accounts exchanged retain their original cost
and purchase date. Once an exchange request is made, either in writing or by
telephone, it may not be modified or canceled. A $50 minimum, or the balance of
your account if less, applies to telephone exchanges. When opening a new account
by an exchange, the initial minimum investment is required. An exchange
transaction is a sale and purchase of shares for federal income tax purposes and
may result in a capital gain or loss.
You may authorize the telephone exchange or redemption privilege by completing
the "telephone authorization" section on your application. If you add the
telephone redemption privilege to your existing account, you must have each
owner's signature guaranteed. (See "ADDITIONAL INVESTMENT INFORMATION --
Signature Guarantees".) By establishing the telephone exchange and redemption
services, you authorize the Fund and its agents to act upon your instruction by
telephone to redeem or exchange shares from any account for which you have
authorized such services. (See "HOW TO REDEEM SHARES--Telephone Redemption".)
The Fund reserves the right, at any time without prior notice, to suspend,
limit, modify, or terminate the exchange privilege or its use in any manner by
any person or class. In particular, since an excessive number of exchanges may
be disadvantageous to the Portfolios, each Portfolio reserves the right to
terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares in a year and/or three exchanges of shares in a calendar
quarter.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan allows you to make regular, systematic investments
in a Portfolio from your bank checking or NOW account. You may choose to make
investments on the fifth and/or twentieth day of each month from your financial
institution in amounts of $50 or more. When used in conjunction with the No
Minimum Investment Program, the initial minimum investment is not required. (See
"HOW TO INVEST -- No Minimum Investment Program".) There is no service fee for
participating in this Plan. You can set up the Automatic Investment Plan with
any financial institution that is a member of the Automated Clearinghouse. For
an application call 1-800-798-1819. The Fund reserves the right to suspend,
modify, or terminate the Automatic Investment Plan or its use by any person
without notice. If the Automatic Investment Plan is discontinued before the
investor reaches the minimum investment that would otherwise be required (see
"ADDITIONAL INVESTMENT INFORMATION -- Minimum Investments"), the Fund reserves
the right to close the investor's account. A service fee of $20 will be deducted
from your account for any Automatic Investment Plan purchase that does not clear
due to insufficient funds or, if prior to notifying IFS in writing to terminate
the Plan, you close your bank account or in any manner prevent withdrawal of
funds from the designated checking or NOW account. (See "Dollar Cost Averaging"
below.)
PAYROLL DIRECT DEPOSIT PLAN
You may purchase additional Fund shares through the Payroll Direct Deposit Plan.
Through this Plan, periodic investments (minimum $50) are made automatically
from your payroll check into your existing Portfolio account. By enrolling in
the Plan, you authorize your employer or its agents to deposit a specified
amount from your payroll check into the Portfolio's bank account. In most cases,
your Portfolio account will be credited the day after the amount is received by
the Fund's bank. In order to participate in the Plan, your employer must have
direct deposit capabilities by EFT available to its employees. The Plan may be
used for other direct deposits, such as social security checks, military
allotments and annuity payments.
This privilege may be selected by completing the Authorization for Direct
Deposit Form, which may be obtained by calling 1-800-798-1819. To enroll in the
Plan, the Authorization Form must be signed by you and given to your employer's
payroll department. You may alter the amount of the deposit, the frequency of
the deposit, or terminate your participation in the Plan by notifying your
employer. Each Portfolio reserves the right, at any time and without prior
notice, to suspend, limit, or terminate the Automatic Direct Deposit privilege
or its use in any manner by any person. (See "Dollar Cost Averaging" below.)
AUTOMATIC EXCHANGE PLAN
The Automatic Exchange Plan allows you to make regular, systematic exchanges
(minimum $50) from one Portfolio account into another Portfolio account. By
establishing the Automatic Exchange Plan, you authorize the Fund and its agents
to redeem a set dollar amount or number of shares from your first Portfolio
account and purchase shares of a second Portfolio. An exchange transaction is a
sale and purchase of shares for federal income tax purposes and may result in a
capital gain or loss. To establish the Automatic Exchange Plan on your account,
request a form by calling 1-800-798-1819. (See "Dollar Cost Averaging" below.)
When used in conjunction with the No Minimum Investment Program, the initial
minimum investment in the second account is not required. An account application
form must be completed and submitted with the Authorization for Automatic
Exchange Form when you establish a new account under the No Minimum Investment
Program. (See "HOW TO INVEST -- No Minimum Investment Program".) If the
Automatic Exchange Plan is discontinued before you reach the minimum initial
investment that would otherwise be required in the second Portfolio, or the
account balance in the first Portfolio falls below the minimum initial
investment, the Fund reserves the right to close your account(s). (See
"ADDITIONAL INVESTMENT INFORMATION -- Minimum Investments".)
To participate in the Automatic Exchange Plan, you must have an initial account
balance in the first account of $12,000. Exchanges may be made monthly,
quarterly or annually. If the amount remaining in the first account is less than
the exchange amount you requested, then the remaining amount will be exchanged.
At such time as the first account has a zero balance, the participation in the
Plan will be terminated. The Plan may also be terminated at any time by written
request to the Fund. Once participation in the Plan has been terminated for any
reason, investing additional funds will not reinstate the Plan. Participation in
the Plan may be reinstated only by written request to the Fund. Each Portfolio
reserves the right, at any time and without prior notice, to modify, suspend, or
terminate the Automatic Exchange Plan privilege or its use in any manner by any
person.
DOLLAR COST AVERAGING
The Capital Value Fund's Automatic Investment Plan, Payroll Direct Deposit Plan,
and Automatic Exchange privilege, all discussed above, are methods of
implementing dollar cost averaging. Dollar cost averaging is an investment
strategy that involves investing a fixed amount of money at a regular time
interval. By always investing the same set amount, you'll be purchasing more
shares when the price is low and fewer shares when the price is high.
Ultimately, by using this principle in conjunction with fluctuations in share
price, your average cost per share may be less than the average transaction
price. A program of regular investment cannot ensure a profit or protect against
a loss. Since such a program involves continuous investment regardless of
fluctuating share values, you should consider your financial ability to continue
the program through periods of low share price levels.
SYSTEMATIC WITHDRAWAL PLAN
The owner of $24,000 or more of a Portfolio's shares may provide for the
withdrawal of a maximum of 10 percent per year from the owner's account to be
paid on a monthly, quarterly, semi-annual or annual basis. One request will be
honored in any 12 month period. The minimum periodic payment is $200.
Redemptions will be made first from Select Shares, then from any Initial Shares
representing reinvested dividends and/or capital gains and then from the
earliest purchased Initial Shares. Any income and capital gain dividends will be
automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment.
The Funds will waive the CDSC on redemptions made pursuant to a Systematic
Withdrawal Plan. The right is reserved to amend the Systematic Withdrawal Plan
on 30 days' notice. The Plan may be terminated at any time by the shareholder or
the Fund.
NO MINIMUM INVESTMENT PROGRAM
The Fund offers a No Minimum Investment Program for shareholders using the
Automatic Investment Plan or the Automatic Exchange Plan. (See "HOW TO INVEST --
No Minimum Investment Program".)
DISTRIBUTIONS AND TAXES
Each Portfolio will qualify and intends to remain qualified as a "regulated
investment company" under the Internal Revenue Code and intends to take all
other action required to ensure that no federal income taxes will be payable by
the Portfolio. Any dividends from the net income of the Fixed Income and
Short-Term Government Portfolios normally will be distributed monthly, and any
dividends from the net income of the Total Return and Equity Portfolios will
normally be distributed quarterly. Any net realized capital gains will be
distributed annually, after using any available capital loss carry-over. The
Portfolios will attempt to do so in such a manner as to avoid the Portfolios
paying income tax on their net investment income and net realized capital gains
or being subject to federal excise taxes.
For federal income tax purposes, dividends paid by a Portfolio and distributions
from net realized short-term capital gains, whether received in cash or
reinvested in additional shares, are taxable as ordinary income. Distributions
paid by a Portfolio from net realized long-term capital gains, whether received
in cash or reinvested in additional shares, are taxable as long-term capital
gains. The capital gain holding period is determined by the length of time a
Portfolio has held the instrument and not the length of time you have held
shares in the Portfolio. If you are not required to pay tax on your income, you
will not be required to pay federal income taxes on the amounts distributed to
you. Promptly after the end of each calendar year, you will receive a statement
of the federal income tax status on all dividends and capital gains
distributions paid during the year.
If you do not furnish a Portfolio with your correct social security number or
employer identification number, such Portfolio will be required to withhold
federal income tax at a rate of 31 percent (backup withholding tax) from your
distribution and redemption proceeds. To avoid backup withholding, you must
provide a social security number or employer identification number and state
that you are not subject to such withholding due to the under reporting of your
income. This certification is included as part of your application. You should
complete it when opening your account.
This section is not intended to be a full discussion of present or proposed
federal income tax laws and the effect of such laws on you. There may be other
federal, state or local tax considerations applicable to your particular
investment. You are urged to consult your tax advisor.
CAPITAL STOCK
The Fund is a Maryland corporation organized on October 7, 1992, and currently
has authorized 4 billion shares of capital stock of $.001 par value each, of
which 1.6 billion shares have been further authorized for issuance in four
Portfolios, with two classes of shares in each Portfolio as set forth below:
Initial Select
Portfolio Shares Shares
---------------------------------------------------------------
Equity Portfolio 200,000,000 200,000,000
Total Return Portfolio 200,000,000 200,000,000
Fixed Income Portfolio 200,000,000 200,000,000
Short-Term Government Portfolio 200,000,000 200,000,000
The Fund has also authorized the issuance of 400 million shares in one class
designated Prime Money Market Portfolio. Shares of the Prime Money Market
Portfolio are offered in a separate Prospectus which may be obtained by calling
IFS at 1-800-798-1819. Please read the Prospectus carefully before investing or
sending money.
Each share has one vote, and all shares participate equally in dividends and
other capital gains distributions by the respective Portfolio and in the
residual assets of the respective Portfolio in the event of liquidation.
Cumulative voting is not authorized. Fractional shares have the same rights
proportionately as do full shares. Shares of the Portfolios have no preemptive,
conversion (except to the extent that Initial Shares of a Portfolio convert to
Select Shares of the same Portfolio eight years after purchase), subscription
rights or sinking fund provisions. None of the Fund's shares are subject to
liability for further calls or assessments. You are entitled to redeem shares as
set forth under "HOW TO REDEEM SHARES." All shares are held in uncertificated
form and will be evidenced by the appropriate notation on the books of the
transfer agent.
CVC is a wholly-owned indirect subsidiary of IASD Health Services Corp. As of
June 30, 1996, IASD Health Services Corp. owned 613,755 shares (44 percent) of
the Equity Portfolio; 1,177,894 shares (72 percent) of the Total Return
Portfolio; 722,976 shares (92 percent) of the Fixed Income Portfolio; and
353,057 shares (82 percent) of the Short-Term Government Portfolio. IASD Health
Services Savings & Investment Plan owned 705,871 shares (50 percent) of the
Equity Portfolio; 430,934 shares (26 percent) of the Total Return Portfolio;
43,561 shares (6 percent) of the Fixed Income Portfolio; and 61,573 shares (14
percent) of the Short-Term Government Portfolio as of June 30, 1996. IASD Health
Services Corp., is a mutual insurance company, operating on a not for profit
basis, in the states of Iowa and South Dakota.
SHAREHOLDER REPORTS AND MEETINGS
Each Portfolio will confirm all transactions for your account. You will also
receive monthly account statements, quarterly Portfolio information, a
semiannual report, and an annual report containing audited financial statements,
reported on by the Fund's independent auditors, KPMG Peat Marwick LLP. If you
have questions about your account, call 1-800-798-1819. You may also write to
IFS at the address on the cover of this Prospectus. You may order statements for
the current and preceding year at no charge. However, there will be a $10.00 fee
per statement per year for statements ordered for other years.
The Fund may operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Fund has
adopted the appropriate provisions in its Bylaws and may, in its discretion, not
hold annual meetings of shareholders for the election of Directors unless
otherwise required by the 1940 Act. The Fund has also adopted provisions in its
Bylaws for the removal of Directors by the shareholders. Shareholders may
receive assistance in communicating with other shareholders as provided in
Section 16(c) of the 1940 Act.
There normally will be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by shareholders, at which time the Directors
then in office will call a shareholders' meeting for the election of Directors.
Fund shareholders may remove a Director by the affirmative vote of a majority of
the Fund's outstanding voting shares. In addition, the Directors are required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of any such Director or for any other purpose when requested in writing
to do so by the shareholders of record of not less than 10 percent of the Fund's
outstanding voting securities.
All consideration received by the Fund for shares of one of the Portfolios and
all assets in which such consideration is invested, belong to that Portfolio
(subject only to the rights of creditors of the Fund) and will be subject to the
liabilities related thereto. The income and expenses attributable to one
Portfolio are treated separately from those of the other Portfolios.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise, to
the holders of the outstanding voting securities of an investment company, such
as the Fund, will not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
Portfolio affected by such matter. Rule 18f-2 further provides that a Portfolio
shall be deemed to be affected by a matter unless it is clear that the interests
of each Portfolio in the matter are identical or that the matter does not affect
any interest of such Portfolio. However, the Rule exempts the selection of
independent accountants and the election of Directors from the separate voting
requirements of the Rule.
CUSTODIAN, FUND ACCOUNTANT, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
SHAREHOLDER SERVICING AGENT
Norwest Bank Minnesota, N.A., Sixth and Marquette, Minneapolis, Minnesota 55479,
acts as custodian of the Fund's assets. IMG, 2203 Grand Avenue, Des Moines, Iowa
50312-5338, acts as fund accountant, transfer agent, dividend disbursing agent
and shareholder servicing agent for the Fund. IMG is compensated for its
services based on an annual fee as a percent of assets. The fees received and
the services provided as fund accountant, transfer agent, dividend disbursing
agent and shareholder servicing agent are in addition to those received and paid
to IMG under the Sub-Advisory Agreement, paid to CVC under the Investment
Advisory Agreement and the Administrative Services Agreement or payable to IFS
under the Distribution Agreement with the Fund.
PERFORMANCE INFORMATION
From time to time, a Portfolio may advertise several types of performance
information. The Initial and Select Shares of the Equity, Total Return, Fixed
Income and Short-Term Government Portfolios may advertise "average annual total
return", "total return", and "cumulative total return". The Initial and Select
Shares of the Fixed Income and Short-Term Government Portfolios may also
advertise "yield". Each of these figures is based upon historical results and is
not necessarily representative of the future performance of a Portfolio.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Portfolio for
the period in question, assuming the reinvestment of all dividends. Thus, these
figures reflect the change in the value of an investment in a Portfolio during a
specified period. Average annual total return will be quoted for at least the
one, five, and ten year periods ending on a recent calendar quarter (or if such
periods have not elapsed, at the end of the shorter period corresponding to the
life of a Portfolio). Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question. Total return figures are not annualized and represent the aggregate
percentage or dollar value change over the period in question. Cumulative total
return reflects a Portfolio's performance over a stated period of time. For
fiscal year ending March 31, 1996, Total Return figures were 23.90 percent,
17.12 percent, 10.28 percent, and 7.27 percent for Equity, Total Return, Fixed
Income, and Short-Term Government Portfolios respectively.
Yield refers to the net investment income per share generated by a hypothetical
investment in Initial and Select Shares of a Portfolio over a specific one
month, or 30 day period. Returns, yields, and net asset values will fluctuate.
Initial and Select Shares of the Portfolios are redeemable by an investor at the
then current net asset value per share, which may be more or less than original
cost. Additional information concerning Initial and Select Portfolio performance
appears in the Statement of Additional Information.
Average Total Returns since inception (May 20,1993) were 12.71 percent, 8.91
percent, 5.56 percent, and 4.42 percent for Equity, Total Return, Fixed Income,
and Short-Term Government Portfolios respectively.
<PAGE>
IMG Financial Services, Inc.
2203 Grand Avenue
Des Moines, Iowa 50312-5338
1-800-798-1819
<PAGE>
CAPITAL VALUE FUND, INC.
PROSPECTUS
PRIME MONEY MARKET PORTFOLIO
<PAGE>
TABLE OF CONTENTS
Summary.......................................................................5
Expenses......................................................................6
Financial Highlights..........................................................7
Investment Objectives and Policies............................................8
Implementation of Policies and Risks.........................................10
Investment Restrictions......................................................16
Management...................................................................17
How to Invest................................................................21
Additional Investment Information............................................23
How to Redeem Shares.........................................................25
Shareholder Services.........................................................27
Distributions and Taxes......................................................28
Capital Stock................................................................29
Shareholder Reports and Meetings.............................................29
Custodian, Fund Accountant, Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent.........................................30
Performance Information......................................................31
Capital Value Fund...........................................................31
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT
OF ADDITIONAL INFORMATION, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE OR
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
Capital Value Fund, Inc.
IMG Financial Services, Inc.
2203 Grand Avenue
Des Moines, IA 50312-5338
1-800-798-1819
Capital Value Fund, Inc. (the "Fund") is a Maryland corporation organized as an
open-end management investment company issuing its shares in series, with each
series representing a diversified portfolio of investments with its own
investment objectives and policies. This Prospectus offers shares of the Prime
Money Market Portfolio (the "Portfolio") which is designed to provide its
shareholders with professional management of short-term investment dollars. The
investment objective of the Portfolio is described on the inside front cover of
this Prospectus.
THE PRIME MONEY MARKET PORTFOLIO WILL ATTEMPT TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE; HOWEVER, THERE CAN BE NO ASSURANCE THAT THE PRIME
MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE AT
$1.00 PER SHARE OR ACHIEVE ITS OBJECTIVES. AN INVESTMENT IN THE PRIME MONEY
MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
This Prospectus contains information you should be aware of before investing in
the Fund. Please read this Prospectus carefully and keep it for future
reference. A Statement of Additional Information, as of the date of this
Prospectus, for the Fund has been filed with the Securities and Exchange
Commission. This Statement, which may be revised from time to time, contains
further information about the Portfolio and is incorporated by reference in this
Prospectus. Upon request at the address and telephone number indicated above,
the Fund will provide a copy of the Statement of Additional Information without
charge to each person to whom a Prospectus is delivered.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 29, 1996.
<PAGE>
The PRIME MONEY MARKET PORTFOLIO seeks preservation of capital, liquidity, and
consistent with these objectives, the highest current income, through a
diversified portfolio of high quality debt obligations with maturities of 397
days or less, issued or guaranteed by the U.S. government, its agencies and
instrumentalities, repurchase agreements thereon, and corporate debt securities
including commercial paper. THE PRIME MONEY MARKET PORTFOLIO'S AVERAGE
DOLLAR-WEIGHTED MATURITY WILL NOT EXCEED 90 DAYS AND YIELD WILL VARY WITH THE
YIELDS OF THE SECURITIES IN WHICH IT WILL INVEST.
For a more detailed discussion of the investment objectives and policies of the
Portfolio, see "INVESTMENT OBJECTIVES AND POLICIES", "IMPLEMENTATION OF POLICIES
AND RISKS" and "INVESTMENT RESTRICTIONS".
<PAGE>
SUMMARY
INVESTMENT OBJECTIVES & POLICIES
The Prime Money Market Portfolio is managed as a diversified open-end investment
management company, with distinct investment objectives and policies. The
objectives of the Prime Money Market Portfolio are preservation of capital,
liquidity, and consistent with these objectives, the highest possible current
income. To achieve its objectives, the Portfolio invests in a diversified
portfolio of high quality, U.S. dollar denominated short-term Fixed Income
Securities. The Portfolio seeks to maintain a net asset value of $1.00 per
share. To do so, the Fund uses the amortized cost method of valuing the
Portfolio's securities pursuant to Rule 2a-7 under the Investment Company Act of
1940 ("1940 Act"). (See "INVESTMENT OBJECTIVES AND POLICIES".)
RISKS AND INVESTMENT PRACTICES
The Portfolio may, within specified limits, invest in repurchase agreements;
illiquid securities; foreign securities; mortgage- and asset-backed securities;
zero coupon, deferred interest and PIK bonds; collateralized mortgage
obligations and multiclass pass-through securities; stripped mortgage-backed
securities; loan participations; delayed delivery transactions; and variable- or
floating-rate securities; and may loan its portfolio securities. However, in the
last year, the Portfolio has not engaged in the use of deferred interest and PIK
bonds or loan participations and has not loaned securities. As a result, the
Portfolio will not, as a nonfundamental policy, engage in any of these
techniques or invest in any of these securities if such technique or security
results in more than 5 percent of the Portfolio's net assets at risk. These
investment practices and techniques involve risks that are different in some
respects from those associated with similar funds that do not use them. (See
"IMPLEMENTATION OF POLICIES AND RISKS".)
MANAGEMENT
The Fund's advisor is Capital Value Corporation ("CVC" or the "Advisor"), an
Iowa corporation. CVC is a wholly-owned, indirect subsidiary of IASD Health
Services Corp., which does business in the state of Iowa as Blue Cross and Blue
Shield of Iowa and in the state of South Dakota as Blue Cross of South Dakota.
CVC was organized as a registered investment advisor in 1993. CVC and the Fund
have contracted with Investors Management Group ("IMG" or the "Sub-Advisor"), to
provide ongoing investment advisory services for the Portfolios. IMG is a
registered investment advisor providing investment management services to four
other money market mutual funds, financial institutions, insurance companies,
public agencies and individuals, with over $1.4 billion presently under
management. IMG's portfolio managers are responsible for the day-to-day
management of the Portfolio's investments. (See "MANAGEMENT".)
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are available through selected financial services firms
at the net asset value per share of the Portfolio. One hundred percent of the
dollars invested in the Portfolio are used to purchase shares of the Portfolio
without any deduction or initial sales charge. Shares of the Portfolio are
redeemable at any time at the next-determined net asset value per share. Shares
of the Portfolio may be exchanged for shares of another Capital Value Fund
Portfolio without charge; however, investments in other Fund Portfolios may be
subject to a contingent deferred sales charge upon redemption. You may obtain a
prospectus for any of the other Portfolios in Capital Value Fund by calling IMG
Financial Services, Inc. ("IFS"), the Distributor of the Fund's shares, at
1-800-798-1819. Please read it carefully before investing or sending money. The
net asset value of the Prime Money Market Portfolio will usually remain constant
at $1.00 per share; however, there can be no assurance that the net asset value
will not change. (See "HOW TO INVEST" and "HOW TO REDEEM SHARES".)
SHAREHOLDER SERVICES
Services offered include mail or telephone purchase; exchange and redemption; an
automatic investment plan; and automatic dividend reinvestment. The Portfolio
offers an easy and effective way for individual and institutional shareholders
to obtain professional management of their short-term investment dollars. There
may be further restrictions and/or fees for transactions placed through
financial services firms. (See "SHAREHOLDER SERVICES".)
DIVIDENDS AND DISTRIBUTIONS
The Prime Money Market Portfolio declares dividends of all of its daily net
investment income on each day the net asset value per share is determined. Any
net realized capital gains for the Portfolio will be distributed at least
annually. (See "DISTRIBUTIONS AND TAXES".)
EXPENSES
The following information is provided in order to assist you in understanding
the various costs and expenses that, as an investor in the Fund, you will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases None
Maximum Sales Charge on Reinvested Dividends None
Exchange Fee None
Redemption Fee None
Maximum Contingent Deferred Sales Charge None
There is a $10 charge associated with final redemptions from retirement plan
accounts and redemptions payable by wire transfer. (See "HOW TO REDEEM SHARES".)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
TOTAL
MANAGEMENT 12B-1 OTHER OPERATING
FEES FEES EXPENSES EXPENSES
- --------------------------------------------------------------------------------
Prime Money Market Portfolio 0.28% None 0.49% 0.78%
Under the Fund Accounting Agreement, IMG has agreed to waive that portion of its
fee for Fund Accounting which exceeds .10 percent of average net assets. Fund
Accounting Fees are included in Other Expenses in the above table.
From time to time, the Fund's Advisor and/or Sub-Advisor, may voluntarily waive
the management fee and/or absorb certain expenses for the Portfolio.
EXAMPLE OF EXPENSES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
You would pay the following expenses $8 $25 $43 $97
on a $1,000 investment, assuming
(1) 5 percent annual return and (2) redemp-
tion at the end of each period:
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Portfolio will bear directly
or indirectly.
Investors should be aware that the above table is not intended to reflect in
detail the fees and expenses associated with an investment in the Fund. The
table has been provided only to assist investors in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, investors should refer to the appropriate section of this
Prospectus.
PLEASE REMEMBER THAT THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF
PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN. FOR MORE COMPLETE DESCRIPTIONS OF THE EXPENSES OF THE PORTFOLIO,
PLEASE SEE THE FOLLOWING SECTIONS: "HOW TO REDEEM SHARES"; "MANAGEMENT".
FINANCIAL HIGHLIGHTS
The following table gives you the Portfolio's financial history. The information
has been audited by KPMG Peat Marwick LLP, independent auditors, whose audit
report on the financial statements appears in the Fund's annual report. A
Statement of Additional Information, as well as a copy of the Annual Report, may
be obtained from the Fund upon request to the address and telephone number on
Page 3 of this Prospectus at no charge. The table uses the Fund's fiscal year
(which ends March 31) and expresses investment and distribution information for
a single share outstanding throughout each period.
1996 1995 1994*
---- ---- -----
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000
---------------------------
INCOME FOR INVESTMENT OPERATIONS
Net Investment Income 0.051 0.042 0.022
Net Gains or Losses on Securities
(both realized and unrealized) 0.000 0.000 0.000
---------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.051 0.042 0.022
---------------------------
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) 0.051 0.042 0.022
Distributions (from Capital Gains) 0.000 0.000 0.000
---------------------------
TOTAL DISTRIBUTIONS 0.051 0.042 0.022
---------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000
===========================
TOTAL RETURN 5.13% 4.20% 2.18%
Net Assets, End of Period (000 omitted) $ 3,637 $ 5,522 $ 5,121
Ratio of Expenses to Average Net Assets 0.78% 0.77% 0.74%
Ratio of Net Income to Average Net Asset 5.15% 4.27% 2.53%
RATIOS HAVE BEEN DETERMINED ON AN ANNUALIZED BASIS. TOTAL RETURN IS NOT
ANNUALIZED FOR PERIODS LESS THAN A FULL YEAR.
*From inception of the Funds on May 20, 1993.
INVESTMENT OBJECTIVES AND POLICIES
The objectives of the Prime Money Market Portfolio are preservation of capital,
liquidity, and consistent with these objectives, the highest possible current
income. It is designed to provide its shareholders with professional management
of short-term investment dollars. The Portfolio's investments are subject to
price fluctuations resulting from rising or declining interest rates and are
subject to the ability of the issuers of such investments to make payment at
maturity. However, because of their short maturities, liquidity and high quality
ratings, high quality money market instruments, such as those in which the Prime
Money Market Portfolio invests, are generally considered to be among the safest
available. Thus, the Portfolio is designed for investors who want to avoid the
fluctuations of principal commonly associated with equity and long-term bond
investments. There can be no assurance that the Portfolio's investment
objectives will be achieved. Securities in which the Portfolio invests may not
earn as high a level of current income as long-term or lower quality securities
which generally have less liquidity, greater market risk and more fluctuation in
market value.
To achieve its objectives, the Portfolio invests in a diversified portfolio of
U.S. dollar denominated short-term Fixed Income Securities (see "Fixed Income
Securities" immediately below). The Portfolio seeks to maintain a net asset
value of $1.00 per share for purchases and redemptions. To do so, the Fund uses
the amortized cost method of valuing its securities pursuant to Rule 2a-7 under
the 1940 Act, certain requirements of which are summarized below.
In accordance with Rule 2a-7, the Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less, and invest only in U.S. dollar
denominated securities determined by the Board of Directors to present minimal
credit risks and which are "Eligible Securities" as that term is defined by Rule
2a-7.
The Prime Money Market Portfolio further limits its investments to prime money
market instruments -- that is, Fixed Income Securities meeting the following
criteria:
(1) A security with a remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in
respect to a class of short-term debt obligations, or any
security within that class, that is comparable in priority and
security with the security) by a nationally recognized
statistical rating organization ("NRSRO") in the highest rating
category for short-term debt obligations; or
(2) a security that at the time of issuance was a long-term security
that has a remaining maturity of 397 calendar days or less, and
whose issuer has received from an NRSRO a rating, with respect
to a class of short-term debt obligations (or any security
within that class) that is now comparable in priority and
security with the security, in the highest rating category for
short-term debt obligations; or
(3) an unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by
the Board of Directors.
The Sub-Advisor subjects all securities eligible for investment to its own
credit analysis, and limits investment to those securities which it believes
present minimal credit risk to the Portfolio.
The Prime Money Market Portfolio will buy and sell securities in an effort to
improve current income return from its assets, trading holdings when there
appear to be advantages to be gained from moving between particular instruments
within the high grade money market. The Prime Money Market Portfolio may realize
capital gains or losses from such trading. The value of the securities held by
the Portfolio will vary inversely according to changes in prevailing interest
rates. Thus, if interest rates have increased from the time a security was
purchased, such security, if sold, might be sold at a price less than its
purchase cost. Similarly, if interest rates have declined from the time a
security was purchased, such security, if sold, might be sold at a price greater
than its purchase cost. In either instance, if the security was purchased at
face value and held to maturity, no gain or loss would be realized.
FIXED INCOME SECURITIES
The Prime Money Market Portfolio may invest in the fixed income investments
described below (collectively "Fixed Income Securities"). All such securities
must be U.S. dollar denominated and meet the quality and maturity restrictions
discussed above.
Fixed Income Securities consist of (i) corporate debt securities, including
bonds, debentures, and notes; (ii) bank obligations, such as certificates of
deposit, bankers' acceptances, and time deposits of domestic banks, foreign
branches and subsidiaries of domestic banks, and domestic and foreign branches
of foreign banks and domestic savings and loan associations (in amounts in
excess of the insurance coverage (currently $100,000 per account) provided by
the Federal Deposit Insurance Corporation); (iii) commercial paper; (iv)
floating and variable rate securities (including variable account master demand
notes); (v) repurchase agreements; (vi) illiquid debt securities (such as
private placements, restricted securities and repurchase agreements maturing in
more than seven days); (vii) foreign securities -- debt securities issued by
foreign issuers traded either in foreign markets or in domestic markets through
depository receipts; (viii) convertible securities -- debt securities of
corporations convertible into or exchangeable for equity securities or debt
securities that carry with them the right to acquire equity securities, as
evidenced by warrants attached to such securities, or acquired as part of units
of the securities; (ix) preferred stocks -- securities that represent an
ownership interest in a corporation and that give the owner a prior claim over
common stock on the company's earnings or assets; (x) U.S. government
securities, (xi) mortgage-backed securities, collateralized mortgage obligations
and similar securities (including corporate asset-backed securities), and (xii)
when-issued or delayed delivery securities.
Fixed Income Securities consist of fixed rate securities and variable or
floating rate securities (income producing debt instruments with interest rates
which change at stated intervals or in relation to a specified interest rate
index). (See "IMPLEMENTATION OF POLICIES AND RISKS -- Variable or Floating Rate
Securities".)
Corporate debt securities, including bonds, debentures, and notes, may be
unsecured or secured by the issuer's assets. They may be senior or subordinate
in right of payment to other creditors of the issuer and may be listed on a
national securities exchange or traded in the over-the-counter market. The
Portfolio may invest in the obligations of banks and savings and loan
associations. However, the Portfolio will only invest in obligations of banks
and savings and loan associations which present minimal credit risks.
"U.S. government securities" include bills, notes, bonds, and other debt
securities differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or issued or guaranteed by U.S.
government agencies or instrumentalities. U.S. government agency securities
include securities issued by (a) the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States; (b)
the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, whose securities are
supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, the Interamerican Development Bank, and the International
Bank for Reconstruction and Development, whose securities are supported only by
the credit of such agencies. While the U.S. government provides financial
support to such U.S. government sponsored agencies or instrumentalities, no
assurance can be given that it always will do so. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of their
securities and consequently, the value of such securities may fluctuate.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to certain
restrictions described herein), the Prime Money Market Portfolio may invest in
the following securities and employ the following investment techniques, some of
which may present special risks as described below. A more complete discussion
of these securities and investment techniques and their associated risks is
contained in the Statement of Additional Information.
REPURCHASE OBLIGATIONS
The Portfolio may enter into repurchase agreements with member banks of the
Federal Reserve System or dealers registered under the Securities and Exchange
Act of 1934. In a repurchase agreement, the Portfolio buys a security at one
price and, at the time of sale, the seller agrees to repurchase the obligation
at an agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Under each repurchase agreement, the selling institution
will be required to maintain the value of the securities subject to the
repurchase agreement at not less than the repurchase price plus accrued
interest. Repurchase agreements could involve certain risks in the event of
default or insolvency of the other party to the agreement, including possible
delays or restrictions upon the Portfolio's ability to dispose of the underlying
securities. The Portfolio may not enter into repurchase agreements if, as a
result, more than 10 percent of the Portfolio's total asset value at the time of
the transaction would be invested in the aggregate in repurchase agreements
maturing in more than seven days and other securities which are not readily
marketable. (See "Illiquid Securities" below.)
ILLIQUID SECURITIES
The Portfolio may invest up to 10 percent of its net assets in illiquid
securities. For purposes of this restriction, illiquid securities include
restricted securities (securities the disposition of which is restricted under
the federal securities laws, such as private placements), other securities
without readily available market quotations (including interest-only and
principal-only stripped mortgage-backed securities), and repurchase agreements
maturing in more than seven days. Risks associated with restricted securities
include the potential obligation to pay all or part of the registration expenses
in order to sell certain restricted securities. A considerable period of time
may elapse between the time of the decision to sell a security and the time the
Portfolio may be permitted to sell it under an effective registration statement.
If, during such a period, adverse conditions were to develop, the Portfolio
might obtain a less favorable price than prevailing when it decided to sell.
(See "Stripped Mortgage-Backed Securities" below.) A complete description of
these investment practices and their associated risks is contained in the
Statement of Additional Information.
VARIABLE OR FLOATING RATE SECURITIES
The Portfolio may invest in securities which offer a variable or floating rate
of interest. Variable rate securities provide for automatic establishment of a
new interest rate at fixed intervals (e.g., daily, monthly, semiannually, etc.).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on seven days' notice; in other
cases, the demand feature is exercisable at any time on 30 days' notice or on
similar notice at intervals of not more than one year. Some securities which do
not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.
Variable rate demand notes include master demand notes which are obligations
that permit a Portfolio to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations normally has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders of such obligations. The interest rate on a floating rate
demand obligation is based on a known lending rate, such as a bank's prime rate,
and is adjusted automatically each time such rate is adjusted. The interest rate
on a variable rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Portfolio's right
to redeem is dependent on the ability of the borrower to pay principal and
interest on demand. Such obligations frequently are not rated by credit rating
agencies. If not so rated, the Portfolio may invest in them only if the
Sub-Advisor determines that at the time of investment the obligations are of
comparable quality to the other obligations in which the Portfolio may invest.
The Sub-Advisor, on behalf of the Portfolio, will consider on an ongoing basis
the creditworthiness of the issuers of the floating and variable rate demand
obligations owned by the Portfolio.
MORTGAGE-BACKED SECURITIES
Mortgage loans made by banks, savings and loan institutions, and other lenders
are often assembled into pools which are issued and guaranteed by an agency or
instrumentality of the U.S. government, though not necessarily backed by the
full faith and credit of the U.S. government itself, or collateralized by U.S.
Treasury obligations or by U.S. government agency securities. Interests in such
pools are described as "Mortgage-Backed Securities". These include securities
issued by the Government National Mortgage Association ("GNMA"), Federal Home
Loan Mortgage Corporation ("FHLMC"), and the Federal National Mortgage
Association ("FNMA"). Subject to the limitations of its investment policies and
restrictions, the Portfolio may invest in Mortgage-Backed Securities
representing undivided ownership interests in pools of mortgage loans, including
GNMA, FHLMC, and FNMA Certificates and so-called "CMOs" i.e., collateralized
mortgage obligations which are issued by nongovernmental entities but which are
collateralized by U.S. Treasury obligations or by U.S. government agency
securities. The Portfolios may also invest in REMIC Certificates issued by FNMA.
Investors may purchase beneficial interest in REMICs which are known as
"regular" interests or "residual" interests. The Portfolio is not presently
permitted to invest in "residual" interests.
GNMA Certificates are Mortgage-Backed Securities which evidence an undivided
interest in a pool of mortgage loans. GNMA Certificates differ from bonds in
that principal is paid monthly by the borrowers over the term of the loan rather
than returned in a lump sum at maturity. GNMA Certificates that the Portfolio
may purchase are the "modified pass-through" type. "Modified pass-through" GNMA
Certificates entitle the holder to receive a share of all interest and principal
payments paid and owed on the mortgage pool, net of fees paid to the "issuer"
and GNMA, regardless of whether or not the mortgagor actually makes the payment.
GNMA Certificates are backed as to the timely payment of principal and interest
by the full faith and credit of the U.S. government.
FHLMC issues two types of mortgage pass-through securities: mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. The FHLMC guarantees timely payments of interest on PCs and the full
return of principal. GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semiannually and return
principal once a year in guaranteed minimum payments. This type of security is
guaranteed by FHLMC as to timely payment of principal and interest but it is not
guaranteed by the full faith and credit of the U.S. government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. The principal and the timely payment of interest on FNMA
Certificates are guaranteed only by FNMA itself, not by the full faith and
credit of the U.S. government. FNMA also issues REMIC Certificates, which
represent an interest in a trust funded with FNMA Certificates. REMIC
Certificates are guaranteed by FNMA and not by the full faith and credit of the
U.S. government.
Each of the Mortgage-Backed Securities described above is characterized by
periodic payments to the holder, reflecting the monthly payments made by the
borrowers who received the underlying mortgage loans. The payments to the
security holders (such as the Portfolio), like the payments on the underlying
loans, represent both principal and interest. 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. Thus, the security holders
frequently receive prepayments of principal in addition to the principal which
is part of the regular payments. 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, some of the Portfolio's higher-yielding
Mortgage-Backed Securities might be converted to cash, and the Portfolio will be
forced to accept lower interest rates when that cash is used to purchase
additional securities in the Mortgage-Backed Securities sector or in other
investment sectors. In addition to the foregoing, the Portfolio may invest in
similar asset-backed securities which are backed not by mortgages but other
assets such as receivables.
ASSET-BACKED SECURITIES
Subject to its investment policies and restrictions, the Portfolio may invest in
corporate asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. 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 sell off certain amounts owed on the credit cards, thereby reducing the
balance due. Most 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. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (i.e. loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
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 ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
Portfolio will not pay any additional or separate fees for credit support. 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. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS, AND PIK BONDS
The Portfolio may invest in zero coupon bonds, deferred interest bonds and PIK
bonds. Zero coupon bonds are debt obligations which are issued or purchased at a
significant discount from face value. The discount approximates the total amount
of interest the bonds will accrue and compound over the period until maturity or
the first interest payment date at a rate of interest reflecting the market rate
of the security at the time of issuance. While zero coupon bonds do not require
the periodic payment of interest, deferred interest bonds provide for a period
of delay before the regular payment of interest begins. PIK bonds are debt
obligations which provide that the issuer thereof may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
(see "INVESTMENT POLICIES AND TECHNIQUES" in the Statement of Additional
Information.)
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
The Portfolio may invest a portion of its assets in Collateralized Mortgage
Obligations ("CMOs"), which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically CMOs are collateralized by
certificates issued by GNMA, FNMA, or FHLMC but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Portfolio may
also invest a portion of its assets in multiclass pass-through securities which
are interests in a trust composed of Mortgage Assets. CMOs (which include
multiclass pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. government or by private originators or investors
in mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. Payments of principal and interest on 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. In a
CMO, a series of bonds or certificates is usually issued in multiple classes
with different maturities. 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 repayments on the Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates, resulting in a loss of all or part of the premium
if any has been paid. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semiannual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a series of a CMO
in innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security).
The Portfolio may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes. For a further description of CMOs,
parallel pay CMOs, and PAC Bonds and the risks related to transactions therein,
see the Statement of Additional Information.
STRIPPED MORTGAGE-BACKED SECURITIES
The Portfolio may invest a portion of its assets in stripped mortgage-backed
securities ("SMBS"), which are derivative multiclass mortgage securities usually
structured with two classes that receive different proportions of interest and
principal distributions from an underlying pool of mortgage assets. For a
further description of SMBS and the risks related to transactions therein, see
the Statement of Additional Information.
PARTICIPATION INTERESTS
The Portfolio may invest in participation interests in securities in which the
Portfolio may invest, subject to the Portfolio's quality, diversification, and
maturity restrictions. A participation interest gives the Portfolio an undivided
interest in the security in the proportion that the Portfolio's participation
interest bears to the total principal amount of the security. (See "INVESTMENT
POLICY AND TECHNIQUES" in the Statement of Additional Information.)
FOREIGN SECURITIES
The Portfolio may invest up to 15 percent of its total assets directly in U.S.
dollar denominated securities of foreign issuers, including the securities of
foreign branches and foreign subsidiaries of domestic banks and domestic and
foreign branches of foreign banks. The foreign investments may involve risks
which are in addition to the risks inherent in domestic investments. In many
countries, there is less publicly available information about issuers than is
available in the reports and ratings published about companies in the United
States.
Foreign companies may not be subject to uniform accounting, auditing, and
financial reporting standards. The value of foreign investments may rise or fall
because of changes in currency exchange rates, and the Portfolio may incur
certain costs in converting securities denominated in foreign currencies to U.S.
dollars. Dividends and interest on foreign securities may be subject to foreign
withholding taxes, which would reduce the Portfolio's income without providing a
tax credit for the Portfolio's shareholders. Obtaining judgments, when
necessary, in foreign countries may be more difficult and more expensive than in
the United States. Although the Portfolio intends to invest in securities of
foreign issuers located in developed countries which are considered as having
stable and friendly governments, there is the possibility of expropriation,
confiscatory taxation, nationalization, currency blockage, or political or
social instability which could affect investments in those nations.
In addition, the net asset value of the Portfolio is determined and shares of
the Portfolio can be redeemed only on days the New York Stock Exchange ("NYSE")
is open for business. However, foreign securities held by the Portfolio may be
traded on days and at times when the NYSE is closed. Accordingly the net asset
value of the Portfolio may be significantly affected on days when the investor
is unable to purchase or redeem shares.
DELAYED DELIVERY SECURITIES
The Portfolio may invest up to 15 percent of its total assets, measured at the
time of purchase, in securities purchased on a when-issued or delayed delivery
basis ("Delayed Delivery" or "When-Issued" Securities). Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days. Purchasing securities on a when-issued
basis allows the Portfolio to lock in a fixed price or yield on a security it
intends to purchase. At the time the Portfolio purchases a When-Issued Security,
it records the transaction and reflects the value of the security in determining
its net asset value (although the Portfolio will not accrue interest income
prior to actual delivery).
The Portfolio may also sell securities on a delayed delivery basis. When the
Portfolio has sold a security on a delayed delivery basis, the Portfolio does
not participate in further gains or losses with respect to the security.
Delayed Delivery Securities are subject to changes in value based on the market
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Delayed Delivery Securities may
expose the Portfolio to this risk because they may experience such fluctuation
prior to actual delivery. The greater the Portfolio's outstanding commitments to
purchase these securities, the greater the Portfolio's exposure to possible
fluctuations in its net asset value. Purchasing (or selling) Delayed Delivery
Securities may involve the additional risk that the yield available in the
market when delivery occurs may be higher (or lower) than that obtained at the
time of commitment. Although the Portfolio may be able to sell Delayed Delivery
Securities prior to the delivery date, the Portfolio will only purchase Delayed
Delivery Securities for the purpose of actually acquiring the securities, unless
after entering into the commitment a sale appears desirable for investment
reasons. The Portfolio will segregate and maintain cash, cash-equivalents, or
other high quality, liquid debt securities in an amount at least equal to the
amount of outstanding commitments for Delayed Delivery Securities at all times.
See the Statement of Additional Information for further discussion of Delayed
Delivery Transactions.
INVESTMENT RESTRICTIONS
The Prime Money Market Portfolio has adopted certain investment restrictions.
The Portfolio's "fundamental" investment restrictions cannot be changed without
approval by holders of a majority of the Portfolio's outstanding voting shares.
As defined in the 1940 Act, this means the lesser of (a) 67 percent of the
shares of the Portfolio at a meeting where more than 50 percent of the
outstanding shares are present in person or by proxy, or (b) more than 50
percent of the outstanding shares of the Portfolio. However, except where
expressly stated to be fundamental, the Portfolio's investment restrictions are
not fundamental and may be changed without shareholder approval. Please refer to
the Statement of Additional Information for a complete list of investment
restrictions adopted by the Portfolio.
The investment restrictions provide, among other things, that the Portfolio may
not:
1. Purchase securities of any company having less than three years of
continuous operation (including operations of any predecessors) if the
purchase would cause the value of the Portfolio's investments in all such
companies to exceed 5 percent of the value of its assets.
2. Purchase the securities of any issuer if such purchase would cause more
than 5 percent of the value of the Portfolio's total assets to be invested
in securities of any one issuer (except securities of the U.S. government
or any instrumentality thereof), or purchase more than 10 percent of the
outstanding voting securities of any one issuer, or more than 10 percent of
the outstanding securities of any class.
3. Borrow money except for temporary or emergency purposes (but not for the
purpose of purchasing investments) and then, only in an amount not to
exceed 25 percent of the value of the Portfolio's net assets at the time
the borrowing is incurred. The Portfolio may borrow from a bank or by
engaging in a reverse repurchase agreement. The Portfolio will not purchase
securities when borrowings exceed 5 percent of its total assets. If the
Portfolio borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. To this extent, purchasing
securities when borrowings are outstanding may involve an element of
leverage. See the Statement of Additional Information for an explanation of
reverse repurchase agreements.
4. Enter into futures contracts, options, or options on futures.
MANAGEMENT
Under the laws of the State of Maryland, the property, affairs and business of
the Fund are managed by the Board of Directors. The Directors elect officers who
are charged with the responsibility for the day-to-day operation of the Prime
Money Market Portfolio as well as other Portfolios and the execution of policies
formulated by the Directors. The Directors and Officers of the Fund are:
* Robert G. Millen, Chairman of the Board and Director of the Fund.
Chief Development Officer, IASD Health Services Corp. (Blue Cross and
Blue Shield of Iowa), 1990 to Present; President and Chief Executive
Officer, First Interstate Bank, 1981 to 1990.
William C. Knapp, II, Director of the Fund. President, AmerUs Properties,
Inc. (real estate development, construction and management) 1992 to
Present; Corporate Counsel/Secretary/Sr. Vice President, Iowa Realty,
Co., Inc. (real estate brokerage), 1978 to 1992.
* Richard C. Anderson, Director of the Fund.
Senior Vice President, Finance, IASD Health Services Corp. (Blue Cross
and Blue Shield of Iowa).
James S. Cownie, Director of the Fund.
Chairman and President, New Heritage Associates (Cable TV Operations).
Thomas K. Koehn, Director of the Fund.
President, The Waldinger Corporation (mechanical contractor).
Marvin J. Walter, Director of the Fund. President, Dayton Road
Development Corporation/W & G Marketing Company, Inc. (real estate
development and meat processing distribution).
* David W. Miles, President and Director of the Fund.
Senior Managing Director, Investors Management Group (registered
investment advisor).
Carole E. Sours, Vice President and Treasurer of the Fund.
Director, Financial Services, IASD Health Services Corp. (Blue Cross and
Blue Shield of Iowa).
Ruth L. Prochaska, Secretary of the Fund. Controller/Compliance Officer,
Investors Management Group (registered investment advisor).
Each Director who is deemed an "interested person," as defined in the 1940 Act,
is indicated by an asterisk.
THE ADVISOR
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Capital Value Corporation ("CVC" or the "Advisor"), an Iowa
corporation located at 636 Grand Avenue, Des Moines, Iowa, 50309. Under the
terms of the Advisory Agreement, CVC oversees the activities of the Sub-Advisor
and establishes and monitors general criteria and policies for the operation of
the Fund, subject to the supervision of the Fund's Board of Directors. CVC, a
wholly-owned indirect subsidiary of IASD Health Services Corp., which does
business in the state of Iowa as Blue Cross and Blue Shield of Iowa and in the
state of South Dakota as Blue Cross of South Dakota, is a newly organized
registered investment advisor with no operating history and no experience
managing or administering a mutual fund.
THE SUB-ADVISOR
The Fund and CVC have entered into a sub-investment advisory agreement (the
"Sub-Advisory Agreement") with Investors Management Group ("IMG" or the
"Sub-Advisor"), 2203 Grand Avenue, Des Moines, Iowa 50312-5338, to serve as the
Portfolio's sub-investment advisor. IMG is a registered investment advisor
organized in 1982. Since then, IMG's principal business has been providing
continuous investment management to pension and profit-sharing plans, insurance
companies, public agencies, banks, endowments and charitable institutions, other
mutual funds, individuals and others. IMG has approximately $1.4 billion in
equity, fixed income, and money market assets under management. David W. Miles,
Mark A. McClurg, and James W. Paulsen are principal shareholders of IMG.
Pursuant to the Sub-Advisory Agreement with the Fund and CVC, IMG provides
investment advisory assistance and the day-to-day management of the Portfolio's
investments, subject to the supervision of CVC and the overall authority of the
Board of Directors of the Fund.
The Prime Money Market Portfolio is co-managed by James W. Paulsen, Ph.D.,
Jeffrey D. Lorenzen, CFA, and Kathryn D. Beyer, CFA. All of the foregoing have
managed the Portfolio since inception. The following is certain biographical
information concerning the co-managers:
JAMES W. PAULSEN, PH.D., SENIOR MANAGING DIRECTOR. Dr. Paulsen is the
firm's chief portfolio strategist and chairs IMG's Investment Policy
Committee. Prior to joining IMG in 1991, Dr. Paulsen served as
president of a Cedar Rapids, Iowa investment firm managing over $700
million from 1983 to 1991. Dr. Paulsen received his Bachelor of Science
degree in economics and his Doctorate in economics from Iowa State
University.
JEFFREY D. LORENZEN, CFA, MANAGING DIRECTOR. Mr. Lorenzen is a fixed
income strategist and is a member of IMG's Investment Policy Committee.
Prior to joining IMG in 1992, his experience includes serving as a
securities analyst and corporate fixed income analyst for The Statesman
Group from 1989 to 1992. He received his Masters of Business
Administration from Drake University and his Bachelor of Business
Administration degree from the University of Iowa.
KATHRYN D. BEYER, CFA, MANAGING DIRECTOR. Ms. Beyer is a fixed income
strategist and is a member of IMG's Investment Policy Committee. Prior
to joining IMG in 1993 her experience includes serving as a securities
analyst and director of mortgage-backed securities for Central Life
Assurance Company from 1988 to 1993. Ms. Beyer received her Masters of
Business Administration from Drake University and her Bachelor of
Science degree in agricultural engineering from Iowa State University.
INVESTMENT ADVISORY FEE PAID TO CVC AND IMG
Under the terms of the Advisory Agreement, the Fund has agreed to pay CVC a
monthly management fee. Under the Sub-Advisory Agreement, the Fund also agrees
to pay IMG a monthly sub-advisory fee. CVC receives from this Portfolio a
management fee computed and paid monthly equal to, on an annual basis, 0.05
percent of the Portfolio's average daily net assets. The Fund pays IMG a
management fee computed and paid monthly equal to, on an annual basis, 0.23
percent of the Portfolio's average daily net assets. During the fiscal year
ended March 31, 1996, CVC received advisory fees totaling $2,738 and IMG
received sub-advisory fees totaling $12,597.
At its expense, IMG provides office space and all necessary office facilities,
equipment, and personnel for servicing the investments of the Fund.
Except for the expenses expressly assumed by IMG as set forth above or as
described below with respect to the distribution of shares of each Portfolio of
the Fund, the Fund is responsible for all its other expenses, including, without
limitation, governmental fees, interest charges, taxes, membership dues in the
Investment Company Institute allocable to the Fund, brokerage commissions, and
other expenses connected with the execution, recording and settlement of
portfolio security transactions; expenses of repurchasing and redeeming shares,
and expenses of servicing shareholder accounts; expenses of registering or
qualifying shares for sale; expenses for preparing, printing and distributing
periodic reports, notices and proxy statements to shareholders and to
governmental officers and commissions; insurance premiums; fees and expenses of
the Fund's custodian including safekeeping of funds and securities and
maintaining required books and accounting; expenses of calculating the net asset
value of shares of the Fund; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
the Fund; compensation and expenses of Directors who are not "interested
persons" of the Advisor or Sub-Advisor; and expenses of shareholder meetings.
Expenses relating to the issuance, registration and qualification of shares of
the Fund and the preparation, printing and mailing of prospectuses are borne by
the Fund except that the Fund's Distribution Agreement with IFS requires IFS to
pay for prospectuses that are to be used for sales purposes.
From time to time, CVC and IMG may voluntarily waive all or a portion of the
management fee and/or absorb certain expenses of the Portfolio without further
notification of the commencement or termination of such waiver or absorption.
Any such waiver will have the effect of lowering the overall expense ratio for
the Portfolio and increasing the Portfolio's overall yield to investors at the
time any such amounts are waived and/or absorbed.
Except as voluntarily absorbed by CVC and IMG, all expenses incurred in the
operation of the Fund will be borne by the Fund. Expenses attributable to a
particular Portfolio are charged against the assets of that Portfolio; other
expenses of the Fund are allocated among the Portfolios on a reasonable basis
determined by the Board of Directors, including, but not limited to,
proportionately in relation to the net assets of each Portfolio.
FEES FOR SHAREHOLDER SERVICES
CVC also provides information and administrative services for Fund shareholders
pursuant to an Administrative Services Agreement ("Administrative Services
Agreement") under a "Shareholder Service Plan" adopted by the Board of Directors
and reviewed at least annually. Under the Shareholder Services Plan, CVC may
enter into related arrangements with various financial services firms, such as
broker-dealer firms or banks ("Firms"), that provide services and facilities for
their customers or clients who are shareholders of the Fund. Such administrative
services and assistance may include, but are not limited to, establishing and
maintaining shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund and its special
features and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. CVC bears all its expenses
of providing services pursuant to the Administrative Services Agreement,
including the payment of any services fees. For services under the
Administrative Services Agreement, the Fund pays CVC a fee, payable monthly, at
the annual rate of up to 0.25 percent of average daily net assets of the
Portfolio. CVC may then pay each Firm a service fee at an annual rate of up to
0.25 percent of net assets of those accounts in the Fund that it maintains and
services. A Firm becomes eligible for the service fee based on assets in the
accounts in the month following the month of purchase and the fee continues
until terminated by CVC or the Fund. The fees are calculated monthly and paid
quarterly.
CVC also may provide some of the above services and may retain any portion of
the fee under the Administrative Services Agreement not paid to Firms to
compensate itself for administrative functions performed for the Fund.
FUND ACCOUNTING
IMG provides fund accounting services pursuant to a Fund Accounting Agreement.
The Fund pays IMG fees equal to an annual rate of .10 percent of average daily
net assets not to exceed $18,000 annually.
DISTRIBUTOR
IFS serves as distributor for the Fund pursuant to a Distribution Agreement. IFS
bears all its expenses of providing services pursuant to the agreement,
including the payment of any commissions. IFS provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than shareholders. The Fund bears the cost of
qualifying and maintaining the qualification of Fund shares for sale under the
securities laws of the various states and the expense of registering its shares
with the Securities and Exchange Commission. For its services under the
Distribution Agreement, IFS presently receives no fee from the Prime Money
Market Portfolio.
For further information, see "MANAGEMENT OF THE FUND" in the Statement of
Additional Information.
HOW TO INVEST
You can purchase shares of the Portfolio in several ways, each of which is
described below, through IFS as distributor of the Fund's shares. You may also
purchase (or redeem) shares of the Portfolio through dealers or others who may
charge a service or transaction fee. (See "Financial Services Firms" below.)
Please review the information under "ADDITIONAL INVESTMENT INFORMATION" and "HOW
TO REDEEM SHARES." All purchases are subject to acceptance by the Fund and the
Fund may decline to accept a purchase order upon receipt when it would not be in
the best interest of existing shareholders to accept the order. The purchase
price of your shares will be the net asset value next determined after IFS
receives your investment in proper form (normally $1.00 per share).
BY MAIL
You can purchase shares of the Portfolio by sending an application and a check
or money order payable to "Capital Value Fund" to the address on the cover of
this Prospectus. You must indicate that you wish to invest in the Prime Money
Market Portfolio. To make additional purchases, enclose a check payable to
Capital Value Fund along with the Additional Investment Form provided with your
account statement. Or, you may send a check along with an indication of which
account it should be deposited in. Please note the minimum investment
requirements for the Portfolio. (See "ADDITIONAL INVESTMENT INFORMATION --
Minimum Investments".) If your check does not clear, you will be charged a $20
service fee. You will also be responsible for any losses suffered by the
Portfolio as a result. All your purchases must be made by checks payable to
Capital Value Fund drawn on U.S. banks. Third-party checks are not accepted.
BY WIRE
You may purchase additional shares by wire. Please call 1-800-798-1819 for
complete wire instructions. The Portfolio will not be responsible for the
consequences of delays resulting from the banking or Federal Reserve wire
systems.
BY EXCHANGE
You can open a new account in the Prime Money Market Portfolio by exchanging
from another Capital Value Fund Portfolio. However, a contingent deferred sales
charge ("CDSC") will be applied (if applicable) to the redemption from the other
Portfolio. You may exchange from the Prime Money Market Portfolio to another
Capital Value Fund Portfolio without charge. However, your investments may then
become subject to a CDSC upon redemption. You may obtain a Prospectus for the
Portfolio you are interested in by calling 1-800-798-1819. Please read it
carefully before investing or sending money. Exchanges may only be made between
identically registered accounts. You may request an exchange by calling or
writing IFS. Your purchase price will be the offering price next determined
after your exchange request is received in proper form. The telephone exchange
minimum is the lesser of $50 or the balance of your account, with no minimum for
written exchanges. Check the minimum initial investment requirements for the
Portfolio under "ADDITIONAL INVESTMENT INFORMATION - Minimum Investments."
Please review the information about this privilege under "SHAREHOLDER SERVICES -
Telephone Exchange and Redemption Privilege".
BY TELEPHONE PURCHASE
You can make additional investments from $50 to $25,000 in your Prime Money
Market Portfolio account by telephone. Upon your authorization, money from your
bank checking or NOW account will be withdrawn to make the investment. The price
you receive will be the price next computed after IFS receives your investment
from your bank in proper form, which is normally two banking days after
initiated through IFS. To establish the telephone purchase privilege, request a
form by calling 1-800-798-1819. Neither the Portfolio nor its transfer agent
will be responsible for the authenticity of purchase instructions received by
telephone. Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
NO MINIMUM INVESTMENT PROGRAM
The Portfolio will waive the minimum initial investment for investors using the
Automatic Investment Plan. To establish this option, call 1-800-798-1819 for an
application. If the Automatic Investment Plan is discontinued before the
investor reaches the minimum investment that would otherwise be required, the
Portfolio reserves the right to close an investor's account. Prior to closing
any account for failure to reach the minimum initial investment, however, the
Portfolio will give the investor written notice and 60 days in which to
reinstate the Automatic Investment Plan or otherwise reach the minimum initial
investment. Since the Portfolio has the right to redeem an investor's account
for failure to reach the minimum initial investment, you should consider your
financial ability to continue in this Plan until the minimum initial investment
amount is met, since such a redemption may occur in periods of declining share
prices. (See "SHAREHOLDER SERVICES -- Automatic Investment Plan".)
FINANCIAL SERVICES FIRMS
Shares of the Portfolio are available through selected financial services firms
such as broker-dealer firms and banks ("Firms"). The purchase price for shares
of a Portfolio purchased through such Firms will be the net asset value
determined after receipt of the order to purchase by the Firm. Such Firms are
responsible for the prompt transmission of purchase and redemption orders.
Firms provide varying arrangements for their clients to purchase and redeem
Portfolio shares. Some may establish higher minimum investment requirements than
set forth above. They may arrange with their clients for other investment or
administrative services. Such Firms may independently establish and charge
additional amounts to their clients for such services, which charges would
reduce the clients' yield or return. Firms may also hold Portfolio shares
positions in nominee or street name as agent for and on behalf of their
customers. In such instances, the Portfolio's transfer agent will have no
information with respect to or control over accounts of specific shareholders.
Such shareholders may obtain access to their accounts and information about
their accounts only from their Firms. Some of the Firms may receive compensation
from the Fund's Shareholder Service Agent for recordkeeping and other expenses
related to these nominee accounts. In addition, certain privileges with respect
to the purchase and redemption of shares or the reinvestment of dividends may
not be available through such Firms. Some Firms may participate in a program
allowing them access to their clients' accounts for servicing including, without
limitation, transfers of registration and dividend payee changes; and may
perform functions such as generation of confirmation statements and disbursement
of cash dividends. This Prospectus should be read in connection with such Firms'
material regarding their fees and services.
ADDITIONAL INVESTMENT INFORMATION
Shares may be purchased at the net asset value of the Portfolio's shares next
determined after the Fund receives the order for such purchase (normally $1.00
per share). The Portfolio reserves the right to cease offering its shares for
sale at any time.
SIGNATURE GUARANTEES
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. A signature guarantee is required for all
persons registered on an account. Some instances in which you will need a
signature guarantee include:
1. when you add the telephone redemption or check writing options to your
existing account;
2. if you transfer the ownership of your account to another individual or
organization;
3. for a written redemption request over $25,000;
4. when you want redemption proceeds sent to a different name or address than
is registered on your account;
5. if you add/change your name or add/remove an owner on your account; and
6. if you add/change the beneficiary on your retirement account.
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the Securities and Exchange Commission. These institutions include
banks, savings and loan associations, credit unions, brokerage firms, and
others. The words "SIGNATURE GUARANTEED" must be stamped or typed near each
person's signature and appear with the printed name, title, and signature of an
officer and the name of the guarantor institution. PLEASE NOTE THAT A NOTARY
PUBLIC STAMP OR SEAL IS NOT A SIGNATURE GUARANTEE.
POWER OF ATTORNEY -- ATTORNEY-IN-FACT
If you are investing as attorney-in-fact for another person, please complete the
account application in the name of such person. You should sign the back of the
application in the following form: "[person's name] by [your name],
attorney-in-fact". An affidavit for the Power of Attorney document must be
submitted with the application if you wish to establish telephone or check
writing privileges for the account. You will also be required to provide an
affidavit of the Power of Attorney document to process all redemption requests
from the attorney-in-fact.
The following form of affidavit typed on the Power of Attorney document and
signed is acceptable:
I hereby certify that this affidavit is a true and complete copy of the
original Power of Attorney, still in full force and effect, and that the
maker is still alive and competent.
BY:_________________________________________________________
(Attorney-in-Fact) (Date)
_______________________________
(Print Name and Title) (Notary Seal)
This affidavit must be notarized and dated within two weeks of the date it is
received by the Fund.
CORPORATIONS AND TRUSTS
If you are investing for a corporation, please include with your account
application a certified copy of your corporate resolution indicating which
officers are authorized to act on behalf of your account. Corporate resolutions
may need to be updated annually. As an alternative, you may complete a
Certification of Authorized Individuals form, which can be obtained from the
Fund. Until a valid corporate resolution or Certification of Authorized
Individuals is received by the Fund, services such as telephone redemption, wire
redemption, and check writing will not be established. If you are investing as a
trustee, please include the date of the trust and attach a copy of the title and
signature pages of the trust agreement, as well as any pages indicating which
signatures are required to execute transactions. All trustees must sign the
application. If not, then services such as telephone redemptions, wire
redemptions, and check writing will not be established. All trustees must sign
redemption requests unless proper documentation to the contrary is provided to
the Fund. Failure to provide these documents or signatures as required when you
invest may result in delays in processing redemption requests.
MINIMUM INVESTMENTS
Except as provided below, the minimum initial investment for the Portfolio is
$500. Subsequent investments must be at least $50. For IRA accounts and Uniform
Gifts/Transfers to Minors accounts, the minimum initial investment is $250.
Minimum investments are waived for employee benefit plans qualified under
Section 401, 403(b)(7), or 457 of the Internal Revenue Code. These minimums can
be changed by the Fund at any time. Shareholders will be given at least 30 days'
notice of any increase in the minimums. The Fund will waive the minimum initial
investment for shareholders using the Automatic Investment Plan. (See "HOW TO
INVEST -- No Minimum Investment Program".)
CALCULATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of trading on the
NYSE, currently 3:00 p.m. Central Time, on days the NYSE is open for business.
However, the net asset value will not be determined for the Portfolio on days
during which the Portfolio receives no orders to purchase shares and no shares
are tendered for redemption. Net asset value is calculated by taking the fair
value of the Portfolio's total assets, subtracting all liabilities, and dividing
by the total number of outstanding shares. Expenses are accrued daily and
applied when determining the net asset value. Fixed Income Securities are valued
on the basis of valuations furnished by a pricing service that utilizes
electronic data processing techniques to determine valuations for normal
institutional sized trading units of Fixed Income Securities without regard to
sale or bid prices when such valuations are believed to more accurately reflect
the fair market value of such institutional securities. Otherwise sale or bid
prices are used. Any securities or other assets for which market quotations are
not readily available are valued at fair value as determined in good faith by
the Board of Directors. All securities held by the Prime Money Market Portfolio
are valued by the amortized cost method unless the Board of Directors believes
unusual circumstances indicate another method of determining fair value should
be used. Under this method of valuation, a security is initially valued at its
acquisition cost, and thereafter, amortization of any discount or premium is
assumed each day regardless of the impact of fluctuating interest rates on the
market value of the security.
The Prime Money Market Portfolio uses the amortized cost method to maintain a
constant net asset value of $1.00 per share, but there can be no assurance that
the $1.00 net asset value per share will be maintained.
HOW TO REDEEM SHARES
You may request redemption of your shares at any time. Once your redemption
request is received in proper form, the Portfolio will normally mail you the
proceeds the next business day. Proceeds will ordinarily be mailed no later than
seven days after receipt of a redemption request in proper form. However, the
Portfolio may withhold payment until investments which were made by check,
telephone, or the Automatic Investment Plan have been collected. (This is a
security precaution only and does not affect your investment. Your money is
invested the day your purchase order is accepted.) Checks generally are
collected in 10 calendar days.
The right of redemption may be suspended during any period, when: (a) trading on
the NYSE is restricted, as determined by the Commission, or such NYSE is closed
for other than weekends and holidays; (b) the Commission has permitted such
suspension by order; or (c) an emergency as determined by the Commission exists,
making disposal of portfolio securities or valuation of net assets of the
Portfolio not reasonably practicable.
If you are exchanging into another Portfolio, see "SHAREHOLDER SERVICES --
Telephone Exchange and Redemption Privilege" for a discussion of procedures and
certain tax consequences. Redemptions may also be made through broker-dealers or
others who may charge a commission or other transaction fee. Requests for
transfers of shares of the Portfolio from or between broker-dealer street name
accounts must be made by the broker-dealer. You should contact the broker in
whose account your shares are held if you want to transfer these shares.
WRITTEN REDEMPTION
To make a written redemption, please send your request to Capital Value Fund,
Inc., 2203 Grand Avenue, Des Moines, Iowa 50312-5338, and include:
1. your account number,
2. the number of shares or dollar amount you want to redeem,
3. each owner's name as registered on the account,
4. your street address as registered on the account, and
5. the signature of each owner as the name appears on the account.
Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. In addition,
redemptions over $25,000 require a signature guarantee. (See "ADDITIONAL
INVESTMENT INFORMATION -Signature Guarantees".)
RETIREMENT PLAN REDEMPTION
To redeem from an Individual Retirement Account (IRA), you may either use the
distribution form which you may request by calling 1-800-798-1819, or you may
send your request which includes the information described under "Written
Redemption" above.
In addition, you must:
1. indicate whether (a) 10 percent or more of the redemption proceeds should
be withheld for taxes, or (b) no portion of the proceeds should be withheld
for taxes;
2. include the type of distribution (e.g., a normal distribution or a
premature distribution); and
3. write that you certify under penalties of perjury that your social security
number is correct and that you are not subject to backup withholding.
For redemptions from any other retirement plan, please call IFS at
1-800-798-1819 for the appropriate distribution form. There is a $10.00 fee for
closing out an IRA or other retirement account.
TELEPHONE REDEMPTION
Telephone redemption privileges are only available to those shareholders who
have elected to use the privilege.
Once you authorize the telephone redemption option on your application, you may
redeem shares in amounts of $500 (or the balance of your account) or more by
telephone. If you would like to add the option to your account, you may request
a telephone redemption form from IFS. Each owner's signature must be guaranteed
in order to add the option to existing accounts. (See "ADDITIONAL INVESTMENT
INFORMATION -- Signature Guarantees".)
To place a redemption request by telephone, call IFS at 1-800-798-1819.
Redemption proceeds can be directly deposited by Electronic Funds Transfer
("EFT") or wired only to a commercial bank that you have authorized on your
account application or telephone redemption form. They may also be mailed to the
registered address on your account. Once you place your telephone redemption
request, it cannot be canceled or modified. The Fund and its Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, including refusing a telephone redemption if they believe
it advisable to do so. The Fund will tape record all telephone redemption
requests and will ask the social security number or other personal identifying
information of the shareholder and will only send redemption proceeds to the
shareholder of record at the address or to a financial account which has been
established by the shareholder pursuant to written authorization. Failure to
follow reasonable procedures may result in the Fund and/or its Transfer Agent
being liable for losses due to unauthorized or fraudulent transactions. IFS does
not charge a fee for redemptions directly deposited to your bank account by EFT.
However, a $10.00 fee is applicable to each wire redemption. Further
documentation may be requested from corporations, executors, administrators,
trustees, guardians, agents, or attorneys-in-fact. Shareholders may experience
difficulty in implementing a telephone redemption during periods of drastic
economic or market changes.
SHAREHOLDER SERVICES
As a Capital Value Fund shareholder, you will enjoy the advantages of:
o Automatic Dividend Reinvestment
o Telephone Purchase Privilege
o Telephone Exchange and Redemption Privilege
o Automatic Investment Plan
o Payroll Direct Deposit Plan
o No Minimum Investment Program
AUTOMATIC DIVIDEND REINVESTMENT
You can automatically reinvest all dividends and capital gains distributions,
have them directly deposited by EFT to your bank account, or receive them in the
form of a check. If you elect to have them reinvested, your dividends and
capital gains distributions will purchase additional shares at the net asset
value determined on the dividend or capital gains distribution payment date (no
sales charges). You may change your election at any time by writing IFS. IFS
must receive any such change seven days (15 days for EFT) prior to a dividend or
capital gains distribution payment date in order for the change to be effective
for that payment.
TELEPHONE PURCHASE PRIVILEGE
The Fund offers free telephone purchase privileges. (See "HOW TO INVEST -- By
Telephone Purchase".)
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
You may exchange shares between identically registered Capital Value Fund
Portfolio accounts either in writing or by telephone. However, certain
restrictions apply. (See "HOW TO INVEST -- By Exchange".)
You may authorize the telephone exchange or redemption privilege by completing
the "telephone authorization" section on your application. If you add the
telephone redemption privilege to your existing account, you must have each
owner's signature guaranteed. (See "ADDITIONAL INVESTMENT INFORMATION --
Signature Guarantees".) By establishing the telephone exchange and redemption
services, you authorize the Fund and its agents to act upon your instruction by
telephone to redeem or exchange shares from any account for which you have
authorized such services. (See "HOW TO REDEEM SHARES--Telephone Redemption".)
The Fund reserves the right, at any time without prior notice, to suspend,
limit, modify, or terminate the exchange privilege or its use in any manner by
any person or class. In particular, since an excessive number of exchanges may
be disadvantageous to the Portfolio, it reserves the right to terminate the
exchange privilege of any shareholder who makes more than five exchanges of
shares in a year and/or three exchanges of shares in a calendar quarter.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan allows you to make regular, systematic investments
into the Portfolio from your bank checking or NOW account. You may choose to
make investments on the fifth and/or twentieth day of each month from your
financial institution in amounts of $50 or more. When used in conjunction with
the No Minimum Investment Program, the initial minimum investment is not
required. (See "HOW TO INVEST -- No Minimum Investment Program".) There is no
service fee for participating in this Plan. You can set up the Automatic
Investment Plan with any financial institution that is a member of the Automated
Clearinghouse. For an application call 1-800-798-1819. The Fund reserves the
right to suspend, modify, or terminate the Automatic Investment Plan or its use
by any person without notice. If the Automatic Investment Plan is discontinued
before the investor reaches the minimum investment that would otherwise be
required (see "ADDITIONAL INVESTMENT INFORMATION -- Minimum Investments"), the
Fund reserves the right to close the investor's account. A service fee of $20
will be deducted from your account for any Automatic Investment Plan purchase
that does not clear due to insufficient funds or, if prior to notifying IFS in
writing to terminate the Plan, you close your bank account or in any manner
prevent withdrawal of funds from the designated checking or NOW account.
PAYROLL DIRECT DEPOSIT PLAN
You may purchase additional Fund shares through the Payroll Direct Deposit Plan.
Through this Plan, periodic investments (minimum $50) are made automatically
from your payroll check into your existing Portfolio account. By enrolling in
the Plan, you authorize your employer or its agents to deposit a specified
amount from your payroll check into the Portfolio's bank account. In most cases,
your Portfolio account will be credited the day after the amount is received by
the Fund's bank. In order to participate in the Plan, your employer must have
direct deposit capabilities by EFT available to its employees. The Plan may be
used for other direct deposits, such as social security checks, military
allotments and annuity payments.
This privilege may be selected by completing the Authorization for Direct
Deposit Form, which may be obtained by calling 1-800-798-1819. To enroll in the
Plan, the Authorization Form must be signed by you and given to your employer's
payroll department. You may alter the amount of the deposit, the frequency of
the deposit, or terminate your participation in the Plan by notifying your
employer. The Portfolio reserves the right, at any time and without prior
notice, to suspend, limit, or terminate the Automatic Direct Deposit privilege
or its use in any manner by any person.
NO MINIMUM INVESTMENT PROGRAM
The Fund offers a No Minimum Investment Program for shareholders using the
Automatic Investment Plan. (See "HOW TO INVEST -- No Minimum Investment
Program".)
DISTRIBUTIONS AND TAXES
The Portfolio will qualify and intends to remain qualified as a "regulated
investment company" under the Internal Revenue Code and intends to take all
other action required to ensure that no federal income taxes will be payable by
the Portfolio. The Prime Money Market Portfolio declares dividends of all of its
daily net investment income on each day the net asset value per share is
determined. Any net realized long-term capital gains will be distributed
annually, after using any available capital loss carry-over. The Portfolio will
attempt to do so in such a manner as to avoid the Portfolio paying income tax on
its net investment income and net realized capital gains or being subject to
federal excise taxes.
For federal income tax purposes, dividends paid by the Portfolio and
distributions from net realized short-term capital gains, whether received in
cash or reinvested in additional shares, are taxable as ordinary income.
Distributions paid by the Portfolio from net realized long-term capital gains,
whether received in cash or reinvested in additional shares, are taxable as
long-term capital gains. The capital gain holding period is determined by the
length of time the Portfolio has held the instrument and not the length of time
you have held shares in the Portfolio. If you are not required to pay tax on
your income, you will not be required to pay federal income taxes on the amounts
distributed to you. Promptly after the end of each calendar year, you will
receive a statement of the federal income tax status on all dividends and
capital gains distributions paid during the year.
If you do not furnish the Portfolio with your correct social security number or
employer identification number, the Portfolio will be required to withhold
federal income tax at a rate of 31 percent (backup withholding tax) from your
distribution and redemption proceeds. To avoid backup withholding, you must
provide a social security number or employer identification number and state
that you are not subject to such withholding due to the under reporting of your
income. This certification is included as part of your application. You should
complete it when opening your account.
This section is not intended to be a full discussion of present or proposed
federal income tax laws and the effect of such laws on you. There may be other
federal, state or local tax considerations applicable to your particular
investment. You are urged to consult your tax advisor.
CAPITAL STOCK
The Fund is a Maryland corporation organized on October 7, 1992, and currently
has authorized 400 million shares of capital stock of $.001 par value for the
Prime Money Market Portfolio.
The Fund has also authorized the issuance of 1.6 billion shares for issuance in
four Portfolios, with two classes of shares in each Portfolio.
Only shares of the Prime Money Market Portfolio are offered through this
Prospectus. If you would like information on any other Portfolios of the Fund,
please call IFS at 1-800-798-1819.
Each share has one vote, and all shares participate equally in dividends and
other capital gains distributions by the respective Portfolio and in the
residual assets of the respective Portfolio in the event of liquidation.
Cumulative voting is not authorized. Fractional shares have the same rights
proportionately as do full shares. Shares of the Portfolio have no preemptive,
conversion, subscription rights or sinking fund provisions. None of the
Portfolio's shares are subject to liability for further calls or assessments.
You are entitled to redeem shares as set forth under "HOW TO REDEEM SHARES." All
shares are held in uncertificated form and will be evidenced by the appropriate
notation on the books of the transfer agent.
CVC is a wholly-owned indirect subsidiary of IASD Health Services Corp. As of
June 30, 1996, IASD Health Services Corp. owned 1,504,079 shares (51 percent) of
the Portfolio. IASD Health Services Corp. is a mutual insurance company,
operating on a not for profit basis, in the states of Iowa and South Dakota.
SHAREHOLDER REPORTS AND MEETINGS
The Portfolio will confirm all transactions for your account. You will also
receive monthly account statements, quarterly Portfolio information, a
semiannual report, and an annual report containing audited financial statements
reported on by the Fund's independent auditors, KPMG Peat Marwick LLP. If you
have questions about your account, call 1-800-798-1819. You may also write to
IFS at the address on the cover of this Prospectus. You may order statements for
the current and preceding year at no charge. However, there will be a $10.00 fee
per statement per year for statements ordered for other years.
The Fund may operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the 1940 Act. The Fund has
adopted the appropriate provisions in its Bylaws and may, in its discretion, not
hold annual meetings of shareholders for the election of Directors unless
otherwise required by the 1940 Act. The Fund has also adopted provisions in its
Bylaws for the removal of Directors by the shareholders. Shareholders may
receive assistance in communicating with other shareholders as provided in
Section 16(c) of the 1940 Act.
There normally will be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by shareholders, at which time the Directors
then in office will call a shareholders' meeting for the election of Directors.
Fund shareholders may remove a Director by the affirmative vote of a majority of
the Fund's outstanding voting shares. In addition, the Directors are required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of any such Director or for any other purpose when requested in writing
to do so by the shareholders of record of not less than 10 percent of the Fund's
outstanding voting securities.
All consideration received by the Fund for shares of one of the Portfolios and
all assets in which such consideration is invested, belong to that Portfolio
(subject only to the rights of creditors of the Fund) and will be subject to the
liabilities related thereto. The income and expenses attributable to one
Portfolio are treated separately from those of the other Portfolios.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
under the provisions of the 1940 Act or applicable state law or otherwise, to
the holders of the outstanding voting securities of an investment company, such
as the Fund, will not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
Portfolio affected by such matter. Rule 18f-2 further provides that a Portfolio
shall be deemed to be affected by a matter unless it is clear that the interests
of each Portfolio in the matter are identical or that the matter does not affect
any interest of such Portfolio. However, the Rule exempts the selection of
independent accountants and the election of Directors from the separate voting
requirements of the Rule.
CUSTODIAN, FUND ACCOUNTANT, TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT
Norwest Bank Minnesota, N.A., Sixth and Marquette, Minneapolis, Minnesota 55479,
acts as custodian of the Fund's assets. IMG, 2203 Grand Avenue, Des Moines, Iowa
50312-5338, acts as fund accountant, transfer agent, dividend disbursing agent
and shareholder servicing agent for the Fund. IMG is compensated for its
services based on an annual fee as a percent of assets. The fees received and
the services provided as fund accountant, transfer agent, dividend disbursing
agent and shareholder servicing agent are in addition to those received and paid
to IMG under the Sub-Advisory Agreement, paid to CVC under the Investment
Advisory Agreement and the Administrative Services Agreement.
PERFORMANCE INFORMATION
From time to time, the Portfolio may advertise "current yield" and "effective
yield". Each of these figures is based upon historical results and is not
necessarily representative of the future performance of a Portfolio.
Current yield refers to the net investment income per share over a specific
seven-day period. This net investment income is then annualized, which means
that the net investment income generated during the period is assumed to be
generated over an annual period and is shown as a percentage of the investment.
The effective yield is calculated similarly, but the net investment income
earned by the investment is assumed to be compounded weekly when annualized. The
effective yield will be slightly higher than the current yield due to this
compounding effect.
The current and effective yields for the seven-day period ended March 31, 1996
were 4.80% and 4.91% respectively.
Returns and yields will fluctuate. Additional information concerning the
Portfolio's performance appears in the Statement of Additional Information.
CAPITAL VALUE FUND
Capital Value Fund is a Maryland corporation organized as an open-end
diversified investment management company issuing its shares in series, with
each series representing a distinct portfolio of investments with its own
investment objectives and policies. Only the Prime Money Market Portfolio is
offered in this Prospectus. There are presently four other Portfolios. They are
designed for long-term investments, especially for funding tax-qualified
investment plans such as employer-sponsored employee benefit plans, IRAs or
other retirement plans:
EQUITY PORTFOLIO seeks capital appreciation in a manner consistent with the
preservation of capital through a diversified portfolio of common stocks and
other equity-type securities.
TOTAL RETURN PORTFOLIO seeks a high total return from capital appreciation and
current income, consistent with the preservation of capital, through a
diversified portfolio of common stocks, other equity-type securities, bonds and
money market instruments.
FIXED INCOME PORTFOLIO seeks to provide a high level of income consistent with
the preservation of capital and prudent investment risk through a diversified
portfolio of marketable U.S. government and corporate debt securities.
SHORT-TERM GOVERNMENT PORTFOLIO seeks a high level of current income, consistent
with minimum fluctuation in principal value, from investments primarily in U.S.
government securities.
For more information on any of these Portfolios, please obtain a Prospectus by
calling IFS at 1-800-798-1819. Please read the Prospectus carefully before
investing or sending money.
<PAGE>
IMG Financial Services, Inc.
2203 Grand Avenue
Des Moines, Iowa 50312-5338
1-800-798-1819
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CAPITAL VALUE FUND, INC.
IMG Financial Services, Inc
2203 Grand Avenue
Des Moines, IA 50312-5338
Telephone: 1-515-244-5426
Toll-Free: 1-800-798-1819
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of each of the Portfolios of Capital Value
Fund, Inc. (the "Fund"), dated July 29, 1996. Please retain this Statement for
future reference. The Annual Report of the Fund for the fiscal year ended March
31, 1996, is incorporated herein by reference. Requests for an additional copy
of the Annual Report or Prospectus should be made by writing to the Fund, 2203
Grand Avenue, Des Moines, IA 50312-5338; or by calling one of the numbers listed
above.
This Statement of Additional Information is dated July 29, 1996.
<PAGE>
CAPITAL VALUE FUND, INC.
TABLE OF CONTENTS
Page No.
INVESTMENT POLICIES AND TECHNIQUES................................... 3
Fixed Income Securities..................................... 3
Illiquid Securities......................................... 4
Delayed Delivery Transactions........................................ 5
Stripped Mortgage-Backed Securities......................... 5
Reverse Repurchase Agreements............................... 5
Securities Lending.......................................... 6
Loan Participations and Other Direct Indebtedness........... 6
Futures Contracts........................................... 7
Federal Tax Treatment of Futures Contracts.................. 9
Stock Index Options......................................... 10
Options on Futures.......................................... 12
Covered Call and Put Options................................ 13
Over-The-Counter Options.................................... 14
Spread Transactions......................................... 15
Federal Tax Treatment of Options............................ 15
Certain Considerations Regarding Options.................... 16
Asset Coverage for Futures and Options Positions............ 16
Low-Rated and Comparable Unrated Fixed Income Securities.... 16
INVESTMENT RESTRICTIONS.............................................. 17
DIRECTORS AND OFFICERS OF THE FUND................................... 20
COMPENSATION TABLE................................................... 21
PRINCIPAL SHAREHOLDERS............................................... 21
MANAGEMENT OF THE FUND............................................... 23
PORTFOLIO TRANSACTIONS AND BROKERAGE................................. 28
TAXES ............................................................ 29
DETERMINATION OF NET ASSET VALUE..................................... 30
SHAREHOLDER SERVICES................................................. 30
Systematic Withdrawal Plan.................................. 30
Automatic Investment Plan................................... 31
General Procedures for Shareholder Accounts................. 31
Telephone Exchange Privilege and Automatic Exchange Plan.... 31
SHAREHOLDER MEETINGS................................................. 32
VALUATION OF PORTFOLIO SECURITIES.................................... 32
PERFORMANCE INFORMATION.............................................. 33
GENERAL INFORMATION.................................................. 36
REPORTS TO SHAREHOLDERS.............................................. 37
INDEPENDENT AUDITORS................................................. 37
APPENDIX A........................................................... 38
APPENDIX B........................................................... 39
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated July 29, 1996, and if given or made, such
information or representations may not be relied upon as having been authorized
by the Fund.
This Statement of Additional Information does not
constitute an offer to sell securities.
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's investment
objectives, policies, and techniques that are described in detail in the
Prospectuses under the captions "INVESTMENT OBJECTIVES AND POLICIES" and
"IMPLEMENTATION OF POLICIES AND RISKS."
FIXED INCOME SECURITIES
The Fixed Income, Short-Term Government and Prime Money Market Portfolios are
invested primarily in Fixed Income Securities. In addition to their investments
in Equity Securities, the Equity and Total Return Portfolios may also invest,
when a more conservative approach is warranted, in Fixed Income Securities.
These include without limitation, the following:
1. U.S. government securities, including bills, notes, bonds, and other debt
securities differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or are issued or guaranteed by
U.S. government agencies or instrumentalities. U.S. government agency
securities include securities issued by (a) the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, and the Government National
Mortgage Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the U.S.
Treasury; (c) the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation, whose securities are supported by the
discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, the Interamerican Development Bank, and the
International Bank for Reconstruction and Development, whose securities are
supported only by the credit of such agencies. While the U.S. government
provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it always will do so
since it is not obligated by law. The U.S. government, its agencies and
instrumentalities do not guarantee the market value of their securities,
and consequently, the value of such securities may fluctuate.
2. Certificates of deposit issued against funds deposited in a bank or savings
and loan association. Such certificates are for a definite period of time,
earn a specified rate of return, and are normally negotiable. If such
certificates of deposit are non-negotiable, they will be considered
illiquid securities and be subject to each Portfolio's 10 percent
restriction on investments in illiquid securities. Pursuant to the
certificate of deposit, the issuer agrees to pay the amount deposited plus
interest to the bearer of the certificate on the date specified thereon.
Under current FDIC regulations, the maximum insurance payable as to any one
certificate of deposit is $100,000; therefore, certificates of deposit
purchased by a Portfolio will not generally be fully insured.
3. Bankers' acceptances which are short-term credit instruments used to
finance commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated amount of
funds to pay for specific merchandise. The draft is then "accepted" by a
bank that, in effect, unconditionally guarantees to pay the face value of
the instrument on its maturity date. The acceptance may then be held by the
accepting bank as an asset or it may be sold in the secondary market at the
going rate of interest for a specific maturity.
4. Repurchase agreements which involve purchases of debt securities. In such a
transaction, at the time a Portfolio purchases the security, it
simultaneously agrees to resell and redeliver the security to the seller,
who also simultaneously agrees to buy back the security at a fixed price
and time. This assures a predetermined yield for the Portfolio during its
holding period since the resale price is always greater than the purchase
price and reflects an agreed-upon market rate. Such transactions afford an
opportunity for a Portfolio to invest temporarily available cash. A
Portfolio may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers' acceptances in which the Portfolio may
invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Portfolio is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement provides
that the Portfolio is entitled to sell the underlying collateral. If the
value of the collateral declines after the agreement is entered into,
however, and if the seller defaults under a repurchase agreement when the
value of the underlying collateral is less than the repurchase price, the
Portfolio could incur a loss of both principal and interest. The value of
the collateral is monitored at the time the transaction is consummated and
at all times during the term of the repurchase agreement to insure that the
value of the collateral always equals or exceeds the agreed-upon repurchase
price to be paid to the Portfolio. If the seller were to become subject to
a federal bankruptcy proceeding, the ability of the Portfolio to liquidate
the collateral could be delayed or impaired because of certain provisions
of the bankruptcy laws.
5. Bank time deposits, which are monies kept on deposit with banks or savings
and loan associations for a stated period of time at a fixed rate of
interest. There may be penalties for the early withdrawal of such time
deposits, in which case the yields of these investments will be reduced.
6. Commercial paper consists of short-term unsecured promissory notes,
including variable rate and master demand notes issued by corporations to
finance their current operations. Master demand notes are direct lending
arrangements between a Portfolio and the corporation. There is no secondary
market for the notes. However, they are redeemable by the Portfolio at any
time. In purchasing commercial paper, the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity ratios)
will be evaluated and will continuously be monitored because a Portfolio's
liquidity might be impaired if the corporation were unable to pay principal
and interest on demand. Investments in commercial paper will be limited to
commercial paper rated in the two highest categories of a nationally
recognized statistical rating organization ("NRSRO") or unrated commercial
paper which is of comparable quality. The Prime Money Market Portfolio
further restricts commercial paper purchases to the highest rating category
or unrated paper which is of comparable quality.
ILLIQUID SECURITIES
Each Portfolio may invest in illiquid securities, which include restricted
securities (privately placed securities) and other securities without readily
available market quotations. However, a Portfolio will not acquire such
securities and other illiquid securities or securities without readily available
market quotations, such as repurchase agreements maturing in more than seven
days, options traded in the over-the-counter market, and interest-only and
principal-only stripped mortgage-backed securities, if as a result they would
comprise more than 10 percent of the value of the Portfolio's net assets.
The Board of Directors has the ultimate authority to determine, to the extent
permissible under the federal securities laws, which securities are liquid or
illiquid for purposes of the 10 percent limitation. Certain securities exempt
from registration or issued in transactions exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), including securities
that may be resold pursuant to Rule 144A under the Securities Act, may be
considered liquid. The Board of Directors has delegated to the Sub-Advisor the
day-to-day determination of the liquidity of a security, although it has
retained oversight and ultimate responsibility for such determinations. Although
no definitive liquidity criteria are used, the Board of Directors has directed
the Sub-Advisor to look to such factors as (i) the nature of the market for a
security (including the institutional private resale market), (ii) the terms of
certain securities or other instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase obligations and demand
instruments), (iii) the availability of market quotations (e.g., for securities
quoted in PORTAL system), and (iv) other permissible relevant factors. Certain
securities, such as repurchase obligations maturing in more than seven days and
other securities that are not readily marketable, are currently considered
illiquid.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act. Where registration is required, a Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell. Restricted securities will be priced at fair value as determined in
good faith by the Board of Directors. If through the appreciation of illiquid
securities or the depreciation of liquid securities, a Portfolio should be in a
position where more than 10 percent of the value of its net assets are invested
in illiquid assets, including restricted securities which are not readily
marketable, the Portfolio will take steps as is deemed advisable, if any, to
protect liquidity.
DELAYED DELIVERY TRANSACTIONS
The Portfolios may buy and sell securities on a delayed delivery or when-issued
basis. (See "IMPLEMENTATION OF POLICIES AND RISKS -- Delayed Delivery
Securities" in the Prospectus.) These transactions involve a commitment by the
Portfolios to purchase or sell specific securities at a predetermined price
and/or yield, with payment and delivery taking place after the customary
settlement period for that type of security (and more than seven days in the
future). Typically, no interest accrues to the purchaser until the security is
delivered. The Portfolios may receive fees for entering into delayed delivery
transactions.
When purchasing securities on a delayed delivery basis, the Portfolio assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Portfolio is not required to pay for the securities
until the delivery date, these risks are in addition to the risks associated
with the Portfolio's other investments. If the Portfolio remains substantially
fully invested at a time when delayed delivery purchases are outstanding, the
delayed delivery purchases may result in a form of leverage. When delayed
delivery purchases are outstanding, the Portfolios will set aside cash or
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a Portfolio has sold a security on a delayed delivery
basis, the Portfolio does not participate in further gains or losses with
respect to the security. If the other party to a delayed delivery transaction
fails to deliver or pay for the securities, the Portfolio could miss a favorable
price or yield opportunity, or could suffer a loss.
A Portfolio may dispose of or renegotiate delayed delivery transactions after
they are entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
STRIPPED MORTGAGE-BACKED SECURITIES
As described in the Prospectus, the Portfolios may invest a portion of their
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of the
U.S. government, or by private originators, or investors in mortgage loans,
including savings and loan institutions, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. A
common type of SMBS 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 while the other class will
receive all of the principal. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities. The market value of the
class consisting primarily or entirely of principal payments generally is
unusually volatile in response to changes in interest rates.
REVERSE REPURCHASE AGREEMENTS
In a reverse repurchase agreement, a Portfolio sells a security to another
party, such as a bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, the Portfolio will maintain
cash and appropriate liquid assets in a segregated custodial account to cover
its obligation under the agreement. The Portfolios will enter into reverse
repurchase agreements only with parties whose creditworthiness is deemed
satisfactory by the Fund's Sub-Advisor, Investors Management Group ("IMG").
SECURITIES LENDING
Each of the Portfolios may seek to increase its income by lending portfolio
securities. Such loans will usually be made only to member banks of the Federal
Reserve System and to member firms (and subsidiaries thereof) of the New York
Stock Exchange ("NYSE") and would be required to be secured continuously by
collateral in cash, cash equivalents, or U.S. government securities maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. A Portfolio would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, a Portfolio
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of the collateral. A Portfolio would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower fail financially. However, the loans would be made only to
firms deemed to be of good standing, and when the consideration which could be
earned currently from securities loans of this type justifies the attendant
risk. The value of the securities loaned will not exceed 30 percent of the value
of a Portfolio's total assets.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
Each of the Portfolios may purchase loan participations and other direct claims
against a borrower. In purchasing a loan participation, a Portfolio acquires
some or all of the interest of a bank or other lending institution in a loan to
a corporate borrower. Many such loans are secured, although some may be
unsecured. Such loans may be in default at the time of purchase. Loans that are
fully secured offer the Portfolio more protection than an unsecured loan in the
event of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their rights against the borrower.
Alternately, such loans may be structured as a novation, pursuant to which the
Portfolio would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Portfolio would purchase an
assignment of a portion of a lender's interest in a loan either directly from
the lender or through an intermediary. A Portfolio may also purchase trade
claims or other claims against companies, which generally represent money owned
by the company to a supplier of goods or services. These claims may also be
purchased at a time when the company is in default.
Certain of the loan participations acquired by a Portfolio may involve revolving
credit facilities or other standby financing commitments which obligate the
Portfolio to pay additional cash on a certain date or on demand. These
commitments may have the effect of requiring the Portfolio to increase its
investment in a company at a time when the Portfolio might not otherwise decide
to do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that the Portfolio is
committed to advance additional funds, it will at all times hold and maintain in
a segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
A Portfolio's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loan participations and
other direct investments which the Fund will purchase, the Sub-Advisor will rely
upon its (and not that of the original lending institution's) own credit
analysis of the borrower. As the Portfolio may be required to rely upon another
lending institution to collect and pass on to the Portfolio amounts payable with
respect to the loan and to enforce the Portfolio's rights under the loan, an
insolvency, bankruptcy or reorganization of the lending institution may delay or
prevent the Portfolio from receiving such amounts. In such cases, the
Sub-Advisor will evaluate as well the creditworthiness of the lending
institution and will treat both the borrower and the lending institution as an
"issuer" of the loan participation for purposes of certain investment
restrictions pertaining to the diversification of the Portfolio's investments.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans may involve additional risk to the Portfolio. For example, if a loan
is foreclosed, the Portfolio could become part owner of any collateral, and
would bear the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, the Portfolio could be held liable as a co-lender. It is
unclear whether loans and other forms of direct indebtedness offer securities
law protections against fraud and misrepresentation. In the absence of
definitive regulatory guidance, the Portfolio relies on the Sub-Advisor's
research in an attempt to avoid situations where fraud and misrepresentation
could adversely affect the Portfolio. In addition, loan participations and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Portfolio may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value. To the extent that the Sub-Advisor determines that any such
investments are illiquid, the Portfolio will include them in the investment
limitations on Illiquid Securities described above.
FUTURES CONTRACTS
Each Portfolio (except the Prime Money Market Portfolio), may enter into
interest rate futures contracts (hereinafter referred to as "Futures" or
"Futures Contracts"), as a hedge against changes in prevailing levels of
interest rates in order to establish more definitely the effective return on
securities held or intended to be acquired by the Portfolio. A Portfolio's
hedging may include sales of Futures as an offset against the effect of expected
increases in interest rates or decline in the market value of its securities and
purchases of Futures as an offset against the effect of expected declines in
interest rates.
A Portfolio will not enter into Futures Contracts for speculation and will, to
the extent required by regulatory authorities, enter only into Futures Contracts
which are traded on national futures exchanges and are standardized as to
maturity date and, if applicable, underlying financial instruments. The
principal futures exchanges in the United States are the Board of Trade of the
City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (the "CFTC.")
Although techniques other than sales and purchases of Futures Contracts could be
used to reduce a Portfolio's exposure to interest rate fluctuations, the
Portfolio may be able to hedge its exposure more effectively, and perhaps at a
lower cost, through using Futures Contracts, since Futures Contracts involve
fewer transaction costs than options on securities transactions.
A Portfolio will not enter into a Futures Contract if, as a result thereof, (i)
more than 30 percent of the Portfolio's net assets would be represented by
Futures Contracts (including the then current aggregate Futures market prices of
financial instruments required to be delivered under open Futures Contract sales
plus the then current aggregate purchase prices of financial instruments
required to be purchased under open Futures Contract purchases) or (ii) more
than 5 percent of the Portfolio's total assets (taken at market value at the
time of entering into the contract) would be committed to initial margin
deposits on such Futures Contracts and options on Futures Contracts.
An interest rate Futures Contract provides for the future sale by one party and
purchase by another party of a specified amount of a specified instrument (debt
security) for a specified price at a designated date, time, and place.
Transaction costs are incurred when a Futures Contract is bought or sold and
margin deposits must be maintained. A Futures Contract may be satisfied by
delivery or purchase, as the case may be, of the instrument. More commonly,
Futures Contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching Futures Contract. If the offsetting
purchase price is less than the original sale price, the Portfolio realizes a
gain; if it is more, the Portfolio realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Portfolio
realizes a gain; if it is less, the Portfolio realizes a loss. Transaction costs
must also be included in these calculations. There can be no assurance, however,
that a Portfolio will be able to enter into an offsetting transaction with
respect to a particular Futures Contract at a particular time. If the Portfolio
is not able to enter into an offsetting transaction, the Portfolio will continue
to be required to maintain the margin deposits on the Futures Contract.
As an example of an offsetting transaction in which the underlying financial
instrument is not delivered pursuant to an interest rate Futures Contract, the
contractual obligations arising from the sale of one Futures Contract of
September Treasury Bills on an exchange may be fulfilled at any time before
delivery is required (i.e., on a specified date in September, the "delivery
month") by the purchase of one Futures Contract of September Treasury Bills on
the same exchange. In such instance, the difference between the price at which
the Futures Contract was sold and the price paid for the offsetting purchase,
after allowance for transaction costs, represents the profit or loss to the
Portfolio.
Persons who trade in Futures Contracts may be broadly classified as "hedgers"
and "speculators". Hedgers, such as the Portfolios, whose business activity
involves investment or other commitments in securities or other obligations, use
the Futures markets primarily to offset unfavorable changes in value that may
occur because of fluctuations in the value of the securities or obligations held
or expected to be acquired by them. Debtors and other obligors may also hedge
the interest cost of their obligations. The speculator, like the hedger,
generally expects neither to deliver nor to receive the financial instrument
underlying the Futures Contract, but, unlike the hedger, hopes to profit from
fluctuations in prevailing interest rates or financial markets.
A public market exists in interest rate Futures Contracts covering primarily the
following financial instruments: U.S. Treasury bonds; U.S. Treasury notes;
Government National Mortgage Association ("GNMA") modified pass-through
mortgage-backed securities; three-month U.S. Treasury bills; 90-day commercial
paper; bank certificates of deposit; and Eurodollar certificates of deposit. It
is expected that Futures Contracts trading in additional financial instruments
will be authorized. The standard contract size is generally $100,000 for Futures
Contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA pass-through
securities and $1,000,000 for the other designated Futures Contracts.
Each Portfolio's Futures transactions will be entered into for traditional
hedging purposes; that is, Futures Contracts will be sold to protect against a
decline in the price of securities that the Portfolio owns, or Futures Contracts
will be purchased to protect the Portfolio against an increase in the price of
securities it intends to purchase. As evidence of this hedging intent, the
Portfolio expects that approximately 75 percent of such Futures Contract
purchases will be "completed"; that is, upon the sale of these long Futures
Contracts, equivalent amounts of related securities will have been or are then
being purchased by the Portfolio in the cash market.
Margin is the amount of funds that must be deposited by the Portfolio with its
custodian in a segregated account in the name of the futures commission merchant
in order to initiate Futures trading and to maintain the Portfolio's open
positions in Futures Contracts. A margin deposit is intended to ensure the
Portfolio's performance of the Futures Contract. The margin required for a
particular Futures Contract is set by the exchange on which the Futures Contract
is traded, and may be significantly modified from time to time by the exchange
during the term of the Futures Contract. Futures Contracts are customarily
purchased and sold on margins that may range upward from less than 5 percent of
the value of the Futures Contract being traded.
If the price of an open Futures Contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the Futures
Contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the Futures
Contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Portfolio. In computing daily net asset value, the
Portfolio will mark to market the current value of its open Futures Contracts.
The Portfolios expect to earn interest income on margin deposits.
The prices of Futures Contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and fluctuations in
the general level of stock prices, which in turn are affected by fiscal and
monetary policies and national and international political and economic events.
At best, the correlation between changes in prices of the Futures Contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances such as: variation in
speculative market demand for futures and for debt securities, including
technical influences in Futures trading and differences between the financial
instruments being hedged and the instruments underlying the standard Futures
Contracts available for trading. For example, in the case of interest rate
Futures Contracts, the interest rate levels, maturities and creditworthiness of
the issues underlying the Futures Contract may differ from the financial
instruments held in the Portfolio. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, interest rate or market
trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10
percent of the value of the Futures Contract is deposited as margin, a
subsequent 10 percent decrease in the value of the Futures Contract would result
in a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15 percent decrease would result
in a loss equal to 150 percent of the original margin deposit, if the Futures
Contract were closed out. Thus, a purchase or sale of a Futures Contract may
result in losses in excess of the amount initially invested in the Futures
Contract. However, a Portfolio would presumably have sustained comparable losses
if, instead of the Futures Contract, it had invested in the underlying financial
instrument and sold it after the decline.
Most United States Futures exchanges limit the amount of fluctuation permitted
in Futures Contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
Futures Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures Contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of Futures positions
and subjecting some Futures traders to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or futures option position. The Portfolio
would continue to be required to meet margin requirements until the position is
closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
For federal income tax purposes, each Portfolio is required to recognize at the
end of each taxable year its net unrealized gains and losses on Futures
Contracts as of the end of the year as well as those actually realized during
the year. Except for transactions in Futures Contracts which the taxpayer elects
to classify as part of a "mixed straddle", any gain or loss recognized with
respect to a Futures Contract is considered to be 60 percent long-term capital
gain or loss and 40 percent short-term capital gain or loss, without regard to
the holding period of the Futures Contract. In the case of a Futures transaction
classified as a "mixed straddle", the recognition of losses may be deferred to a
later taxable year.
Sales of Futures Contracts which are intended to hedge against a change in the
value of securities held by a Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for each Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90 percent of its gross
income for a taxable year must be derived from qualifying income (i.e.,
dividends, interest, income derived from loans of securities and gains from the
sale of securities, and other income (including gains on options and Futures
Contracts)) derived with respect to the Portfolio's business of investing in
securities. In addition, gains realized on the sale or other disposition of
securities on Futures Contracts held for less than three months must be limited
to less than 30 percent of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of Futures Contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90 percent requirement. For purposes of applying
these tests any increase in value on a position that is part of a designated
hedge will be offset by any decrease in value (whether or not realized) on any
other position that is part of such hedge. It is anticipated that unrealized
gains on Futures Contracts, which have been open for less than three months as
of the end of a Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on securities held less than three months
for purposes of the 30 percent test.
Each Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including unrealized
gains at the end of the Portfolio's fiscal year) on Futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments.
STOCK INDEX OPTIONS
The Equity and Total Return Portfolios may (i) purchase stock index options for
any purpose, (ii) sell stock index options in order to close out existing
positions, and/or (iii) write covered options on stock indexes for hedging
purposes. Stock index options are put options and call options on various stock
indexes. In most respects, they are identical to listed options on common
stocks. The primary difference between stock options and index options occurs
when index options are exercised. In the case of stock options, the underlying
security, common stock, is delivered. However, upon the exercise of an index
option, settlement does not occur by delivery of the securities comprising the
index. The option holder who exercises the index option receives an amount of
cash if the closing level of the stock index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the stock index and the exercise price of the
option expressed in dollars times a specified multiple.
A stock index fluctuates with changes in the market values of the stocks
included in the index. For example, some stock index options are based on a
broad market index, such as the Standard & Poor's 500 or the Value Line
Composite Index or a narrower market index, such as the Standard & Poor's 100.
Indexes may also be based on an industry or market segment, such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are currently traded on the following exchanges: the Chicago Board
Options Exchange, the NYSE, the American Stock Exchange, the Pacific Stock
Exchange and the Philadelphia Stock Exchange.
The Equity and Total Return Portfolios may purchase call and put options in an
attempt to either hedge against the risk of unfavorable price movements
adversely affecting the value of each Portfolio's securities, or securities each
Portfolio intends to buy, or otherwise in furtherance of the Portfolio's
investment objective. The Portfolio will sell (write) stock index options for
hedging purposes or in order to close out positions in stock index options which
the Portfolio has purchased. The Portfolios may only write "covered" options.
The Portfolio may cover a call option on a stock index it writes by, for
example, having a portfolio of securities which approximately correlates with
the stock index.
Put options may be purchased in order to hedge against an anticipated decline in
stock market prices that might adversely affect the value of the Portfolio's
securities or in an attempt to capitalize on an anticipated decline in stock
market prices. If the Portfolio purchases a put option on a stock index, the
amount of the payment it receives upon exercising the option depends on the
extent of any decline in the level of the stock index below the exercise price.
Such payments would tend to offset a decline in the value of the Portfolio
securities. If, however, the level of the stock index increases and remains
above the exercise price while the put option is outstanding, the Portfolio will
not be able to profitably exercise the option and will lose the amount of the
premium and any transaction costs. Such loss may be offset by an increase in the
value of the Portfolio securities.
Call options on stock indexes may be purchased in order to participate in an
anticipated increase in stock market prices or to hedge against higher prices
for securities that the Portfolio intends to buy in the future. If the Portfolio
purchases a call option on a stock index, the amount of the payment it receives
upon exercising the option depends on the extent of any increase in the level of
the stock index above the exercise price. Such payments would in effect allow
the Portfolio to benefit from stock market appreciation even though it may not
have had sufficient cash to purchase the underlying stocks. Such payments may
also offset increases in the price of stocks that the Portfolio intends to
purchase. If, however, the level of the stock index declines and remains below
the exercise price while the call option is outstanding, the Portfolio will not
be able to exercise the option profitably and will lose the amount of the
premium and transaction costs. Such loss may be offset by a reduction in the
price the Portfolio pays to buy additional securities.
The use of stock index options by the Equity and Total Return Portfolios is
subject to certain risks. Successful use by each Portfolio of options on stock
indexes will be subject to the ability to correctly predict movements in the
directions of the stock market. This requires different skills and techniques
than predicting changes in the prices of individual securities. In addition,
each Portfolio's ability to effectively hedge all or a portion of the securities
in its portfolio, in anticipation of or during a market decline through
transactions in put options on stock indexes, depends on the degree to which
price movements in the underlying index correlate with the price movements in
the Portfolio's securities. Inasmuch as the Portfolio's securities will not
duplicate the components of an index, the correlation will not be perfect.
Consequently, the Portfolio will bear the risk that the prices of its securities
being hedged will not move in the same amount as the prices of the Portfolio put
options on the stock indexes. It is also possible that there may be a negative
correlation between the index and the securities which would result in a loss on
both such portfolio securities and the options on stock indexes acquired by the
Portfolios.
All index options purchased by each Portfolio will be listed and traded on a
national securities exchange. However, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at any
particular time, and for some options no secondary market may exist. If the
Portfolio is unable to effect a closing sale transaction with respect to options
that it has purchased, it would have to exercise the options in order to realize
any profit.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the options 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 options markets. The purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The purchase of stock index
options involves the risk that the premium and transaction costs paid by each
Portfolio in purchasing an option will be lost as a result of unanticipated
movements in prices of the securities comprising the stock index on which the
option is based.
In the case of transactions involving "non-equity options", each Portfolio will
treat any gain or loss arising from the lapse, closing out or exercise of such
positions as 60 percent long-term and 40 percent short-term gain or loss as
required by Section 1256 of the Internal Revenue Code (the "Code"). In addition,
such positions must be marked-to-market as of the last business day of the year
and gain or loss recognized for federal income tax purposes in accordance with
the 60/40 rule discussed above even though the position has not been terminated.
A "non-equity option" includes an option with respect to any group of stocks or
a stock index if there is in effect a designation by the Commodity Futures
Trading Commission of a contract market for a contract based on such group of
stocks or indexes. For example, transactions involving broad-based stock indexes
such as the Standard & Poor's 500 and 100 Indexes would be "non-equity options"
within the meaning of Code Section 1256.
OPTIONS ON FUTURES
Each Portfolio (except the Prime Money Market Portfolio) may also purchase put
and write call options on Futures Contracts and enter into closing transactions
with respect to such options to terminate an existing position. A futures option
gives the holder the right, in return for the premium paid, to assume a long
position (call) or short position (put) in a Futures Contract at a specified
exercise price prior to the expiration of the option. Upon exercise of a call
option, the holder acquires a long position in the Futures Contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true. Prior to exercise or expiration, a futures option may be
closed out by an offsetting purchase or sale of a futures option of the same
series.
Each Portfolio may use its options on Futures Contracts in connection with
hedging strategies. Generally, these strategies would be employed under the same
market and market sector conditions in which the Portfolio uses put and call
options on securities. (See "Covered Call and Put Options" below.) The purchase
of put options on Futures Contracts is analogous to the purchase of puts on
securities so as to hedge the Portfolio's securities against the risk of
declining market prices. The writing of a call option on a Futures Contract
constitutes a partial hedge against declining prices of the securities being
hedged. If the futures price at expiration of a written call option is below the
exercise price, the Portfolio will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings of securities. If the futures price when the option is
exercised is above the exercise price, however, the Portfolio will incur a loss,
which may be offset, in whole or in part, by the increase in the value of the
securities that were being hedged.
As with investments in Futures Contracts, each Portfolio is also required to
deposit and maintain margin with respect to options on Futures Contracts written
by it. Such margin deposits will vary depending on the nature of the underlying
Futures Contracts (and the related initial margin requirements), the current
market value of the option and other Futures positions held by each Portfolio.
The risks associated with the use of options on Futures Contracts include the
risk that the Portfolio may close out its position as a writer of an option only
if a liquid secondary market exists for such options, which cannot be assured.
The Portfolio's successful use of options on Futures Contracts also depends on
the ability to correctly predict the movement in prices of Futures Contracts and
the underlying instruments, which may prove to be incorrect. In addition, there
may be imperfect correlation between the instruments being hedged and the
Futures Contract subject to the option. ( See "Futures Contracts".)
Each Portfolio will not purchase or write options on Futures Contracts if, as a
result (i) the aggregate market value of all portfolio securities covering the
Portfolio's options (including options on Futures Contracts and portfolio
securities) exceeds 25 percent of the Portfolio's net assets; (ii) the value of
all options (including options on Futures Contracts and portfolio securities)
exceeds 5 percent of the Portfolio's total assets; (iii) the aggregate premiums
paid for all options (including options on Futures Contracts and portfolio
securities) held exceeds 5 percent of the Portfolio's net assets; or (iv) more
than 5 percent of the Portfolio's total assets (taken at market value at the
time of entering into the contract) would be committed to initial margin and
premiums paid on Futures Contracts and options on Futures Contracts.
COVERED CALL AND PUT OPTIONS
Each Portfolio may write (sell) covered call options and purchase options to
close out options previously written by the Portfolio. The purpose of writing
covered call options is to reduce the effect of price fluctuations of the
securities owned by the Portfolio (and involved in the options) on the
Portfolio's net asset value per share. Although premiums may be generated
through the use of covered call options, the Sub-Advisor does not consider such
premiums as the primary reason for writing covered call options.
A call option gives the holder (buyer) the right to purchase a security at a
specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, such writer may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring the writer to deliver the
underlying security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by repurchasing the option the
writer previously sold. To secure the writer's obligation to deliver the
underlying security in the case of a call option, the writer is required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the clearing corporations and of the exchanges. A put option gives the
holder (buyer) the right to sell a security at a specified price (the exercise
price) at any time until a certain date (the expiration date). A Portfolio will
only write covered call options and purchase covered put options. This means
that the Portfolio will only write a call option or purchase a put option on a
security that the Portfolio already owns. The Portfolio will not write call
options on when-issued securities. The Portfolio will write covered call options
and purchase covered put options in standard contracts, which may be quoted on
NASDAQ or on national securities exchanges, or write covered call options with
and purchase covered put options directly from investment dealers meeting the
creditworthiness criteria of the Sub-Advisor. In order to comply with the
requirements of the securities laws in several states, a Portfolio will not
write a covered call option or purchase a put option on portfolio securities if,
as a result, (i) the aggregate market value of all portfolio securities covering
the Fund's options (including options on Futures Contracts and portfolio
securities) exceeds 25 percent of the Portfolio's net assets; (ii) the value of
all options (including options on Futures Contracts and portfolio securities)
exceeds 5 percent of the Portfolio's total assets; or (iii) the aggregate
premiums paid for all options (including options on Futures Contracts and
portfolio securities) held exceeds 5 percent of the Portfolio's net assets.
Securities on which put options will be purchased and call options may be
written will be purchased solely on the basis of investment considerations
consistent with the Portfolio's investment objective. The writing of covered
call options is a conservative investment technique believed to involve
relatively little risk (in contrast to the writing of naked or uncovered
options, which the Portfolios will not do), but capable of enhancing each
Portfolio's total return. When writing a covered call option, the Portfolio, in
return for the premium, gives up the opportunity for profit from a price
increase in the underlying security above the exercise price, but conversely
retains the risk of loss should the price of the security decline. If a call
option which the Portfolio has written expires, the Portfolio will realize a
gain in the amount of the premium; however, such gain may be offset by a decline
in the market value of the underlying security during the option period. If the
call option is exercised, the Portfolio will realize a gain or loss from the
sale of the underlying security. Each Portfolio will purchase put options
involving portfolio securities only when a temporary defensive position is
desirable in light of market conditions and the Portfolio will hold the
portfolio security. As a result, the purchase of put options will be utilized to
protect a Portfolio's holdings in an underlying security against a substantial
decline in market value. Such protection is, of course, only provided during the
life of the put option when a Portfolio, as the holder of the put option, is
able to sell the underlying security at the put exercise price regardless of any
decline in the underlying security's market price. By using put options in this
manner, the Portfolios will reduce any profit they might otherwise have realized
in its underlying security by the premium paid for the put option and by
transaction costs. The securities covering the call option will be maintained in
a segregated account of the Custodian. The Portfolios do not consider a security
covered by a call option or put option to be "pledged" as that term is used in
each Portfolio's policy limiting the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the Portfolio
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, the length of the option period, the general supply of and
demand for credit and the general interest rate environment. The premium
received by the Portfolio for writing covered call options will be recorded as a
liability in the Portfolio's Statement of Assets and Liabilities. This liability
will be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Portfolio is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The liability will be extinguished upon
expiration of the option, the purchase of an identical option in a closing
transaction or delivery of the underlying security upon the exercise of the
option.
The premium paid by each Portfolio when purchasing a put option will be recorded
as an asset in the Portfolio's Statement of Assets and Liabilities. This asset
will be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Portfolio is computed (close of the NYSE), or, in the absence of such sale, the
latest bid price. The asset will be extinguished upon expiration of the option,
the selling (writing) of an identical option in a closing transaction or the
delivery of the underlying security upon the exercise of the option.
Each Portfolio will only purchase a call option to close out a covered call
option it has written. A Portfolio will only write a put option to close out a
put option it has purchased. Such closing transactions will be effected in order
to realize a profit on an outstanding call or put option, to prevent an
underlying security from being called or put, or to permit the sale of the
underlying security. Furthermore, effecting a closing transaction will permit
the Portfolio to write another call option on the underlying security with
either a different exercise price or expiration date or both. If the Portfolio
desires to sell a particular security from its portfolio on which it has written
a call option or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security. There is,
of course, no assurance that the Portfolio will be able to effect such closing
transactions at a favorable price. If the Portfolio cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk on the security. This
could result in higher transaction costs, including brokerage commissions. The
Portfolio will pay brokerage commissions in connection with the writing or
purchase of options to close out previously written options. Such brokerage
commissions are normally higher than the transaction costs applicable to
purchases and sales of portfolio securities.
Call options written by each Portfolio will normally have expiration dates
between three and nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities at the time the options are written. From time to time,
the Portfolio may purchase an underlying security for delivery in accordance
with an exercise notice of a call option assigned to it rather than delivering
such security from its portfolio. In such cases additional transaction costs
will be incurred.
A Portfolio will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from the
writing of the call option; however, any loss so incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different call or put option. Also, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio.
OVER-THE-COUNTER OPTIONS
Subject to restrictions on investments in Illiquid Securities, and its own
investment limitations, each Portfolio (except the Prime Money Market Portfolio)
may invest in over-the-counter options. Unlike transactions entered into by the
Portfolios in Futures Contracts or exchange-traded options, over-the-counter
options on securities are not traded on contract markets regulated by the CFTC
or the United States Securities and Exchange Commission, ("SEC"). To the
contrary, such instruments are traded through financial institutions acting as
market-makers. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Portfolio.
Where no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may not be a liquid secondary market in the
trading of over-the-counter contracts, and a Portfolio could be required to
retain options purchased or written, until exercise, expiration or maturity.
This in turn could limit the Portfolio's ability to profit from open positions
or to reduce losses experienced, and could result in greater losses.
Furthermore, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and a Portfolio will therefore be subject to the risk
of default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency, metal or security, thereby
restricting the Portfolio's ability to enter into desired hedging transactions.
A Portfolio will enter into an over-the-counter transaction only with parties
whose creditworthiness has been reviewed and found satisfactory by the
Sub-Advisor.
SPREAD TRANSACTIONS
Each Portfolio (except the Prime Money Market Portfolio) may purchase from
securities dealers covered spread options. Such covered spread options are not
presently exchange listed or traded. The purchase of a spread option gives the
Portfolio the right to put or sell a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the
Portfolio does not own, but which is used as a benchmark. The risk to the
Portfolio in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect the Portfolio against adverse changes in
prevailing credit quality spreads (i.e., the yield spread between high quality
and lower-quality securities). Such protection is only provided during the life
of the spread option. The security covering the spread option will be maintained
in a segregated account by the Portfolio's custodian. The Portfolios do not
consider a security covered by a spread option to be "pledged" as that term is
used in each Portfolio's policy limiting the pledging or mortgaging of its
assets.
FEDERAL TAX TREATMENT OF OPTIONS
Certain option transactions have special tax results. Expiration of a call
option written by a Portfolio will result in a short-term capital gain. If the
call option is exercised, the Portfolio will realize a gain or loss from the
sale of the security covering the call option, and in determining such gain or
loss the premium will be included in the proceeds of the sale.
If a Portfolio writes options other than "qualified covered call options", as
defined in the Code or purchases puts, any losses on such options transactions,
to the extent they do not exceed the unrealized gains on the securities covering
the options, may be subject to deferral until the securities covering the
options have been sold.
In the case of transactions involving "non-equity options" and options on
Futures Contracts, a Portfolio will treat any gain or loss arising from the
lapse, closing out or exercise of such positions as 60 percent long-term and 40
percent short-term gain or loss as required by Section 1256 of the Code. In
addition, such positions must be marked-to-market as of the last business day of
the year and gain or loss recognized for federal income tax purposes in
accordance with the 60/40 rule discussed above even though the position has not
been terminated.
CERTAIN CONSIDERATIONS REGARDING OPTIONS
There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or elsewhere may exist. The writing and
purchasing of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. Imperfect correlation between the options and
securities markets may detract from the effectiveness of attempted hedging.
Options transactions may result in significantly higher transaction costs and
portfolio turnover for a Portfolio.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS
Each Portfolio will comply with regulatory requirements of the SEC and the CFTC
with respect to coverage of options and futures positions by registered
investment companies and, if the guidelines so require, will set aside cash
and/or appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures or options position is outstanding, unless replaced with other
permissible assets. As a result, there is a possibility that the segregation of
a large percentage of the Portfolio's assets may force the Portfolio to close
out futures and options positions and/or liquidate other portfolio securities,
any of which may occur at disadvantageous prices, in order for the Portfolio to
meet redemption requests or other current obligations.
LOW-RATED AND COMPARABLE UNRATED FIXED INCOME SECURITIES
The Fixed Income Portfolio may invest up to 25 percent of its total assets in
non-Investment-Grade Debt Securities ("junk bonds"). Non-Investment-Grade Debt
Securities (hereinafter referred to as "low-rated and comparable unrated
securities") include (i) bonds rated as low as "Ba" by Moody's Investors
Service, Inc. ("Moody's"), or "BB" by Standard & Poor's Corporation ("S&P"),
Fitch Investors Services, Inc. ("Fitch") or Duff & Phelps, Inc. ("D&P") or of
similar quality by another NRSRO; and (ii) unrated debt securities of comparable
quality.
Low-rated and comparable unrated securities, while generally offering higher
yields than investment-grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with such
investments are discussed below. Refer to Appendix B of this Statement of
Additional Information for a discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The low-rated and
comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
low-rated and comparable unrated securities tend to reflect individual corporate
development to a greater extent than do higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Low-rated and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risk than securities in the higher-rated categories. During an
economic downtown or a sustained period of rising interest rates, highly
leveraged issuers of low-rated and comparable unrated securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations may also be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by an issuer of low-rated and
comparable unrated securities is significantly greater than that of issuers of
higher-rated securities because such securities are generally unsecured and are
often subordinated to other creditors. Further, if the issuer of a low-rated and
comparable unrated security defaulted, the Portfolio might incur additional
expenses to seek recovery. Periods of economic uncertainty and changes would
also generally result in increased volatility in the market prices of low-rated
and comparable unrated securities and thus in the Portfolio's net asset value.
As previously stated, the value of such a security will decrease in a rising
interest rate market and accordingly, so will the Portfolio's net asset value.
If the Portfolio experiences unexpected net redemptions in such a market, it may
be forced to liquidate a portion of its portfolio securities without regard to
their investment merits. Due to the limited liquidity of high-yield securities
(discussed below) the Portfolio may be forced to liquidate these securities at a
substantial discount. Any such liquidation would reduce the Portfolio's asset
base over which expenses could be allocated and could result in a reduced rate
of return for the Portfolio.
PAYMENT EXPECTATIONS. Low-rated and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at their discretion,
redeem the securities. During periods of falling interest rates, issuers of
high-yield securities are likely to redeem or prepay the securities and
refinance them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, the
Portfolio may have to replace the securities with a lower-yielding security,
which would result in a lower return for the Portfolio.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of low-rated and comparable
unrated securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit-rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in low-rated and comparable unrated securities will be more
dependent on the credit analysis than would be the case with investments in
investment grade debt securities. The Sub-Advisor employs its own credit
research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history, and the current trend
of earnings. The Sub-Advisor continually monitors the investments owned by the
Portfolios and carefully evaluates whether to dispose of or to retain low-rated
and comparable unrated securities whose credit ratings or credit quality may
have changed.
LIQUIDITY AND VALUATION. The Portfolio may have difficulty disposing of
certain low-rated and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
low-rated and comparable unrated securities, there is no established retail
secondary market for many of these securities. The Portfolio anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
As a result, the Portfolio's asset value and the Portfolio's ability to dispose
of particular securities, when necessary to meet the Portfolio's liquidity needs
or in response to a specific economic event, may be impacted. The lack of a
liquid secondary market for certain securities may also make it more difficult
for the Portfolio to obtain accurate market quotations for purposes of valuing
the Portfolio's securities. Market quotations are generally available on many
low-rated and comparable unrated securities only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. During periods of thin trading, the spread between bid and
asked prices is likely to increase significantly. In addition, adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of low-rated and comparable unrated
securities, especially in a thinly-traded market.
INVESTMENT RESTRICTIONS
The Prospectus sets forth the investment objectives and policies applicable to
each Portfolio under the caption "INVESTMENT OBJECTIVES AND POLICIES". The
following is a list of investment restrictions applicable to each Portfolio. If
a percentage limitation is adhered to at the time of an investment by a
Portfolio, a later increase or decrease in percentage resulting from any change
in value or net assets will not result in a violation of the restriction.
Each Portfolio's "fundamental" investment restrictions may not be changed by
that Portfolio without the approval of a majority of its shareholders, which
means the vote at any shareholder meeting of the Portfolio, of (i) 67 percent or
more of the shares present or represented by proxy at the meeting (if holders of
more than 50 percent of the outstanding shares are present or represented by
proxy) or (ii) more than 50 percent of the outstanding shares, whichever is
less. However, except for the fundamental investment limitations set forth
below, the investment policies and limitations described in this Statement of
Additional Information are not fundamental, and may be changed without
shareholder approval.
Except as otherwise stated, the following fundamental restrictions apply to all
Portfolios of the Fund. The Portfolios may not:
1. Purchase the securities of any issuer if such purchase would cause more
than 5 percent of the value of 75 percent (100 percent as to the Prime
Money Market Portfolio) of the Portfolio's total assets to be invested in
securities of any one issuer (except securities of the U.S. government or
any instrumentality thereof), or purchase more than 10 percent of the
outstanding voting securities of any one issuer, or more than 10 percent of
the outstanding securities of any class; provided, however that the Prime
Money Market Portfolio may invest up to 75 percent of its assets in
instruments of domestic banks (as described in the Prospectus) when in the
opinion of the Sub-Advisor yield differentials and money market conditions
suggest and when cash is available for such investments and instruments are
available for purchase which fulfill the Prime Money Market Portfolio's
objective in terms of quality and marketability.
2. Borrow money except for temporary or emergency purposes (but not for the
purpose of purchasing investments) and then, only in an amount not to
exceed 25 percent of the value of a Portfolio's net assets at the time the
borrowing is incurred; provided, however, that a Portfolio may enter into
transactions in options, futures and options on futures. A Portfolio may
not purchase securities when borrowings exceed 5 percent of its total
assets. If a Portfolio borrows money, its share price may be subject to
greater fluctuation until the borrowing is paid off. To this extent,
purchasing securities when borrowings are outstanding may involve an
element of leverage.
3. Invest in commodities or physical commodity contracts. However, the
Portfolios (except the Prime Money Market Portfolio), may purchase and sell
financial futures contracts and options on such contracts.
4. Make loans, except that the Portfolios may (i) purchase and hold debt
obligations in accordance with their investment objectives and policies,
(ii) enter into repurchase agreements, and (iii) lend portfolio securities
against collateral (consisting of cash or securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities) equal at all
times to not less than 100 percent of the value of the securities loaned
provided no such loan may be made if as a result the aggregate of such
loans of a Portfolio's securities exceeds 30 percent of the value of the
Portfolio's total assets.
5. Invest in real estate, although they may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.
6. Issue senior securities, bonds or debentures.
7. Underwrite securities of other issuers, except to the extent a Portfolio
may be deemed to be an underwriter in connection with the sale of
securities held by it.
8. Invest in the securities of a company for the purpose of exercising control
or management.
9. Sell securities short (except where the Portfolio holds or has the right to
obtain at no added cost a long position in the securities sold that equals
or exceeds the securities sold short) or purchase any securities on margin,
except that it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in connection
with transactions in options and financial futures contracts is not
considered the purchase of securities on margin.
10. Concentrate investments in any industry. However, a Portfolio may invest up
to 25 percent of the value of its total assets in any one industry, and the
Prime Money Market Portfolio may invest up to 100 percent of its assets in
obligations of U.S. banks which are members of the Federal Reserve System.
The following limitations are not fundamental and may be changed without
shareholder approval. The Portfolios do not currently intend to:
A. Purchase securities of any company having less than three years of
continuous operation (including the operations of any predecessors) if the
purchase would cause the value of a Portfolio's investments in all such
companies to exceed 5 percent of the value of its net assets.
B. Enter into a Futures Contract or an option thereon unless if, as a result
thereof, (i) the then current aggregate futures market prices of
instruments required to be delivered under open Futures Contract sales plus
the then current aggregate purchase prices of instruments required to be
purchased under open Futures Contract purchases would not exceed 30 percent
of a Portfolio's net assets (taken at market value at the time of entering
into the contract) and (ii) not more than 5 percent of a Portfolio's total
assets (taken at market value at the time of entering into the contract)
would be committed to initial margin and premiums paid on Futures Contracts
or options on Futures Contracts. Transactions in Futures Contracts or
options thereon may be entered into only for hedging purposes. The Prime
Money Market Portfolio may not invest in Futures Contracts.
C. Engage in the purchase and sale of put, spread or call options on specific
securities or Futures Contracts, or engage in writing such options, except
that a Portfolio may, subject to the provisions of Items B and D, (i)
purchase warrants where the grantor of the warrants is the issuer of the
underlying securities, provided that not more than 5 percent of a
Portfolio's net assets may be invested in such warrants; (ii) purchase
covered spread options, provided that the value of such options at any time
does not exceed 5 percent of a Portfolio's net assets; (iii) write covered
call options, and purchase covered put options with respect to all of its
portfolio securities and enter into closing transactions with respect to
such options; and (iv) write call options and purchase put options on
Futures Contracts and enter into closing transactions with respect to such
options. The Prime Money Market Portfolio may not write or purchase
options.
D. Purchase or write options on specific securities, Futures Contracts and
indexes if as a result thereof, (i) the aggregate market value of all
portfolio securities covering such options (including options on Futures
Contracts and portfolio securities) exceeds 25 percent of a Portfolio's net
assets; (ii) the value of all such options (including options on Futures
Contracts and portfolio securities) exceeds 5 percent of a Portfolio's
total assets; (iii) the aggregate premiums paid for all such options
(including options on Futures Contracts and portfolio securities) held
exceeds 5 percent of a Portfolio's net assets; or (iv) more than 5 percent
of the Portfolio's total assets (taken at market value at the time of
entering into the contract) would be committed to initial margin and
premiums paid on Futures Contracts and options on Futures Contracts.
E. Invest more than 10 percent of any Portfolio's total assets in securities
of other open-end investment companies, invest more than 5 percent of total
assets in the securities of any one investment company, or acquire more
than 3 percent of the outstanding voting securities of any one investment
company except in connection with a merger, consolidation or plan of
reorganization.
F. Borrow money, except (a) from a bank or (b) by engaging in reverse
repurchase agreements with any party (reverse repurchase agreements are
treated as borrowings for purposes of fundamental investment limitation
(2)). A Portfolio may not purchase any security while borrowings
representing more than 5 percent of its total assets are outstanding.
G. Purchase or retain securities issued by an issuer, any of whose officers or
directors or security holders is an Officer or Director of the Fund or its
Advisor or Sub-Advisor if, or so long as, the Officers and Directors of the
Fund and of its Advisor or Sub-Advisor together own beneficially more than
5 percent of any class of securities of the issuer.
H. Invest in oil, gas or other mineral exploration or development programs,
although the Portfolios may invest in securities of issuers which invest in
or sponsor such programs.
For further discussion of the limitations of each Portfolio's investments which
are not fundamental and may be changed without shareholder approval, see
"INVESTMENT POLICIES AND TECHNIQUES" above.
DIRECTORS AND OFFICERS OF THE FUND
Directors and Officers of the Fund, together with information as to their
principal business occupations during the last five years, and other information
are shown below. Each Director who is deemed an "interested person", as defined
in the Investment Company Act, is indicated by an asterisk.
* Robert G. Millen, age 49, Chairman of the Board and Director of the Fund.
Chief Development Officer, IASD Health Services Corp. (Blue Cross and
Blue Shield of Iowa), 08/90 to Present; President and Chief Executive
Officer, First Interstate Bank, 03/81-08/90.
William C. Knapp, II, age 44, Director of the Fund.
President, AmerUs Properties, Inc. (real estate development, construction
and management), 1992 to -Present; Corporate Counsel/Secretary/Sr. Vice
President, Iowa Realty, Co., Inc. (real estate brokerage), 1978-1992.
* Richard C. Anderson, age 44, Director of the Fund.
Senior Vice President, Finance, IASD Health Services Corp. (Blue Cross
and Blue Shield of Iowa).
James S. Cownie, age 52, Director of the Fund.
Chairman and President, New Heritage Associates (Cable TV Operation).
Thomas K. Koehn, age 47, Director of the Fund.
President, The Waldinger Corporation (mechanical contractor).
Marvin J. Walter, age 55, Director of the Fund.
President, Dayton Road Development Corporation/W & G Marketing Company,
Inc.(real estate development and meat processing and distribution).
* David W. Miles, age 39, President and Director of the Fund.
Senior Managing Director, Investors Management Group (registered
investment advisor)
Carole E. Sours, age 50, Vice President and Treasurer of the Fund.
Director, Financial Services, IASD Health Services Corp. (Blue Cross and
Blue Shield of Iowa).
Ruth L. Prochaska, age 43, Secretary of the Fund.
Controller/Compliance Officer, Investors Management Group (registered
investment advisor).
The address for Messrs. Millen and Anderson and Ms. Sours is 636 Grand Avenue,
Des Moines, Iowa 50309. The address for Mr. Miles and Ms. Prochaska is 2203
Grand Avenue, Des Moines, Iowa 50312-5338. The address for Mr. Cownie is 2600
Grand Avenue, Suite 301, Des Moines, Iowa 50312. The address for Mr. Knapp is
4949 Westown Parkway, Suite 245, West Des Moines, Iowa 50266. The address for
Mr. Koehn is 2601 Bell Avenue, Des Moines, Iowa 50321. The address for Mr.
Walter is 413 Kellogg Avenue, Ames, Iowa 50010.
As of the date hereof, Officers and Directors of the Fund beneficially owned no
more than 1 percent of the shares of any Portfolio of the Fund.
Directors and Officers of the Fund who are officers, directors, employees, or
stockholders of the Advisor or Sub-Advisor do not receive any remuneration from
the Fund for serving as Directors or Officers. Those Directors of the Fund who
are not so affiliated with the Advisor receive $250 for each Board of Directors
meeting attended, plus reimbursement for out-of-pocket expenses in attending
meetings.
COMPENSATION TABLE
Name of Aggregate Compensation Total Compensation From Registrant
Person, Position From Registrant and Fund Complex Paid to Directors
- --------------------------------------------------------------------------------
Robert G. Millen $ 0 $ 0
Director
William C. Knapp II 750 750
Director
Richard C. Anderson 0 0
Director
James S. Cownie 500 500
Director
Thomas K. Koehn 500 500
Director
Marvin J. Walter 1,000 1,000
Director
PRINCIPAL SHAREHOLDERS
As of June 30, 1996, IASD Health Services Corp., IASD Health Services Savings
and Investment Plan, and Weitz Corporation owned in the aggregate $32,789,433
(52 percent), $14,639,534 (23 percent) and $3,708,237 (6 percent) respectively
of the Fund's Portfolios. IASD Health Services Corp., is a mutual insurance
company, operating on a not for profit basis, organized under Iowa law marketing
primarily health and related insurance products. (See Appendix A.)
As of June 30, 1996, the following persons owned 5 percent or more of the
outstanding shares of the Portfolios indicated.
EQUITY PORTFOLIO - INITIAL SHARES
Name Amount % Ownership
- --------------------------------------------------------------------------------
Weitz Company $ 1,648,694 24.64%
Wheeler Consolidated $ 1,449,298 21.66%
Seneca Companies $ 1,076,603 16.09%
Kaser Corporation $ 663,760 9.92%
EQUITY PORTFOLIO - SELECT SHARES
Name Amount % Ownership
- --------------------------------------------------------------------------------
IASD Savings and Investment Plan $ 8,857,353 50.48%
IASD Health Services Corp. $ 7,701,054 43.89%
TOTAL RETURN PORTFOLIO - INITIAL SHARES
Name Amount % Ownership
- --------------------------------------------------------------------------------
Weitz Company $ 1,681,599 46.97%
Seneca Companies $ 723,907 20.22%
Hockenberg Newburgh $ 614,355 17.16%
TOTAL RETURN PORTFOLIO - SELECT SHARES
Name Amount % Ownership
- --------------------------------------------------------------------------------
IASD Health Services Corp. $ 12,974,329 72.28%
IASD Savings and Investment Plan $ 4,746,005 26.44%
FIXED INCOME PORTFOLIO - INITIAL SHARES
Name Amount % Ownership
- --------------------------------------------------------------------------------
Weitz Company $ 377,944 20.80%
Seneca Companies $ 350,870 19.31%
Wheeler Consolidated $ 255,475 14.06%
Hockenberg Newburgh $ 250,206 13.77%
Cedar Graphics $ 234,943 12.93%
Weland Laboratories $ 109,749 6.04%
FIXED INCOME PORTFOLIO - SELECT SHARES
Name Amount % Ownership
- --------------------------------------------------------------------------------
IASD Health Services Corp. $ 7,120,856 91.52%
IASD Savings and Investment Plan $ 428,714 5.51%
SHORT-TERM GOVERNMENT PORTFOLIO - INITIAL SHARES
Name Amount % Ownership
- --------------------------------------------------------------------------------
Hockenberg Newburgh $ 211,993 87.00%
Kane Manufacturing $ 13,719 5.63%
SHORT-TERM GOVERNMENT PORTFOLIO - SELECT SHARES
Name Amount % Ownership
- --------------------------------------------------------------------------------
IASD Health Services Corp. $ 3,489,196 82.31%
IASD Savings and Investment Plan $ 607,462 14.33%
PRIME MONEY MARKET PORTFOLIO
Name Amount % Ownership
- --------------------------------------------------------------------------------
IASD Health Services Corp. $ 1,503,999 51.34%
YMCA of Greater Des Moines $ 282,988 9.66%
Wheeler Consolidated $ 169,910 5.80%
Robert Riley, Jr. $ 159,950 5.46%
As a result, IASD Health Services Corp., could be deemed to be in control of the
Fund and the Portfolios. As a control person, IASD Health Services Corp., can
determine the outcome of any matter presented to the shareholders of any
Portfolio and the Fund including the election of directors, changes in the
fundamental investment policies, approval of the Investment Advisory Agreements
and the Rule 12b-1 Plan.
MANAGEMENT OF THE FUND
THE ADVISORS
The Fund's advisor is Capital Value Corporation ("CVC" or the "Advisor"), an
Iowa corporation. CVC is a wholly-owned, indirect subsidiary of IASD Health
Services Corp., which does business in the state of Iowa as Blue Cross and Blue
Shield of Iowa and does business in the state of South Dakota as Blue Cross of
South Dakota. (See Appendix A.) A brief description of the Fund's investment
advisory agreement is set forth in the Prospectus under "MANAGEMENT".
The Advisory Agreement, which is dated December 16, 1992 (the "Advisory
Agreement"), was approved by the initial shareholder on December 16, 1992. The
Advisory Agreement is required to be approved annually by the Board of Directors
of the Fund or by a vote of a majority of the Fund's outstanding voting
securities (as defined in the Investment Company Act). In either case, each
annual renewal must be approved by the vote of a majority of the Fund's
Directors who are not parties to the Advisory Agreement or interested persons of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. The Advisory Agreement is terminable, without penalty, on 60
days' written notice by the Board of Directors of the Fund, by vote of a
majority of the Fund's outstanding voting securities, or by CVC . In addition,
the Advisory Agreement will terminate automatically in the event of its
assignment.
Under the terms of the Advisory Agreement, CVC oversees the activities of the
Sub-Advisor and establishes and monitors general criteria and policies for the
operation of the Fund, subject to the supervision of the Fund's Board of
Directors. In a separate sub-advisory agreement, (see below) all day-to-day
management of the Fund is delegated to Investors Management Group ("IMG" or the
"Sub-Advisor"); collectively CVC and IMG are referred to as the "Advisors".
The Equity Portfolio is co-managed by James W. Paulsen, Ph.D. and Douglas R.
Ramsey. The Total Return Portfolio is co-managed by James W. Paulsen, Ph.D.,
Douglas R. Ramsey, Jeffrey D. Lorenzen, CFA, and Kathryn D. Beyer, CFA. The
Fixed Income, Short-Term Government and Prime Money Market Portfolios are
co-managed by James W. Paulsen, Ph.D., Jeffrey D. Lorenzen, CFA, and Kathryn D.
Beyer, CFA. James W. Paulsen, Ph.D.; Jeffrey D. Lorenzen, CFA; and Kathryn D.
Beyer, CFA; have managed their respective Portfolios since inception. The
following is certain biographical information concerning the co-managers:
JAMES W. PAULSEN, PH.D., SENIOR MANAGING DIRECTOR. Dr. Paulsen is the
firm's chief portfolio strategist and chairs IMGs Investment Policy
Committee. Prior to joining IMG in 1991, Dr. Paulsen served as president
of a Cedar Rapids, Iowa investment firm managing over $700 million from
1983 to 1991. Dr. Paulsen received his Bachelor of Science degree in
economics and his Doctorate in economics from Iowa State University.
DOUGLAS R. RAMSEY, SENIOR EQUITY ANALYST. Mr. Ramsey serves as IMG's
senior equity analyst and is a member of IMG's Investment Policy
Committee. Prior to joining IMG in 1996, he was a securities analyst at a
Minneapolis-based regional brokerage firm from 1995 to 1996. He was an
economist at a Cedar Rapids, Iowa-based investment firm from 1990 to
1995. Mr. Ramsey received his B.A. degree in business administration and
economics from Coe College and his M.A. degree in economics from Ohio
State University.
JEFFREY D. LORENZEN, CFA, MANAGING DIRECTOR. Mr. Lorenzen is a fixed
income strategist and is a member of IMG's Investment Policy Committee.
Prior to joining IMG in 1992, his experience includes serving as a
securities analyst and corporate fixed income analyst for The Statesman
Group from 1989 to 1992. He received his Masters of Business
Administration from Drake University and his Bachelor of Business
Administration degree from the University of Iowa.
KATHRYN D. BEYER, CFA, MANAGING DIRECTOR. Ms. Beyer is a fixed income
strategist and is a member of IMG's Investment Policy Committee. Prior to
joining IMG in 1993, her experience includes serving as a securities
analyst and director of mortgage-backed securities for Central Life
Assurance Company from 1988 to 1993. Ms. Beyer received her Masters of
Business Administration from Drake University and her Bachelor of Science
degree in agricultural engineering from Iowa State University.
IMG is responsible for investment decisions and supplies investment research and
portfolio management. At its expense, IMG provides office space and all
necessary office facilities, equipment, and personnel for servicing the
investments of the Fund.
Except for the expenses expressly assumed by IMG as set forth above or as
described below with respect to the distribution of the Fund's shares, the Fund
is responsible for all its other expenses, including, without limitation,
governmental fees, interest charges, taxes, membership dues in the Investment
Company Institute allocable to the Fund, brokerage commissions, and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; expenses of repurchasing and redeeming shares and
servicing shareholder accounts; expenses of registering or qualifying shares for
sale; expenses for preparing, printing and distributing periodic reports,
notices and proxy statements to shareholders and to governmental officers and
commissions; insurance premiums; fees and expenses of the Fund's custodian
including safekeeping of funds and securities and maintaining required books and
accounting; expenses of calculating the net asset value of shares of the Fund;
fees and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Fund; compensation and
expenses of Directors who are not "interested persons" of the Advisor or
Sub-Advisor; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses are borne by the Fund except
that the Fund's Distribution Agreement with IFS requires IFS to pay for
prospectuses that are to be used for sales purposes.
As compensation for its services, the Fund pays to the Advisor a monthly
management fee at an annual rate of 0.10 percent of each of the Portfolio's
average net assets (0.05 percent for the Prime Money Market Portfolio). The Fund
paid management fees to the Advisor in fiscal 1996 of $21,498 for the Equity
Portfolio; $19,412 for the Total Return Portfolio; $9,229 for the Fixed Income
Portfolio; $4,300 for the Short-Term Government Portfolio; and $2,738 for the
Prime Money Market Portfolio. The Fund paid management fees to the Advisor in
fiscal 1995 of $14,323 for the Equity Portfolio; $15,552 for the Total Return
Portfolio; $7,030 for the Fixed Income Portfolio; $3,843 for the Short-Term
Government Portfolio and $2,757 for the Prime Money Market Portfolio. For the
period May 20, 1993 (commencement of Operations) to March 31, 1994, the Fund
paid management fees to the Advisor of $7,830 for the Equity Portfolio; $10,249
for the Total Return Portfolio; $5,482 for the Fixed Income Portfolio; $2,905
for the Short-Term Government Portfolio and $2,167 for the Prime Money Market
Portfolio.
The Sub-Advisor is paid a monthly management fee at an annual rate of 0.43
percent of each of the Portfolios' net assets (0.23 percent for the Prime Money
Market Portfolio). The Fund paid management fees to the Sub-Advisor in fiscal
1996 of $92,443 for the Equity Portfolio; $83,473 for the Total Return
Portfolio; $39,685 for the Fixed Income Portfolio; $18,494 for the Short-Term
Government Portfolio; and $12,597 for the Prime Money Market Portfolio. The Fund
paid management fees to the Sub-Advisor in fiscal 1995 of $61,588 for the Equity
Portfolio; $66,873 for the Total Return Portfolio; $30,232 for the Fixed Income
Portfolio; $16,528 for the Short-Term Government Portfolio and $12,679 for the
Prime Money Market Portfolio. For the period May 20, 1993 (commencement of
Operations) to March 31, 1994, the Fund paid management fees to the Sub-Advisor
of $33,668 for the Equity Portfolio; $44,070 for the Total Return Portfolio;
$23,571 for the Fixed Income Portfolio; $12,490 for the Short-Term Government
Portfolio and $9,972 for the Prime Money Market Portfolio.
(See "ADDITIONAL INVESTMENT INFORMATION -- Calculation of Net Asset Value" in
the Prospectus.) From time to time, CVC and IMG may voluntarily waive all or a
portion of their management fees for one or more Portfolios of the Fund. The
organizational expenses of the Fund were borne by CVC and will not be reimbursed
by the Fund.
The Advisory Agreement requires CVC to reimburse the Fund in the event that the
expenses and charges payable by the Fund in any fiscal year, including the
advisory fee but excluding taxes, interest, brokerage commissions, and similar
fees, exceed that percentage of the average net asset value of the Fund for such
year, which is the most restrictive percentage provided by the state laws of the
various states in which the Fund's common stock is qualified for sale. Such
excess is determined by valuations made as of the close of each business day of
the year. No percentage limitation is currently applicable to the Fund.
Reimbursement of expenses in excess of the applicable limitation will be made on
a monthly basis and will be paid to the Fund by reduction of the Advisor's fee,
subject to later adjustment, month by month, for the remainder of the Fund's
fiscal year. CVC and IMG may from time to time voluntarily absorb expenses for
the Fund in addition to the reimbursement of expenses in excess of applicable
limitations.
THE DISTRIBUTOR
The Directors of the Fund have adopted a Distribution Plan (the "Distribution
Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder,
after having concluded that there was a reasonable likelihood that the
Distribution Plan would benefit the Fund and the shareholders of the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan provides that the Fund shall pay IMG Financial Services,
Inc. ("IFS"), as the Fund's distributor, a daily distribution fee payable
monthly and equal on an annual basis to 0.50 percent of each Portfolio's average
daily net assets. The purpose of such payments is to compensate IFS for its
distribution services to the Fund. IFS pays the cost of commissions to
broker-dealers, and for expenses of printing prospectuses and reports used for
sales purposes, expenses of the preparation and printing of sales literature and
other distribution-related expenses, including, without limitation, the cost
necessary to provide distribution-related services, of personnel, travel, office
expenses and equipment. The Distribution Plan also provides that IFS will
receive all contingent deferred sales charges ("CDSC"). (See "MANAGEMENT
- -Distributor" and "HOW TO REDEEM SHARES" in the Prospectus.) The Fund paid
distribution fees to IFS in fiscal 1996 of $28,701 for the Equity Portfolio;
$16,013 for the Total Return Portfolio; $8,887 for the Fixed Income Portfolio
and $1,135 for the Short-Term Government Portfolio. No contingent deferred sale
charges were collected in fiscal 1996. For Equity, Total Return, Fixed Income,
and Short-Term Government, contingent deferred sales charges of $5,854, $3,002,
$1,253 and $2,284 respectively, were collected by the Distributor in fiscal
1995. During the period May 20, 1993 (date of inception) to March 31, 1994, no
contingent deferred sales charges were collected.
In accordance with Rule 12b-1, all agreements relating to the Distribution Plan
entered into between either the Fund or IFS and other organizations must be
approved by the Fund's Board of Directors, including a majority of the Directors
who are not "interested persons" of the Fund (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to such Plan ("Qualified
Directors"). The Distribution Plan further provides that the selection and
nomination of Qualified Directors shall be committed to the discretion of the
non-interested Directors then in office.
The Distribution Plan requires that the Fund shall provide to the Directors, and
the Directors shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under the Distribution Plan. The Distribution
Plan may be terminated at any time by vote of a majority of the Qualified
Directors or by vote of the holders of a majority of the shares of the Fund (as
defined in "Investment Restrictions" above). The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of shareholders and may not be materially amended in any
case without a vote of the majority of both the Directors and the Qualified
Directors.
As the distributor of the Fund, IFS acts as agent in selling shares of the Fund
to dealers. From time to time, IFS, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to dealers
which sell shares of the Fund. Such concessions provided by IFS may include
financial assistance to dealers in connection with preapproved conferences or
seminars, sales or training programs for invited registered representatives,
payment for travel expenses, including lodging, incurred by registered
representatives and members of their families to various locations for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds and/or other dealer-sponsored events. In
some instances, these concessions may be offered to dealers or only to certain
dealers who have sold or may sell, during specified periods, certain minimum
amounts of shares of the Fund. No other concessions will be offered to the
extent prohibited by the laws of any state or any self-regulatory agency, such
as the National Association of Securities Dealers, Inc. Neither IFS nor dealers
are permitted to delay placing orders to benefit themselves by a price change.
Shares of each Portfolio may be sold without a dealer commission or a CDSC to
certain persons and in certain instances as described in "ADDITIONAL INVESTMENT
INFORMATION -- Conversion Feature" in the Prospectus. Such sales are made
without a CDSC to promote goodwill with employees and others with whom CVC, IMG,
IFS and/or the Fund have business relationships, and because the sales effort,
if any, involved in making such sales is negligible.
The Fund has entered into a Distribution Agreement dated December 16, 1992 (the
"Distribution Agreement"), with IFS in accordance with the provisions of the
Distribution Plan. Under the Agreement IFS will serve as distributor for the
continuous offering of shares of the Fund. The public offering price of shares
of each Portfolio is their net asset value next computed after the sale (see
"HOW TO INVEST" in the Prospectus). The Distribution Agreement will remain in
effect only if such continuance is specifically approved at least annually by
vote of both a majority of the Directors and a majority of the Qualified
Directors of the Fund. The Distribution Agreement will be terminated
automatically if assigned, and may be terminated at any time by a majority of
the Qualified Directors or by vote of the holders of a majority of the shares of
the Fund.
ADMINISTRATIVE SERVICES AGREEMENT
CVC provides information and administrative services for Fund shareholders
pursuant to a Shareholder Services Plan and Administrative Services Agreement
(the "Administrative Services Agreement"). CVC may enter into related
arrangements with various financial services firms, such as broker-dealer firms
or banks ("firms"), that provide services and facilities for their customers or
clients who are shareholders of the Fund. Such administrative services and
assistance may include, but are not limited to, establishing and maintaining
shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund and its special
features and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. CVC bears all its expenses
of providing services pursuant to the Administrative Services Agreement,
including the payment of any services fees. For services under the
Administrative Services Agreement, the Fund pays CVC a fee, payable monthly, at
the annual rate of up to 0.25 percent of average daily net assets of the Fund
(including both Initial Shares and Select Shares). CVC may then pay each firm a
service fee at an annual rate of up to 0.25 percent of net assets of those
accounts in the Fund that it maintains and services. A firm becomes eligible for
the service fee based on assets in the accounts in the month following the month
of purchase and the fee continues until terminated by CVC or the Fund. The fees
are calculated monthly and paid quarterly.
SHAREHOLDER SERVICE PLAN
Pursuant to the "Shareholder Services Plan", adopted by the Board of Directors
and reviewed at least annually, CVC may enter into related arrangements with
various financial services firms that provide services and facilities for their
customers or clients who are shareholders of the Fund. Such administrative
services and assistance may include, but are not limited to, establishing and
maintaining shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund and its special
features and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. As long as the
Administrative Services Agreement or any Amendment thereto shall remain in
effect, it is understood that CVC shall be paid fees as set forth in the
Administrative Services Agreement. Unless otherwise specifically approved by the
Board of Directors, CVC shall be solely responsible for all costs and expenses
incurred by it in delivery of such services and its sole compensation shall be
the receipt of its fees.
CVC also may provide some of the above services and may retain any portion of
the fee under the Administrative Services Agreement not paid to firms to
compensate itself for administrative functions performed for the Fund.
SHAREHOLDER SERVICING, TRANSFER AND DIVIDEND DISBURSING AGENT
IMG provides shareholder servicing, transfer agency and dividend disbursing
services pursuant to a Transfer Agent, Dividend Disbursing Agent, and
Shareholder Servicing Agent Agreement with the Fund, dated December 16, 1992
(the "Agency Agreement"). IMG's responsibilities under the Agency Agreement
include administering and performing transfer agent functions and the keeping of
records in connection with the issuance, transfer and redemption of the shares
of each Portfolio. For these services, IMG receives a fee, computed and paid
monthly, at the annual rate of 0.05 percent of average daily net assets of the
Fund (including both Initial Shares and Select Shares).
FUND ACCOUNTING SERVICES
IMG provides fund accounting services under a Fund Accounting Agreement.
Pursuant to this Agreement, IMG is responsible for maintaining all usual,
customary and required books, journals and ledgers of accounts and providing
pricing and reporting all computational services. Under the Agreement, IMG will
be paid a fee of the lesser of $24,000 or an annual rate of 0.15 percent of
averge daily net assets for the Equity Portfolio and Total Return Portfolio, and
the lesser of $24,000 or an annual rate of 0.10 percent of average daily net
assets of the Fixed Income and Short-Term Government Portfolios and the lesser
of $18,000 or an annual rate of 0.10 percent of average daily net assets of the
Prime Money Market Portfolio.
CUSTODIAN
Norwest Bank Minnesota, N.A., Sixth and Marquette, Minneapolis, Minnesota 55479
(the "Custodian") is the custodian of the Fund's assets. The Custodian's
responsibilities include safekeeping and controlling each Portfolio's cash and
securities, handling the receipt and delivery of securities, determining income
and collecting interest and dividends on each Portfolio's investments,
maintaining books of original entry for portfolio and fund accounting and other
required books and accounts, and calculating the daily net asset value and
public offering price of shares of each Portfolio. The Custodian does not
determine the investment policies of any Portfolio or decide which securities a
Portfolio will buy or sell. Any Portfolio may, however, invest in securities of
the Custodian and may deal with the Custodian as principal in securities
transactions.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisors are responsible for decisions to buy and sell securities for each
Portfolio of the Fund and for the placement of its business and the negotiation
of the commissions to be paid on such transactions. It is the policy of the
Advisors to seek the best execution at the best security price available with
respect to each transaction, in light of the overall quality of brokerage and
research services provided to the Advisors or the Fund. In over-the-counter
transactions, orders are placed directly with a principal market maker unless it
is believed that a better price and execution can be achieved by using a broker.
Normally, the Fixed Income, Short-Term Government and Prime Money Market
Portfolios will pay no brokerage commissions on purchases and sales of portfolio
securities since most of their purchases and sales will be principal
transactions. In selecting broker-dealers and in negotiating commissions, the
Advisor considers the firm's reliability, the quality of its execution services
on a continuing basis, and its financial condition.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment advisor, under certain circumstances, to cause an account to pay a
broker or dealer who supplies brokerage and research services a commission for
effecting a transaction in excess of the amount of commission another broker or
dealer would have charged for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value of securities, the
advisability of investing, purchasing, or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
In carrying out the provisions of the Advisory Agreement and Sub-Advisory
Agreement, the Advisors may cause the Fund to pay a broker which provides
brokerage and research services to the Advisor a commission for effecting a
securities transaction in excess of the amount another broker would have charged
for effecting the transaction. The Advisors are of the opinion that the
continued receipt of supplemental investment research services from
broker-dealers is essential to its provision of high-quality portfolio
management services to the Fund. The Advisory and Sub-Advisory Agreements
provide that such higher commissions will not be paid by the Fund unless (a) the
Advisors determine in good faith that the amount is reasonable in relation to
the services in terms of the particular transaction or in terms of the Advisors'
overall responsibilities with respect to the accounts as to which it exercises
investment discretion; (b) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal laws, and the
Advisory Agreement and Sub-Advisory Agreement; and (c) in the opinion of the
Advisors, the total commissions paid by the Fund will be reasonable in relation
to the benefits to the Fund over the long term. The investment advisory fee paid
by the Fund under the Advisory Agreement is not reduced as a result of the
Advisors' receipt of research services.
The Advisors are authorized to use research services provided by and to place
transactions with brokerage firms that have provided assistance in the
distribution of shares of the Fund or shares of other funds managed by the
Advisors to the extent permitted by law.
The Sub-Advisor places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Sub-Advisor. Research services
furnished by firms through which the Fund effects its securities transactions
may be used by the Sub-Advisor in servicing all of its accounts; not all of such
services may be used by the Sub-Advisor in connection with the Fund. In the
opinion of the Sub-Advisor, it is not possible to separately measure the
benefits from research services to each of the accounts (including the Fund)
managed by the Sub-Advisor. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in excess
of those charged by another broker paid by each account for brokerage and
research services will vary. However, in the opinion of the Sub-Advisor, such
costs to the Fund will not be disproportionate to the benefits received by the
Fund on a continuing basis. The Fund paid brokerage commissions during fiscal
1996 of $32,220 for the Equity Portfolio; $14,195 for the Total Return Portfolio
and $367 for the Fixed Income Portfolio.
The Sub-Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations between the Fund and other advisory accounts, the main factors
considered by the Sub-Advisor are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for recommending the
investment.
TAXES
As indicated under "DISTRIBUTIONS AND TAXES" in the Prospectus, it is the Fund's
intent to qualify each of the Portfolios as a "regulated investment company"
under the Code. This qualification does not involve governmental supervision of
the Fund's management practices or policies.
A dividend or capital gains distribution received shortly after the purchase of
shares reduces the net asset value of the shares by the amount of the dividend
or distribution and, although in effect a return of capital, will be subject to
income taxes. Net gain on sale of securities when realized and distributed,
actually or constructively, is taxable as capital gain. If the net asset value
of shares were reduced below a shareholder's cost by distribution of gains
realized on sales of securities, such distribution would be a return of
investments although taxable as stated above.
Net investment income and net realized gains (losses) for the funds may differ
for financial statement and tax purposes. The character of distributions made
during the year from net investment income or net realized gains may differ from
their ultimate characterization for federal income tax purposes. Also, due to
the timing of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or realized gains (losses)
were recorded by the funds. For federal income tax purposes, the Short-Term
Government Portfolio has a capital loss carryover at March 31, 1996 of $26,981
expiring in 2004 if not offset by subsequent capital gains. It is unlikely the
Board of Directors will authorize a distribution of any net realized capital
gains until the available capital loss carryover has been offset or expires.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "ADDITIONAL INVESTMENT
INFORMATION -- Calculation of Net Asset Value", the net asset value of each
Portfolio will be determined as of the close of trading on each day the NYSE is
open for trading. The New York Stock Exchange is open for trading Monday through
Friday except New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Additionally, if any of the aforementioned holidays falls on a
Saturday, the New York Stock Exchange will not be open for trading on the
preceding Friday, and when any such holiday falls on a Sunday, the New York
Stock Exchange will not be open for trading on the succeeding Monday unless
unusual business conditions exist, such as the ending of a monthly or the yearly
accounting period.
The Fund received an order from the Securities and Exchange Commission pursuant
to Section 6(c) of the 1940 Act for exemption from the provisions of Sections
2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c), 22(d) and Rule 22c-1 of the 1940
Act. The conditional order granted permits the Equity, Total Return, Fixed
Income and Short-Term Government Portfolios (a) to issue two classes of shares,
("Initial" Shares and "Select" Shares), representing interests in the same
portfolio of securities; (b) convert Initial Shares to Select Shares after eight
years, and (c) to assess a contingent deferred sales charge ("CDSC") on certain
redemptions of shares of one of the classes and to waive the CDSC under certain
circumstances. See Prospectus for a complete description of the Initial and
Select Shares, the conversion feature, and the CDSC.
SHAREHOLDER SERVICES
As described under "SHAREHOLDER SERVICES -- Automatic Dividend Reinvestment" in
the Prospectus, all income dividends and capital gain distributions will be
invested automatically in additional shares of the Portfolio paying the
distribution unless the Fund is otherwise notified in writing.
SYSTEMATIC WITHDRAWAL PLAN
You can set up automatic withdrawals from your account at monthly, quarterly or
annual intervals. To begin distributions, you must have an initial balance of
$24,000 in the Portfolio account, and a maximum of 10 percent per year may be
withdrawn pursuant to the Systematic Withdrawal Plan. To establish the
Systematic Withdrawal Plan, call 1-800-798-1819 and request an application. To
establish the Systematic Withdrawal Plan, you appoint the Fund as your agent to
effect redemptions of Fund shares held in your account for the purpose of making
monthly, quarterly or annual withdrawal payments of a fixed amount to you out of
your account. One request will be honored in any 12 month period.
The minimum periodic withdrawal payment is $200. These payments will be made
first from Select Shares, then from any Initial Shares representing reinvested
dividends and/or capital gains, then from the earliest purchased Initial Shares.
Redemptions will be made on the fifth business day preceding the last day of
each month or, if that day is a holiday, on the next preceding business day. The
shareholder may wish to consider reinvesting dividends in additional Fund shares
at net asset value. You may deposit additional Fund shares in your account at
any time.
The Fund will waive the CDSC on redemptions made pursuant to a Systematic
Withdrawal Plan. The right is reserved to amend the Systematic Withdrawal Plan
on 30 days' notice. The Plan may be terminated at any time by the shareholder or
the Fund.
Withdrawal payments cannot be considered to be yield or income on the
shareholder's investment since portions of each payment will normally consist of
a return of capital. Depending on the size or the frequency of the disbursements
requested and the fluctuation in the value of a Portfolio's securities,
redemptions for the purpose of making such disbursements may reduce or even
exhaust your account.
You may vary the amount or frequency of withdrawal payments, temporarily
discontinue them, or change the designated payee or payee's address by notifying
the Fund.
AUTOMATIC INVESTMENT PLAN
An Automatic Investment Plan may be established at any time. By participating in
the Automatic Investment Plan, you may automatically make purchases of shares of
any Fund Portfolio on a regular, convenient basis. You may choose to make
contributions on the fifth and/or twentieth day of each month in an amount of
$50 or more.
Under the Automatic Investment Plan, your bank or other financial institution
debits preauthorized amounts drawn on your account each month and applies such
amounts to the purchase of shares of the Fund. The Automatic Investment Plan can
be implemented with any financial institution that is a member of the Automated
Clearinghouse. You may obtain an application to establish the Automatic
Investment Plan from the Fund. No service fee is charged by the Fund for
participating in the Automatic Investment Plan.
GENERAL PROCEDURES FOR SHAREHOLDER ACCOUNTS
As set forth under "CAPITAL STOCK" in the Prospectus, certificates for Fund
shares will not be issued.
Either an investor or the Fund, by written notice to the other, may terminate
the investor's participation in the plans, programs, privileges, or other
services described under "SHAREHOLDER SERVICES" in the Prospectus without
penalty at any time, except as discussed in the Prospectus.
Your account may be terminated by the Fund on not less than 30 days' notice if,
at the time of any transfer or redemption of shares in the account, the value of
the remaining shares in the account at the current net asset value falls below
$500. Upon any such termination, the shares will be redeemed at the then current
net asset value and a check for the proceeds of redemption sent within seven
days of such redemption. The proceeds may be reduced by any applicable CDSC.
TELEPHONE EXCHANGE PRIVILEGE AND AUTOMATIC EXCHANGE PLAN
A discussion of the Telephone Exchange Privilege and Automatic Exchange Plan is
set forth in the Prospectus under the captions "SHAREHOLDER SERVICES -Telephone
Exchange and Redemption Privilege" and "-- Automatic Exchange Plan".
Shares of each Portfolio may be exchanged for each other at relative net asset
values. No CDSC is charged on an exchange between the Equity Portfolio, Total
Return Portfolio, Fixed Income Portfolio and Short-Term Government Portfolio.
Since the CDSC does not apply to shares of the Prime Money Market Portfolio, the
Prime Money Market Portfolio is not included in the Automatic Exchange Plan.
Shareholders may exchange shares of any Portfolio for shares of the Prime Money
Market Portfolio, but the normal CDSC will be applied at the time of the
exchange. For purposes of the CDSC and conversion to Select Shares, amounts
exchanged retain their original cost and purchase date. Exchanges will be
effected by redemption of shares of the Portfolio held and purchase of shares of
the Portfolio for which Portfolio shares are being exchanged (the "New
Portfolio"). For federal income tax purposes, any such exchange constitutes a
sale upon which a capital gain or loss will be realized, depending upon whether
the value of the shares being exchanged is more or less than the shareholder's
adjusted cost basis. Upon a telephone exchange, the transfer agent establishes a
new account in the New Portfolio with the same registration and dividend and
capital gains options as the redeemed account, unless otherwise specified, and
confirms the purchase to you. In order to establish a Systematic Withdrawal Plan
for the new account, however, an exchanging shareholder must file a specific
written request.
The Telephone Exchange Privilege and Automatic Exchange Plan are available only
in states where shares of the New Portfolio may be sold, and the privilege may
be modified or discontinued at any time. Additional information concerning these
exchange privileges is contained in the Fund's Prospectus.
SHAREHOLDER MEETINGS
The Maryland Corporation Law permits registered investment companies, such as
the Fund, to operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the Investment Company Act
of 1940. The Fund has adopted the appropriate provisions in its Bylaws and may,
at its discretion, not hold an annual meeting in any year in which the election
of Directors is not required to be acted on by shareholders under the 1940 Act.
The Fund's Bylaws also contain procedures for the removal of Directors by its
shareholders. At any meeting of shareholders, duly called and at which a quorum
is present, the shareholders may, by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any Director or
Directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of removed Directors.
Upon the written request of the holders of shares entitled to not less than 10
percent of all the votes entitled to be cast at such meeting, the Secretary of
the Fund shall promptly call a special meeting of shareholders for the purpose
of voting upon the question of removal of any Director. Whenever 10 or more
shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either shares having a net
asset value of at least $25,000 or at least 1 percent of the total outstanding
shares, whichever is less, shall apply to the Fund's Secretary in writing,
stating that they wish to communicate with other shareholders with a view to
obtaining signatures to a request for a meeting as described above and
accompanied by a form of communication and request which they wish to transmit,
the Secretary shall within five business days after such application either: (1)
afford to such applicants access to a list of the names and addresses of all
shareholders as recorded on the books of the Fund; or (2) inform such applicants
as to the approximate number of shareholders of record and the approximate cost
of mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of the last
sentence of the preceding paragraph, the Secretary, upon the written request of
such applicants, accompanied by a tender of the material to be mailed and of the
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all shareholders of record at their addresses as recorded on the
books unless within five business days after such tender the Secretary shall
mail to such applicants and file with the SEC, together with a copy of the
material to be mailed, a written statement signed by at least a majority of the
Board of Directors to the effect that in their opinion either such material
contains untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the written
statement so filed, the SEC may, and if demanded by the Board of Directors or by
such applicants shall, enter an order either sustaining one or more of such
objections or refusing to sustain any of them. If the SEC shall enter an order
refusing to sustain any of such objections, or if, after the entry of an order
sustaining one or more of such objections, the SEC shall find, after notice and
opportunity for hearing, that all objections so sustained have been met, and
shall enter an order so declaring, the Secretary shall mail copies of such
material to all shareholders with reasonable promptness after the entry of such
order and the renewal of such tender.
VALUATION OF PORTFOLIO SECURITIES
The net asset value per share of the Portfolios is determined by IMG, under
procedures established by the Board of Directors. Portfolio securities are
valued primarily on the basis of valuations furnished by a pricing service which
uses both dealer-supplied valuations and electronic data processing techniques
that take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, with exclusive reliance
upon quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities. Use
of the pricing service has been approved by the Board of Directors. There are a
number of pricing services available, and the Directors, or Officers acting on
behalf of the Directors, on the basis of ongoing evaluation of these services,
may use other pricing services or discontinue the use of any pricing service in
whole or in part.
Securities not valued by the pricing service and for which quotations are
readily available are valued at market values determined on the basis of their
latest available bid prices as furnished by recognized dealers in such
securities. Futures contracts and options are valued on the basis of market
quotations, if available. Securities and other assets for which quotations or
pricing service valuations are not readily available are valued at their fair
value as determined in good faith under consistently applied procedures under
the general supervision of the Board of Directors.
PERFORMANCE INFORMATION
As described in the "PERFORMANCE INFORMATION" section of the Fund's Prospectus,
the historical performance or return of the Initial Shares and Select Shares of
each Portfolio may be shown in the form of "yield", "average annual total
return", "total return", and "cumulative total return".
Each class of shares' average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the SEC. The
average annual total return for Initial Shares and Select Shares for a specific
period is found by first taking a hypothetical $10,000 investment ("initial
investment") in the Portfolio's respective shares on the first day of the period
and computing the "redeemable value" of that investment at the end of the
period. The redeemable value is then divided by the initial investment, and this
quotient is taken to the Nth root (N representing the number of years in the
period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Portfolio have been reinvested at net asset value on the
reinvestment dates during the period.
Calculation of a Portfolio's total return is subject to a standardized format.
Total return performance for a specific period is calculated by first taking an
investment (assumed below to be $10,000) ("initial investment") in the shares on
the first day of the period and computing the "ending value" of that investment
at the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The calculation assumes that all income and capital gains dividends paid by the
Portfolio have been reinvested at net asset value on the reinvestment dates
during the period. Total return may also be shown as the increased dollar value
of the hypothetical investment over the period.
Cumulative total return represents the simple change in value of your investment
over a stated period and may be quoted as a percentage or as a dollar amount.
Total returns may be broken down into their components of income and capital
(including capital gains and changes in share price) in order to illustrate the
relationship between these factors and their contributions to total return.
Average Annual Total Returns are as follows:
Initial Select
Shares Shares
1996 1995 1994* 1996 1995 1994*
----------------------------------------------
Equity Portfolio 23.90% 9.78% 7.16% 24.52% 10.31% 7.88%
Total Return Portfolio 17.12% 6.16% 4.77% 17.70% 6.69% 4.75%
Fixed Income Portfolio 10.28% 4.59% 3.12% 10.84% 5.12% 3.38%
Short-Term Government Portfolio 7.27% 3.73% 2.28% 7.81% 4.25% 3.39%
*From inception of Fund on May 20, 1993.
Average Total Returns since inception (May 20, 1993) were 12.71 percent, 8.91
percent, 5.56 percent, and 4.22 percent for Initial Shares for Equity, Total
Return, Fixed Income, and Short-Term Government Portfolios, respectively; and
13.40 percent, 9.09 percent, 5.91 percent, and 4.90 percent for Select Shares
for Equity, Total Return, Fixed Income, and Short-Term Government Portfolios,
respectively.
Yield for the shares of the Fixed Income Portfolio, and Short-Term Government
Portfolio is computed in accordance with a standardized method prescribed by
rules of the SEC. Under that method, the current yield quotation for each
Portfolio is based on a one month or 30-day period. Yield is computed by
dividing the net investment income per share earned during the 30-day or one
month period by the maximum offering price per share on the last day of the
period, according to the following formula:
a-b
YIELD = 2[(-------- + 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.
Yields for the 30-day period ended March 31, 1996 are as follows:
Initial Select
Shares Shares
------ ------
Fixed Income Portfolio 4.97% 5.48%
Short-Term Government Portfolio 5.01% 5.52%
For the Prime Money Market Portfolio, "current yield" (a seven-calendar-day
historical yield) is calculated by first dividing the average daily net
investment income per share for that seven-day period by the average daily net
asset value per share for the same period ($1.00). That "base period return" is
then annualized by multiplying the result times 365/7. Net investment income
does not include realized or unrealized gains or losses:
net change in value of one share 365
-------------------------------- --- = Current Yield
value of account at beginning of period x 7
"Effective yield" is calculated by adding 1 to the base period return, raising
the sum by a number equal to 365 divided by 7, and subtracting 1 from the
result, i.e.:
365
(base period return + 1) --- - 1 = Effective Yield
7
The current yield and effective yield for the Prime Money Market Portfolio for
the seven-day period ended March 31, 1996 were 4.80 percent and 4.91 percent
respectively.
Yield on shares of the Prime Money Market Portfolio may fluctuate daily and does
not provide a basis for determining future yields. Yield is not guaranteed nor
is the principal of the Portfolio insured. In comparing the Portfolio's yield
with those of alternative investments (such as savings accounts, various types
of bank deposits and other money market funds), investors should consider
differences between the Portfolio and the alternative investments, including
differences in the periods and methods used in calculating the yields being
compared.
In computing yield, the Fund follows certain standardized accounting practices
specified by SEC rules. These practices are not necessarily consistent with
those that the Fund uses to prepare annual and interim financial statements in
conformity with generally accepted accounting principles. In particular, the
determination of net change for the Prime Money Market Portfolio does not
reflect realized gains or losses from the sale of securities or unrealized
appreciation or depreciation. The Prime Money Market Portfolio includes realized
gains or losses in the determination of actual daily dividends. Therefore, the
quoted yields as calculated above may differ from the actual dividends paid.
Performance figures are based upon historical results and are not necessarily
representative of future performance. Except for the Prime Money Market
Portfolio, returns and net asset value will fluctuate and shares are redeemable
at the then current net asset value, which may be more or less than original
cost. Factors affecting performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce the returns described in this
section.
Each Portfolio may compare its share performance to that of U.S. Treasury bonds,
bills or notes because such instruments represent alternative income producing
products. Treasury obligations are issued in selected denominations. Rates of
Treasury obligations are fixed at the time of issuance and payment of principal
and interest is backed by the full faith and credit of the United States
Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities.
From time to time, in marketing and other fund literature, performance may be
compared to the performance of other mutual funds in general or to the
performance of particular types of mutual funds, with similar investment goals,
as tracked by independent organizations. Among these organizations, Lipper
Analytical Services, Inc. ("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance, investment objectives, and
assets, may be cited. Lipper performance figures are based on changes in net
asset value, with all income and capital gain dividends reinvested. Such
calculations do not include the effect of any sales charges. Shares of each
Portfolio will be compared to Lipper's appropriate fund category, that is, by
fund objective and portfolio holdings. Lipper also issues a monthly yield
analysis for fixed-income funds and the Fund may, from time to time, advertise
those rankings.
Performance may also be compared to the performance of other mutual funds by
Morningstar, Inc. which rates funds on the basis of historical risk and total
return. Morningstar's ratings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the historical risk level and
total return of a fund as a weighted average for three, five, and ten year
periods. Ratings are not absolute or necessarily predictive of future
performance.
The Prime Money Market Portfolio's performance also may be compared to other
money market mutual funds rated by IBC/Donoghue's Money Fund Report
("Donoghue's"), a reporting service on money market funds. As reported by
Donoghue's, all investment results represent total return (annualized results
for the period net of management fees and expenses) and one year investment
results are effective annual yields assuming reinvestment of dividends.
Evaluations of performance made by independent sources may also be used in
advertisements concerning the Fund, including reprints of, or selections from,
editorials or articles about the Fund, especially those with similar objectives.
Sources for the performance information and articles about the Fund may include
publications such as MONEY, FORBES, KIPLINGER'S, FINANCIAL WORLD, BUSINESS WEEK,
U.S. NEWS AND WORLD REPORT, THE WALL STREET JOURNAL, BARRON'S and a variety of
investment newsletters. The Fund may compare Portfolio performance to a wide
variety of indices including, but not limited to the following:
EQUITY TOTAL RETURN FIXED INCOME & SHORT- PRIME MONEY
PORTFOLIO TERM GOVERNMENT PORTFOLIOS MARKET PORTFOLIO
Standard & Poor's Lehman Brothers Government IBC/Donoghue
NASDAQ Over-the-Counter Corporate Index Money Fund
Composite Index Lehman Brothers Intermediate Index
Russell 1000 Index Bond Index
Russell 2000 Small Stock Index Merrill Lynch Governmen
Russell 2500 Index Corporate Master Index
Russell 3000 Index Lehman Brothers All Government
Wilshire 5000 Equity Index Bond Index
Lehman Brothers One to Three
Years Government Bond Index
Merrill Lynch Government
Master Index
Merrill Lynch Short-Term U.S.
Treasury Index
Merrill Lynch Intermediate-Term
U.S. Treasury Index
Merrill Lynch All Mortgages Index
Merrill Lynch All GNMAs Index
There are differences and similarities between the investments which each
Portfolio may purchase and the investments measured by the indices which are
noted herein. The market prices and yields of bonds will fluctuate. There are
important differences among the various investments included in the indices that
should be considered in reviewing this information.
Investors may want to compare each Portfolio's performance to that of
certificates of deposit offered by banks and other depository institutions.
Certificates of deposit represent an alternative (taxable) income producing
product. Certificates of deposit may offer fixed or variable interest rates and
principal is guaranteed and may be insured. Withdrawal of the deposits prior to
maturity normally will be subject to a penalty. Rates offered by banks and other
depository institutions are subject to change at any time specified by the
issuing institution. The bonds held by the Fixed Income Portfolio are generally
of longer term than most certificates of deposit and may reflect longer term
market rate fluctuations.
Investors may also want to compare performance of the Portfolios to that of
money market funds. Money market fund yields will fluctuate and shares are not
insured, but share values usually remain stable.
GENERAL INFORMATION
The Advisors believe that actively managing each Portfolio's investments,
including adjusting the average portfolio maturity according to the interest
rate outlook, is the best way to achieve each Portfolio's objective. This policy
is based on a fundamental belief that economic and financial conditions create
favorable and unfavorable investment periods and sectors, and that these
different periods require different investment approaches. Financial goals vary
from person to person. Investors may choose one or more of the Portfolios to
help them reach their financial goals. To help you better understand all of the
Portfolios of Capital Value Fund and determine which Portfolio or combination of
Portfolios best meets your personal investment objectives, study the Prospectus
carefully before you invest.
REPORTS TO SHAREHOLDERS
Semi-annual and annual reports will include financial statements which, in the
case of the annual report, will be reported on by the Fund's independent
auditors, KPMG Peat Marwick LLP. The Annual Report is incorporated by reference
into the Fund's Statement of Additional Information.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, P.O. Box 772, Des Moines, Iowa, 50309, have been selected
as the independent accountants for the Fund.
<PAGE>
APPENDIX A
CAPITAL VALUE CORPORATION
OWNERSHIP, CONTROL AND AFFILIATIONS
____________________________________
| |
| *IASD Health Services Corp. |
|____________________________________|
|
|
________|__________
| |
| **Health |
| Ventures, |
| Inc. |
| (Holding Co.) |
|___________________|
|
________________________|_____________________
| | |
______|_________ _______|________ _______|________
| | | | | |
| **Heartland | | **Capital | | **Benefit |
| Health | | Value | | Admin. of |
| Network | | Corporation | | America, Inc. |
| Corp. | | (Investment | | |
| (Holding Co.) | | Advisor) | | |
|________________| |________________| |________________|
|
|
|
________|_________
| |
| Midwest |
| Benefit |
| Consultants, |
| Inc. |
| (Ins. Agency) |
|__________________|
*Iowa, Non-Profit
**Iowa, For Profit
<PAGE>
APPENDIX B
BOND RATINGS
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's corporate rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. Standard & Poor's
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
"AAA" Bonds have the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
"AA" Bonds have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only in small degrees.
"A" Bonds have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
"BBB" Bonds are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for bonds in this
category than in higher rated categories.
"BB", "B", "CCC", "CC" and "C" Bonds are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the least degree of
speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. A "C" rating
is typically applied to debt subordinated to senior debt which is assigned an
actual or implied "CCC" rating. It may also be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
MOODY'S BOND RATINGS
"Aaa" Bonds are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edged". 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 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 protection 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 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 some time in the future.
"Baa" Bonds 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.
"Ba" Bonds are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes Bonds in
this class.
"B" Bonds 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 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 represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
"C" Bonds 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.
FITCH INVESTORS SERVICES, INC.
BOND RATINGS
The Fitch Bond Rating provides a guide to investors in determining the
investment risk associated with a particular security. The rating represents its
assessment of the issuer's ability to meet the obligations of a specific debt
issue. Fitch bond ratings are not recommendations to buy, sell or hold
securities since they incorporate no information on market price or yield
relative to other debt instruments.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the record of the issuer and of
any guarantor, as well as the political and economic environment that might
affect the future financial strength and credit quality of the issuer.
Bonds which have the same rating are of similar but not necessarily identical
investment quality since the limited number of rating categories cannot fully
reflect small differences in the degree of risk. Moreover, the character of the
risk factor varies from industry to industry and between corporate, health care
and municipal obligations.
In assessing credit risk, Fitch Investors Services relies on current information
furnished by the issuer and/or guarantor and other sources which it considers
reliable. Fitch does not perform an audit of the financial statements used in
assigning a rating.
Ratings may be changed, withdrawn or suspended at any time to reflect changes in
the financial condition of the issuer, the status of the issue relative to other
debt of the issuer, or any other circumstances that Fitch considers to have a
material effect on the credit of the obligor.
"AAA" rated Bonds are considered to be investment grade and of the highest
credit quality. The obligor has an extraordinary ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" rated Bonds are considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and reapply principal, while very
strong, is somewhat less than for "AAA" rated securities or more subject to
possible change over the term of the issue.
"A" rated Bonds are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" rated Bonds are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to weaken this ability than bonds with
higher ratings.
"BB" rated bonds are considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
"B" rated Bonds are considered highly speculative. Bonds in this class are
highly protected as to the obligor's ability to pay interest over the life of
the issue and repay principal when due.
"CCC" rated Bonds may have certain identifiable characteristics which, if not
remedied, could lead to the possibility of default in either principal or
interest payments.
"CC" rated Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
"C" rated Bonds are in actual or imminent default in payment of interest or
principal.
DUFF & PHELPS, INC.
LONG-TERM RATINGS
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security, (e.g., first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors, including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary).
RATING
SCALE DEFINITION
- --------------------------------------------------------------------------------
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
- --------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk is modest, but
AA may vary slightly from time to time because of economic conditions.
AA-
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk factors are
A more variable and greater in periods of economic stress.
A-
- --------------------------------------------------------------------------------
BBB+ Below average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
BB- to industry conditions or company fortunes. Overall quality may BB- move
up or down frequently within this category.
- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will not be
B met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
- --------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
- --------------------------------------------------------------------------------
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
- --------------------------------------------------------------------------------
DP Preferred stock with dividend averages.
- --------------------------------------------------------------------------------
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The categories are as follows:
"A" Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues within this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
"A-1" Designation indicates that the degree of safety regarding timely payment
is either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are designated "A-1+".
"A-2" Designation indicates that the capacity for timely payment is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
"A-3" Designation indicates a satisfactory capacity for timely payment. Issues
with this designation, however, are somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" Issues are regarded as having only an adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
"C" Issues have a doubtful capacity for payment.
"D" Issues are in payment default. The "D" rating category is used when interest
payments or principal payments are not made on the due date even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period.
MOODY'S COMMERCIAL PAPER RATINGS
Moody's rates commercial paper as either Prime, which contains three categories,
or Not Prime. The commercial paper ratings are as follows:
"P-1" Issuers (or related supporting institutions) have a superior capacity for
repayment of short-term promissory obligations, normally evidenced by the
following characteristics: (i) leading market positions in well established
industries, (ii) high rates of return on funds employed, (iii) conservative
capitalization structures with moderate reliance on debt and ample asset
protection, (iv) broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and (v) well established access to a range of
financial markets and assured sources of alternate liquidity.
"P-2" Issuers (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations, normally evidenced by many of
the characteristics of a "P-1" rating, but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
"P-3" Issuers (or related supporting institutions) have an acceptable capacity
for repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" Issuers (or related supporting institutions) do not fall within any
of the Prime rating categories.
FITCH INVESTORS SERVICES, INC.
SHORT-TERM RATINGS
Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this
rating are regarded as having the strongest degree of assurance for timely
payment.
Fitch-1 (Very Strong Credit Quality) Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than issues
rated Fitch-1+.
Fitch-2 (Good Credit Quality) Issues carrying this rating have a
satisfactory degree of assurance for timely payment but the margin of safety is
not as great as the two higher categories.
Fitch-3 (Fair Credit Quality) Issues carrying this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near-term adverse change is likely to cause these securities
to be rated below investment grade.
Fitch-S (Weak Credit Quality) Issues carrying this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near term adverse changes in financial and economic
conditions.
D (Default) Issues carrying this rating are in actual or imminent
payment default.
DUFF & PHELPS, INC.
SHORT-TERM RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds, including trade
credit, bank lines and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
A. Category 1: High Grade
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1 High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
B. Category 2: Good Grade
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
C. Category 3: Satisfactory Grade
Duff 2 Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D. Category 4: Non-investment Grade
Duff 4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
E. Category 5: Default
Duf 5 Issuer failed to meet scheduled principal and/or interest
payments.
THOMAS BANKWATCH (TBW)
SHORT-TERM RATINGS
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.
TBW-1 The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1933, and the Investment Company Act of 1940, the Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Des Moines, State of Iowa, on the 12th
day of July, 1996. By execution hereto, the undersigned hereby certifies that
this post-effective amendments meets all the requirements for effectiveness
under Rule 485(b) under the Securities Act of 1933.
CAPITAL VALUE FUND, INC.
By: /S/ DAVID W. MILES
David W. Miles, President
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities indicated on the date indicated.
______________
SIGNATURE TITLE |
|
|
/s/ Robert G. Millen Chairman and Director |
Robert G. Millen |
|
/s/ David W. Miles President, Principal Executive |
David W. Miles Officer, and Principal Financial |
and Accounting Officer |
|
/s/ Carole E. Sours Vice President and Treasurer > /s/ David W. Miles
Carole E. Sours | by David W. Miles
| Attorney in Fact
/s/ Ruth L. Prochaska Secretary | July 12, 1996
Ruth L. Prochaska |
|
/s/ Richard C. Anderson Director |
Richard C. Anderson |
|
/s/ James S. Cownie Director |
James S. Cownie |
|
/s/ William Knapp II Director |
William Knapp II |
|
/s/ Thomas K. Koehn Director |
Thomas K. Koehn |
|
/s/ Marvin J. Walter Director |
Marvin J. Walter |
______________|
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
(1) Included in Part A:
Financial Highlights for the Periods Ended March 31, 1996,
March 31, 1995, and March 31, 1994
(2) Incorporated in Part B:
Independent Auditors' Report dated April 26, 1996
Schedule of Investments, March 31, 1996
Statements of Assets and Liabilities, March 31, 1996
Statement of Operations for the Year Ended March 31, 1996
Statementof Changes in Net Assets for the Periods Ended
March 31, 1996 and March 31, 1995
(3) Included in Part C:
Consent of KPMG Peat Marwick, LLP
(b) Exhibits
EXHIBIT NUMBER DESCRIPTION
*1.(a) Articles of Incorporation, incorporated by reference to
the Fund's Registration Statement, filed November 6, 1992
*1.(b) Amendment to Articles of Incorporation, incorporated by
reference to Pre-Effective Amendment No. 1, filed
December 22, 1992
*2. Bylaws, incorporated by reference to the Fund's Registration
Statement, filed November 6, 1992
*5.(a) Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent Agreement, incorporated by reference to
Pre-Effective Amendment No. 1, filed December 22, 1992
*5.(b) Investment Advisory Agreement with Capital Value Corporation,
incorporated by reference to Pre-Effective Amendment No. 1,
filed December 22, 1992
*5.(c) Sub-Advisory Agreement with Investors Management Group,
incorporated by reference to Pre-Effective Amendment No. 1,
filed December 22, 1992
*5.(d) Administrative Services Agreement, incorporated by reference
to Pre-Effective Amendment No. 1, filed December 22, 1992
*5.(e) Fund Accounting Agreement, incorporated by reference to
Pre-Effective Amendment No. 2, filed May 12, 1993
*6. Distribution Agreement, incorporated by reference to
Pre-Effective Amendment No. 1, filed December 22, 1992
*8. Custodial Agreement, with Norwest Bank Minnesota, N.A.,
incorporated by reference to Pre-Effective Amendment No. 2,
filed May 12, 1993
*10. Opinion of Ober, Kaler, Grimes & Shriver, incorporated by
reference to Pre-Effective Amendment No. 2 filed May 12, 1993
*13. Amended Subscription Agreement of Initial Stockholders,
incorporated by reference to Pre-Effective Amendment No. 1,
filed December 22, 1992
*15. Rule 12b-1 Plan, incorporated by reference to Pre-Effective
Amendment No. 1, filed December 22, 1992
16. Calculation of Yield Quotations, included in Part B of this
Registration Statement.
17. Financial Data Schedule.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is under common control with IASD Health Services Corp.,
which is the parent company of Capital Value Corporation, the
Registrant's Advisor. (See Exhibit A to the Statement of Additional
Information.) As of June 30, 1996, IASD Health Services Corp. owned 53%
and IASD Health Services Savings & Investment Plan owned 15% of the
Fund.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Common Stock
Equity Portfolio 73 as of June 30, 1996
Total Return Portfolio 47 as of June 30, 1996
Fixed Income Portfolio 61 as of June 30, 1996
Short-Term Government Portfolio 18 as of June 30, 1996
Prime Money Market Portfolio 22 as of June 30, 1996
Item 27. INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the Opinion of the Securities and Exchange Commission
such indemnification by the Registrant is against public policy as expressed in
the Act and, therefore, may be unenforceable. In the event that a claim for such
indemnification (except insofar as it provides for the payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person and the Securities
and Exchange Commission is still of the same opinion, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
or not such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Section 2-418 of the Maryland General Corporation Law permits the
Registrant to indemnify directors and officers. In addition, Section 2-405.1
sets forth the standard of care for directors and Section 2-405.2 allows the
Registrant to include in the Charter provisions further limiting the liability
of the directors and officers in certain circumstances. Article TENTH of the
Amended and Restated Articles of Incorporation included herewith as Exhibit 1(b)
(the "Articles") limits the liability of any director or officer of the
Registrant arising out of a breach of fiduciary duty, subject to the limits of
the Investment Company Act of 1940 ("1940 Act"). Article ELEVENTH of the
Articles and Article VII of the Bylaws, included herewith as Exhibit (2), makes
mandatory the indemnification of any person made or threatened to be made a
party to any action by reason of the fact that such person is or was a director,
officer or employee, subject to the limits otherwise imposed by law or by the
1940 Act.
In addition, Paragraph 7 of the Advisory Agreement included herewith as
Exhibit (5)(b) and Paragraph 9 of the Sub-Advisory Agreement included herewith
as Exhibit (5)(c), and Article III of the Distribution Agreement, included
herewith as Exhibit (6), provide that Capital Value Corporation ("CVC"),
Investors Management Group, ("IMG") and IMG Financial Services, Inc. ("IFS"),
shall not be liable to the Registrant for any error, judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
management provided by CVC and IMG or for any distribution services provided by
IFS to the Registrant for the performance of the duties under such agreements,
except for willful misfeasance, bad faith or gross negligence in the performance
of their duties or by reason of reckless disregard of their obligation and
duties under such agreements. In addition, Article IV of the Distribution
Agreement and Paragraph 8 of the Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agreement, included herewith as Exhibit (5)(a), further
indemnify IFS and IMG against certain liabilities arising out of the performance
of such agreements.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Capital Value Corporation
Name and Principal Occupations
Principal Business Positions with (Present and for
Address Advisor Past Two Years)
------- ------- ---------------
Robert G. Millen President, Director Chief Development Officer
IASD Health Services Corp. IASD Health Services Corp.
636 Grand Avenue
Des Moines, IA 50309
Carole E. Sours Vice President Director, Financial Services
IASD Health Services Corp. IASD Health Services Corp.
636 Grand Avenue
Des Moines, IA 50309
Richard C. Anderson Treasurer Senior Vice-President-Finance
IASD Health Services Corp. IASD Health Services Corp.
636 Grand Avenue
Des Moines, IA 50309
Michele A. Druker Secretary Counsel
IASD Health Services Corp. IASD Health Services Crop.
636 Grand Avenue
Des Moines, IA 50309
Charles C. Hennesy Director Chief Operating Officer
IASD Health Services Corp. IASD Health Services Corp.
636 Grand Avenue
Des Moines, IA 50309
Richard A. Stilley Director Chief Administrative Officer
IASD Health Services Corp. IASD Health Services Corp.
636 Grand Avenue
Des Moines, IA 50309
Investors Management Group
Name and Principal Occupations
Principal Business Positions with (Present and for
Address Advisor Past Two Years)
------- ------- ---------------
Mark A. McClurg Vice President, Sales & Marketing Manager.
Secretary, Director
and Senior Managing
Director
David W. Miles President, Treasurer, See caption "Management"
Director, and Senior in the Statement of
Managing Director Additional Information
forming a part of this
Registration Statement.
James W. Paulsen Director and Senior Asset Management Manager.
Managing Director
Item 29. PRINCIPAL UNDERWRITERS
(a) IMG Financial Services, Inc., acts as distributor to IMG
Government Assets Fund, IMG Tax Exempt Liquid Assets Fund,
Inc., and IMG Mutual Funds, Inc.
Positions and Positions and
Name and Principal Offices with Offices with
Business Address Underwriter Registrant
---------------- ----------- ----------
Mark A. McClurg Vice President, Secretary, None
2203 Grand Avenue Director and Senior
Des Moines, IA 50312-5338 Managing Director
David W. Miles President, Treasurer, President
2203 Grand Avenue Director, and Senior
Des Moines, IA 50312-5338 Managing Director
James W. Paulsen Director and Senior Managing None
2203 Grand Avenue Director
Des Moines, IA 50312-5338
(c) Not Applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All required accounts, books and records will be maintained by Ruth L.
Prochaska, Investors Management Group, 2203 Grand Avenue, Des Moines, Iowa
50312-5338.
Item 31. MANAGEMENT SERVICES
Not Applicable.
Item 32. UNDERTAKINGS
Subject to the terms and conditions of Section 15(d) of the Securities
and Exchange Act of 1934, the undersigned Registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
The Registrant further undertakes to assist in facilitating shareholder
communications as required by Section 16(c) of the 1940 Act.
The Registrant further undertakes to furnish each person to whom a
Prospectus is delivered a copy of the Registrant's latest report to shareholders
upon request and without charge.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
To the Directors and Shareholders of
Capital Value Fund, Inc.
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "FINANCIAL HIGHLIGHTS" and
"SHAREHOLDER REPORTS AND MEETINGS" in the Prospectuses and "REPORTS TO
SHAREHOLDERS" and "INDEPENDENT AUDITORS" in the Statement of Additional
Information.
KPMG Peat Marwick, LLP
Des Moines, Iowa
July 23, 1996
<PAGE>
CAPITAL VALUE FUND, INC.
EXHIBIT VOLUME
TO
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM N-1A REGISTRATION STATEMENT
<PAGE>
CAPITAL VALUE FUND, INC.
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
*1.(a) Articles of Incorporation, incorporated by reference to the
Fund's Registration Statement, filed November 6, 1992........
*1.(b) Amendment to Articles of Incorporation, incorporated by
reference to Pre-Effective Amendment No. 1, filed
December 22, 1992............................................
*2. Bylaws, incorporated by reference to the Fund's Registration
Statement, filed November 6, 1992............................
*5.(a) Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent Agreement, incorporated by reference to
Pre-Effective Amendment No. 1, filed December 22, 1992.......
*5.(b) Investment Advisory Agreement with Capital Value Corporation,
incorporated by reference to Pre-Effective Amendment No. 1,
filed December 22, 1992......................................
*5.(c) Sub-Advisory Agreement with Investors Management Group,
incorporated by reference to Pre-Effective Amendment No. 1,
filed December 22, 1992......................................
*5.(d) Administrative Services Agreement, incorporated by reference
to Pre-Effective Amendment No. 1, filed December 22, 1992....
*5.(e) Fund Accounting Agreement, incorporated by reference to
Pre-Effective Amendment No. 2, filed May 12, 1993............
*6. Distribution Agreement, incorporated by reference to
Pre-Effective Amendment No. 1, filed December 22, 1992.......
*8. Custodial Agreement, incorporated by reference to
Pre-Effective Amendment No 2, filed May 12, 1993.............
*10. Opinion of Ober, Kaler, Grimes & Shriver, incorporated by
reference to Pre-Effective Amendment No. 2 filed
May 12, 1993.................................................
*13. Amended Subscription Agreement of Initial Stockholders,
incorporated by reference to Pre-Effective Amendment No. 1,
filed December 22, 1992......................................
*15. Rule 12b-1 Plan, incorporated by reference to Pre-Effective
Amendment No. 1, filed December 22, 1992.....................
16. Calculation of Yield Quotations..............................
17. Financial Data Schedule......................................
<PAGE>
EXHIBIT 16
SCHEDULE OF CALCULATIONS OF YIELD QUOTATIONS
<PAGE>
<TABLE>
<CAPTION>
EQUITY - SELECT SHARES
MONTH INITIAL DIVIDEND SHARE SHARES SHARES TOTAL PERIOD
END INVESTMENT RATE PRICE PURCHASED HELD ERV RETURN RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000.00 10.6029 94.314 94.314 1,000.00
4/30/95 10.7794 0.000 94.314 1,016.65 1.66%
5/31/95 11.1773 0.000 94.314 1,054.17 3.69%
6/30/95 .07800000 11.2786 0.652 94.966 1,071.08 1.60% 7.11% 2nd Qtr
7/31/95 11.4451 0.000 94.966 1,086.90 1.48%
8/31/95 11.6955 0.000 94.966 1,110.68 2.19%
9/30/95 .08400000 12.0881 0.660 95.626 1,155.94 4.08% 7.92% 3rd Qtr
10/31/95 12.1250 0.000 95.626 1,159.47 0.31%
11/30/95 12.5359 0.000 95.626 1,198.76 3.39%
12/13/95 (CAP. GAIN DIST.) .27400000 12.5833 2.082 97.708 1,229.49
12/31/95 .09600000 12.6426 0.742 98.450 1,244.67 3.83% 7.68% 4th Qtr
1/31/96 12.8014 0.000 98.450 1,260.30 1.26%
2/29/96 12.6779 0.000 98.450 1,248.14 -0.96%
3/31/96 (4/1 price) .10100000 12.6633 0.785 99.235 1,256.65
3/31/96 .00000000 12.5476 0.000 99.235 1,245.17 -0.24% 0.04% 1st Qtr
<CAPTION>
EQUITY - INITIAL SHARES
MONTH INITIAL DIVIDEND SHARE SHARES SHARES TOTAL PERIOD
END INVESTMENT RATE PRICE PURCHASED HELD ERV RETURN RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000 10.6147 94.209 193.444 2,053.35
4/30/95 10.7873 0.000 193.444 2,086.74 1.63%
5/31/95 11.1805 0.000 193.444 2,162.80 3.65%
6/30/95 .06400000 11.2911 1.096 194.541 2,196.58 1.56% 6.98% 2nd Qtr
7/31/95 11.4529 0.000 194.541 2,228.06 1.43%
8/31/95 11.6985 0.000 194.541 2,275.84 2.14%
9/30/95 .07000000 12.1008 1.125 195.666 2,367.72 4.04% 7.79% 3rd Qtr
10/31/95 12.1324 0.000 195.666 2,373.90 0.26%
11/30/95 12.5384 0.000 195.666 2,453.34 3.35%
12/13/95 (CAP. GAIN DIST.) .27400000 12.5836 4.261 199.927 2,515.80
12/30/95 .08100000 12.6551 1.280 201.206 2,546.29 3.79% 7.54% 4th Qtr
1/31/96 12.8083 0.000 201.206 2,577.11 1.21%
2/29/96 12.6798 0.000 201.206 2,551.26 -1.00%
3/31/96 (4/1 price) .08600000 12.6747 1.365 202.572 2,567.53
3/31/96 .00000000 12.5594 0.000 202.572 2,544.18 -0.28% -0.08% 1st Qtr
<PAGE>
<CAPTION>
TOTAL RETURN - SELECT SHARES
MONTH INITIAL DIVIDEND SHARE SHARES SHARES TOTAL PERIOD
END INVESTMENT RATE PRICE PURCHASED HELD ERV RETURN RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000.00 9.9320 100.685 100.685 1,000.00
4/30/95 10.0638 0.000 100.685 1,013.27 1.33%
5/31/95 10.5084 0.000 100.685 1,058.03 4.42%
6/30/95 .12300000 10.5003 1.179 101.864 1,069.60 1.09% 6.96% 2nd Qtr
7/31/95 10.5358 0.000 101.864 1,073.22 0.34%
8/31/95 10.7070 0.000 101.864 1,090.66 1.62%
9/30/95 .12400000 10.8476 1.164 103.028 1,117.61 2.47% 4.49% 3rd Qtr
10/31/95 10.9403 0.000 103.028 1,127.16 0.85%
11/30/95 11.2089 0.000 103.028 1,154.84 2.46%
12/13/95 (CAP. GAIN DIST.) .09900000 11.2733 0.905 103.933 1,171.67
12/31/95 .13200000 11.2589 1.219 105.152 1,183.89 2.52% 5.93% 4th Qtr
1/31/96 11.3825 0.000 105.152 1,196.89 1.10%
2/29/96 11.2399 0.000 105.152 1,181.90 -1.25%
3/31/96 (4/1 price) .12100000 11.1373 1.142 106.294 1,183.83
3/31/96 .00000000 11.0730 0.000 106.294 1,177.00 -0.41% -0.58% 1st Qtr
<CAPTION>
TOTAL RETURN - INITIAL SHARES
MONTH INITIAL DIVIDEND SHARE SHARES SHARES TOTAL PERIOD
END INVESTMENT RATE PRICE PURCHASED HELD ERV RETURN RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000.00 10.1126 98.887 98.887 1,000.00
4/30/95 10.2433 0.000 98.887 1,012.92 1.29%
5/31/95 10.6910 0.000 98.887 1,057.20 4.37%
6/30/95 .11000000 10.6934 1.017 99.904 1,068.31 1.05% 6.83% 2nd Qtr
7/31/95 10.7250 0.000 99.904 1,071.47 0.30%
8/31/95 10.8946 0.000 99.904 1,088.41 1.58%
9/30/95 .11100000 11.0484 1.004 100.907 1,114.87 2.43% 4.36% 3rd Qtr
10/31/95 11.1379 0.000 100.907 1,123.90 0.81%
11/30/95 11.4067 0.000 100.907 1,151.02 2.41%
12/13/95 (CAP. GAIN DIST.) .09900000 11.4719 0.871 101.778 1,167.59
12/31/95 .11800000 11.4710 1.047 102.825 1,179.51 2.47% 5.80% 4th Qtr
1/31/96 11.5918 0.000 102.825 1,191.93 1.05%
2/29/96 11.4420 0.000 102.825 1,176.53 -1.29%
3/31/96 (4/1 price) .10700000 11.3489 0.969 103.795 1,177.96
3/31/96 .00000000 11.2838 0.000 103.795 1,171.20 -0.45% -0.70% 1st Qtr
<PAGE>
<CAPTION>
FIXED INCOME - SELECT SHARES
MONTH INITIAL DIVIDEND SHARE SHARES SHARES TOTAL PERIOD
END INVESTMENT RATE PRICE PURCHASED HELD ERV RETURN RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000.00 9.5656 104.541 104.541 1,000.00
4/30/95 .04900000 9.6426 0.531 105.073 1,013.17 1.32%
5/31/95 .05800000 10.0405 0.607 105.679 1,061.07 4.73%
6/30/95 .05100000 10.0687 0.535 106.215 1,069.44 0.79% 6.94% 2nd Qtr
7/31/95 .05300000 9.9541 0.566 106.780 1,062.90 -0.61%
8/31/95 .05300000 10.0266 0.564 107.345 1,076.30 1.26%
9/30/95 .04900000 10.0764 0.522 107.867 1,086.91 0.99% 1.63% 3rd Qtr
10/31/95 .05400000 10.1740 0.573 108.439 1,103.26 1.50%
11/30/95 .05200000 10.2936 0.548 108.987 1,121.87 1.69%
12/31/95 .05300000 10.3927 0.556 109.543 1,138.45 1.48% 4.74% 4th Qtr
1/31/96 .05400000 10.3919 0.569 110.112 1,144.27 0.51%
2/29/96 .04800000 10.1224 0.522 110.634 1,119.88 -2.13%
3/31/96 (4/1 price) .03500000 9.9987 0.387 111.021 1,110.07
3/31/96 .00000000 9.9834 0.000 111.021 1,108.37 -1.03% -2.64% 1st Qtr
<CAPTION>
FIXED INCOME - INITIAL SHARES
MONTH INITIAL DIVIDEND SHARE SHARES SHARES TOTAL PERIOD
END INVESTMENT RATE PRICE PURCHASED HELD ERV RETURN RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000.00 9.6535 103.589 103.589 1,000.00
4/30/95 .04500000 9.7317 0.479 104.068 1,012.76 1.28%
5/31/95 .05400000 10.1332 0.555 104.623 1,060.17 4.68%
6/30/95 .04700000 10.1619 0.484 105.107 1,068.09 0.75% 6.81% 2nd Qtr
7/31/95 .04900000 10.0466 0.513 105.619 1,061.12 -0.65%
8/31/95 .04900000 10.1199 0.511 106.131 1,074.03 1.22%
9/30/95 .04500000 10.1706 0.470 106.600 1,084.19 0.95% 1.51% 3rd Qtr
10/31/95 .05000000 10.2690 0.519 107.120 1,100.01 1.46%
11/30/95 .04700000 10.3910 0.485 107.604 1,118.11 1.65%
12/31/95 .04900000 10.4913 0.503 108.107 1,134.18 1.44% 4.61% 4th Qtr
1/31/96 .05000000 10.4903 0.515 108.622 1,139.48 0.47%
2/29/96 .04400000 10.2186 0.468 109.090 1,114.74 -2.17%
3/31/96 (4/1 price) .03100000 10.0935 0.335 109.425 1,104.48
3/31/96 .00000000 10.0786 0.000 109.425 1,102.85 -1.07% -2.76% 1st Qtr
<PAGE>
<CAPTION>
SHORT-TERM GOVERNMENT - SELECT SHARES
MONTH INITIAL DIVIDEND SHARE SHARES SHARES TOTAL PERIOD
END INVESTMENT RATE PRICE PURCHASED HELD ERV RETURN RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000.00 9.7757 102.294 102.294 1,000.00
4/30/95 .04700000 9.8175 0.490 102.784 1,009.08 0.91%
5/31/95 .05500000 9.9796 0.566 103.351 1,031.40 2.21%
6/30/95 .04900000 9.9613 0.508 103.859 1,034.57 0.31% 3.46% 1st Qtr
7/31/95 .05000000 9.9448 0.522 104.381 1,038.05 0.34%
8/31/95 .04900000 9.9619 0.513 104.895 1,044.95 0.66%
9/30/95 .05000000 9.9644 0.526 105.421 1,050.46 0.53% 1.54% 3rd Qtr
10/31/95 .05000000 10.0019 0.527 105.948 1,059.68 0.88%
11/30/95 .04800000 10.0521 0.506 106.454 1,070.09 0.98%
12/31/95 .04500000 10.0905 0.475 106.929 1,078.96 0.83% 2.71% 4th Qtr
1/31/96 .04800000 10.1194 0.507 107.436 1,087.19 0.76%
2/29/96 .04300000 10.0139 0.461 107.897 1,080.47 -0.62%
3/31/96 (4/1 price) .04000000 9.9567 0.433 108.331 1,078.62
3/31/96 .00000000 9.9515 0.000 108.331 1,078.05 -0.22% -0.08% 1st Qtr
<CAPTION>
SHORT-TERM GOVERNMENT - INITIAL SHARES
MONTH INITIAL DIVIDEND SHARE SHARES SHARES TOTAL PERIOD
END INVESTMENT RATE PRICE PURCHASED HELD ERV RETURN RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,000.00 9.6492 103.636 103.636 1,000.00
4/30/95 .04300000 9.6902 0.460 104.095 1,008.71 0.87%
5/31/95 .05100000 9.8490 0.539 104.634 1,030.54 2.17%
6/30/95 .04500000 9.8303 0.479 105.113 1,033.30 0.27% 3.33% 2nd Qtr
7/31/95 .04600000 9.8130 0.493 105.606 1,036.31 0.29%
8/31/95 .04500000 9.8291 0.483 106.090 1,042.77 0.62%
9/30/95 .04600000 9.8309 0.496 106.586 1,047.84 0.49% 1.41% 3rd Qtr
10/31/95 .04600000 9.8670 0.497 107.083 1,056.59 0.84%
11/30/95 .04400000 9.9157 0.475 107.558 1,066.51 0.94%
12/31/95 .04100000 9.9531 0.443 108.001 1,074.95 0.79% 2.59% 4th Qtr
1/31/96 .04400000 9.9804 0.476 108.477 1,082.65 0.72%
2/29/96 .03900000 9.8759 0.428 108.906 1,075.54 -0.66%
3/31/96 (4/1 price) .03600000 9.8186 0.399 109.305 1,073.22
3/31/96 .00000000 9.8138 0.000 109.305 1,072.70 -0.26% -0.21% 1st Qtr
</TABLE>
<PAGE>
COMPUTATION OF THE EFFECTIVE YIELD
CAPITAL VALUE FUND, INC.
PRIME MONEY MARKET PORTFOLIO
ENDING EARNINGS
DIVIDEND SHARES PER
PAYABLE EARNINGS OUTSTANDING SHARE
24-Mar-96 $10,297.53 $430.29 3,324,234.31
25-Mar-96 $10,732.64 $435.11 3,329,131.50 0.0001306978
26-Mar-96 $11,168.64 $436.00 3,331,906.05 0.0001308560
27-Mar-96 $11,611.41 $442.77 3,329,339.10 0.0001329904
28-Mar-96 $12,061.86 $450.45 3,403,210.08 0.0001323603
29-Mar-96 $12,542.04 $480.18 3,637,446.14 0.0001320102
30-Mar-96 $13,017.20 $475.16 3,637,446.14 0.0001306301
31-Mar-96 $13,492.37 $475.17 3,637,446.14 0.0001306329
INCOME FOR ONE SHARE FOR THE SEVEN DAYS ENDED MARCH 31 0.0009201776
BASE PERIOD RETURN = 0.000920178
(CHANGE/BEGINNING ACCOUNT VALUE)
CURRENT YIELD = 4.80%
BASE PERIOD RETURN * (365/7) 0.047980691
EFFECTIVE YIELD = 0.049050032
((1+CURRENT YIELD/12)^12)-1 4.91%
<PAGE>
CAPITAL VALUE FUND, INC.
'30 DAY SEC YIELD FOR THE PERIOD ENDED MARCH 31, 1996
FIXED INCOME PORTFOLIO
INITIAL SHARES
9,900.31 Total Income
(2,328.46) Total Expenses
-----------------
7,571.85 Net Income
183,174.3615 Average Shares
10.0800 Maximum Offering Price
-----------------
1,846,397.5639 Shareholder Equity
2((730.91/164,241.9792)+1)^6-1)=4.97%
- --------------------------------------------------------------------------------
FiXED INCOME PORTFOLIO
SELECT SHARES
41,281.48 Total Income
(6,534.09) Total Expenses
-----------------
34,747.39 Net Income
770,562.4425 Average Shares
9.9900 Maximum Offering Price
-----------------
7,697,918.8006 Shareholder Equity
2((30,352.27/6,248,692.1844)+1)^6-1)=5.48%
- --------------------------------------------------------------------------------
SHORT-TERM GOVERNMENT PORTFOLIO
INITIAL SHARES
1,268.51 Total Income
(296.07) Total Expenses
-----------------
972.44 Net Income
23,955.0459 Average Shares
9.8200 Maximum Offering Price
-----------------
235,238.5507 Shareholder Equity
2((221.27/61,579.1776)+1)^6-1)=5.01%
- --------------------------------------------------------------------------------
SHORT-TERM GOVERNMENT PORTFOLIO
SELECT SHARES
23,066.39 Total Income
(3,625.50) Total Expenses
-----------------
19,440.89 Net Income
429,587.7621 Average Shares
9.9500 Maximum Offering Price
-----------------
4,274,398.2329 Shareholder Equity
2((14,092.65/3,521,902.0615)+1)^6-1)=5.52%
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000893969
<NAME> Capital Value Fund, Inc.
<SERIES>
<NUMBER> 5
<NAME> Equity,Total Return,Fix Inc.ST Gov't,Prime Mny Mkt
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Mar-31-1996
<PERIOD-START> Apr-01-1995
<PERIOD-END> Mar-31-1996
<INVESTMENTS-AT-COST> $58,022,037
<INVESTMENTS-AT-VALUE> $63,147,947
<RECEIVABLES> $564,897
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> $63,712,844
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> $573,811
<TOTAL-LIABILITIES> $573,811
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 8,883,305
<SHARES-COMMON-PRIOR> 10,201,472
<ACCUMULATED-NII-CURRENT> $17,751
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> $1,060,219
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> $5,125,909
<NET-ASSETS> $63,138,832
<DIVIDEND-INCOME> $934,584
<INTEREST-INCOME> $2,337,636
<OTHER-INCOME> 0
<EXPENSES-NET> $678,648
<NET-INVESTMENT-INCOME> $2,593,572
<REALIZED-GAINS-CURRENT> $2,247,066
<APPREC-INCREASE-CURRENT> $4,189,039
<NET-CHANGE-FROM-OPS> $9,029,677
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> $2,584,540
<DISTRIBUTIONS-OF-GAINS> $669,710
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,757,940
<NUMBER-OF-SHARES-REDEEMED> 2,135,387
<SHARES-REINVESTED> 559,704
<NET-CHANGE-IN-ASSETS> $10,319,156
<ACCUMULATED-NII-PRIOR> $7,018
<ACCUMULATED-GAINS-PRIOR> ($517,193)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> $303,869
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> $678,648
<AVERAGE-NET-ASSETS> $59,803,133
<PER-SHARE-NAV-BEGIN> $5.18
<PER-SHARE-NII> $2.07
<PER-SHARE-GAIN-APPREC> $2.29
<PER-SHARE-DIVIDEND> $2.06
<PER-SHARE-DISTRIBUTIONS> $0.37
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> $7.11
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>