<PAGE> 1
PACIFIC CAPITAL FUNDS
Telephone: 800-258-9232
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 1, 1999
AS REVISED MAY 4, 2000
GROWTH STOCK FUND
GROWTH AND INCOME FUND
VALUE FUND
BALANCED FUND
SMALL CAP FUND
NEW ASIA GROWTH FUND
INTERNATIONAL STOCK FUND
TAX-FREE SECURITIES FUND
TAX-FREE SHORT INTERMEDIATE SECURITIES FUND
DIVERSIFIED FIXED INCOME FUND
U.S. TREASURY SECURITIES FUND
SHORT INTERMEDIATE U.S. TREASURY SECURITIES FUND
Pacific Capital Funds (the "Trust") is a professionally
managed, open-end, management investment company with multiple funds available
for investment. This Statement of Additional Information ("SAI") contains
information about the Class A, Class B and Class Y shares of all twelve of the
Trust's investment portfolios (each a "Fund" and collectively the "Funds"). The
various Funds and Classes of shares of the Funds are offered through separate
Prospectuses.
All Funds except Tax-Free Securities Fund and Tax-Free
Short-Intermediate Securities Fund (the "Tax Free Funds") are diversified
portfolios.
This SAI is not a prospectus. You should read this SAI in
conjunction with the applicable Prospectus, dated December 1, 1999. All terms
defined in the applicable Prospectus have the same meanings in this SAI. In
addition, the Trust's 1999 Annual Report to Shareholders is incorporated by
reference into this SAI. You can order copies of the Prospectuses and Annual
Report without charge by writing to BISYS Fund Services ("BISYS") at 3435
Stelzer Road, Columbus, Ohio 43219-3035 or calling the Transfer Agent at the
telephone number indicated above.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT RESTRICTIONS.................................................................................3
ADDITIONAL INFORMATION ON FUND INVESTMENTS AND RISKS....................................................6
MANAGEMENT.............................................................................................32
DISTRIBUTION AND SHAREHOLDER SERVICE PLANS.............................................................41
CALCULATION OF YIELD AND TOTAL RETURN..................................................................43
DETERMINATION OF NET ASSET VALUE.......................................................................59
PURCHASE OF SHARES.....................................................................................60
REDEMPTION OF SHARES...................................................................................61
PORTFOLIO TRANSACTIONS.................................................................................62
FEDERAL AND HAWAIIAN TAX INFORMATION...................................................................65
GENERAL INFORMATION....................................................................................69
CUSTODIAN..............................................................................................75
INDEPENDENT AUDITORS AND COUNSEL.......................................................................75
FINANCIAL INFORMATION..................................................................................75
REGISTRATION STATEMENT.................................................................................75
APPENDIX A: RATINGS OF FIXED INCOME SECURITIES....................................................... A-1
</TABLE>
<PAGE> 3
INVESTMENT RESTRICTIONS
Each Fund's investment objectives are fundamental and may not
be changed without approval by vote of the holders of a majority of the relevant
Fund's outstanding voting securities, as described under "General Information --
Voting." If the Trust's Board of Trustees determines, however, that a Fund's
investment objective can best be achieved by a substantive change in a
non-fundamental investment policy or strategy, the Trust's Board may make such
change without shareholder approval and will disclose any such material change
in the then-current prospectus. Any policy that is not specified in a Fund's
Prospectus, or in the SAI, as being fundamental, is nonfundamental.
The following investment restrictions also apply to the Funds.
The restrictions designated as fundamental policies may not be changed without
approval by the holders of a majority of the relevant Fund's outstanding shares.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
a Fund's portfolio securities or resulting from reorganizations, consolidations,
payments out of assets of the Fund or redemption of shares will not constitute a
violation of such limitation, except for investment restriction (3) below.
INVESTMENT RESTRICTIONS FOR ALL FUNDS EXCEPT NEW ASIA
GROWTH FUND AND INTERNATIONAL STOCK FUND
None of these Funds may:
(1) Purchase securities of any issuer (except debt obligations
of issuers that pay interest which, in the opinions of counsel to such issuers,
is exempt from federal income tax and is not subject to the federal alternative
minimum tax ("Municipal Obligations") and securities issued or guaranteed by the
U.S. Government, its agencies and instrumentalities ("U.S. Government
Obligations")) if, as a result, with respect to 75% of its total assets, more
than 5% of the value of the Fund's total assets would be invested in the
securities of any one issuer or, with respect to 100% of its total assets, the
Fund's ownership would be more than 10% of the outstanding voting securities of
any one issuer. This restriction does not apply to the Tax-Free Funds, which are
non-diversified funds.
(2) Purchase the securities of issuers conducting their
principal business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of the Fund's investments in that
industry would be 25% or more of the current value of such Fund's total assets,
provided that there is no limitation with respect to investments in (a) U.S.
Government Obligations and repurchase agreements secured by such obligations and
(b) with respect to the Tax-Free Funds, Municipal Obligations (for purposes of
this limitation, Municipal Obligations do not include private activity bonds
that are backed only by the assets and revenues of a non-governmental user).
(3) Borrow money or issue senior securities as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), except (a) with
regard to senior securities, as permitted pursuant to an order and/or a rule
issued by the Securities and Exchange Commission (the "Commission"), and (b)
that each Fund may borrow from banks up to 20% of the current value of its net
assets for temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 20% of the current value of its
net assets (but investments may not be purchased while any such outstanding
borrowing in excess of 5% of its net assets exists).
(4) Purchase or sell real estate or real estate limited partnerships
(other than obligations or other securities secured by real estate or interests
therein or securities issued by companies that invest in real estate or
interests therein).
3
<PAGE> 4
(5) Purchase commodities or commodity contracts, except that each Fund
may enter into futures contracts and may write call options and purchase call
and put options on futures contracts in accordance with its investment objective
and policies.
(6) Purchase securities on margin (except for short-term credits
necessary for the clearance of transactions and except for margin payments in
connection with options, futures and options on futures) or make short sales of
securities.
(7) Underwrite securities of other issuers, except to the extent that
the purchase of permitted investments directly from the issuer or from an
underwriter for an issuer and the later disposition of such securities in
accordance with the Fund's investment program may be deemed to be an
underwriting.
(8) Purchase interests, leases, or limited partnership interests in
oil, gas, or other mineral exploration or development programs.
(9) Make investments for the purpose of exercising control or
management.
(10) Lend money or portfolio securities, except that each of the Funds
may enter into repurchase agreements and lend portfolio securities to certain
brokers, dealers and financial institutions aggregating up to 30% of the current
value of the lending Fund's total assets.
In addition, each of these Funds will comply with the following
non-fundamental restrictions, which may be changed by the Board of Trustees
without shareholder approval:
(1) No Fund will purchase securities of unseasoned issuers, including
their predecessors, that have been in operation for less than three years, if as
a result thereof the value of the Fund's investment in such classes of
securities would exceed 15% of the Fund's total assets.
(2) No Fund will invest more than 10% of its net assets in warrants.
(3) No Fund will invest more than 15% of the current value of its net
assets in repurchase agreements having maturities of more than seven days and
other illiquid securities. For purposes of this restriction, illiquid securities
do not include securities which may be resold under Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") that the Board of
Trustees or its delegate determines to be liquid based upon the trading markets
for such securities.
(4) No Fund will purchase put and call options or write covered put and
call options on securities unless (a) it may invest directly in such securities,
(b) such options are traded on registered domestic securities exchanges or
result from separate, privately negotiated transactions with primary U.S.
Government securities dealers recognized by the Board of Governors of the
Federal Reserve System, and (c) the total assets subject to such options does
not exceed 5% of the Fund's net assets.
INVESTMENT RESTRICTIONS FOR NEW ASIA GROWTH FUND AND
INTERNATIONAL STOCK FUND
New Asia Growth Fund and International Stock Fund are subject to the
following investment restrictions, all of which are fundamental policies.
Neither Fund may:
(1) Purchase securities of any issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, with respect to 75% of its total assets, more than 5% of the value of
the Fund's total assets would be invested in the securities of any one issuer
or, with respect
4
<PAGE> 5
to 100% of its total assets, the Fund's ownership would be more than 10% of the
outstanding voting securities of any one issuer.
(2) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the purchase and as
a result thereof, the value of the Fund's investments in that industry would be
25% or more of the current value of the Fund's total assets, provided that there
is no limitation with respect to investments in U.S. Government Obligations and
repurchase agreements secured by such Obligations.
(3) Borrow money or issue senior securities as defined in the 1940 Act,
except (a) with regard to senior securities, as permitted pursuant to an order
and/or a rule issued by the Commission, and (b) that the Fund may borrow from
banks up to 33-1/3% the current value of its net assets for temporary,
extraordinary or emergency purposes, for clearance of transactions, to hedge
against currency movements or for investment purposes, and these borrowings may
be secured by the pledge of up to 33-1/3% current value of its net assets.
(4) Purchase or sell real estate or real estate limited partnerships
(other than obligations or other securities secured by real estate or interests
therein or securities issued by companies that invest in real estate or
interests therein).
(5) Purchase commodities or commodity contracts, except that the Fund
may deal in forward foreign exchange contracts between currencies of the
different countries in which it may invest, may enter into futures contracts and
may write call options and purchase call and put options on futures contracts in
accordance with its investment objective and policies.
(6) Purchase securities on margin (except for short-term credits
necessary for the clearance of transactions and except for margin payments in
connection with options, futures and options on futures) or make short sales of
securities.
(7) Underwrite securities of other issuers, except to the extent that
the purchase of permitted investments directly from the issuer or from an
underwriter for an issuer and the later disposition of such securities in
accordance with the Fund's investment program may be deemed to be an
underwriting.
(8) Purchase interests, leases, or limited partnership interests in
oil, gas, or other mineral exploration or development programs.
(9) Make investments for the purpose of exercising control or
management. Investments by the Fund in wholly-owned investment entities created
under the laws of certain countries will not be deemed the making of investments
for the purpose of exercising control of management.
(10) Lend money or portfolio securities, except that the Fund may enter
into repurchase agreements and lend portfolio securities to certain brokers,
dealers and financial institutions aggregating up to 33-1/3% of the current
value of the Fund's total assets.
In addition, New Asia Growth Fund and International Stock Fund will
each comply with the following non fundamental restrictions, which may be
changed by the Board of Trustees without shareholder approval:
(1) Each Fund will not purchase securities of unseasoned issuers,
including their predecessors, that have been in operation for less than three
years, if as a result the value of the Fund's investment in such classes of
securities would exceed 15% of such Fund's total assets.
(2) Each Fund will not invest more than 15% of the current value of its
net assets in repurchase agreements having maturities of more than seven days
and other illiquid securities. For purposes of this
5
<PAGE> 6
restriction, illiquid securities do not include securities which may be resold
under Rule 144A under the Securities Act that the Board of Trustees, or its
delegate, determines to be liquid, based upon the trading markets for the
specific security.
(3) To the extent required by the Commission or its staff, each Fund
will, for purposes of fundamental investment restrictions (1) and (2), treat
securities issued or guaranteed by the government of any one foreign country
(including governmental agencies and instrumentalities thereof) as the
obligations of a single issuer.
(4) Each Fund will not invest more than 10% of its net assets in
warrants.
(5) The aggregate value of the exercise price or strike price of call
options written by each Fund will not exceed 25% of the Fund's net asset value.
ADDITIONAL INFORMATION ON FUND INVESTMENTS AND RISKS
FOREIGN SECURITIES
Each of the Funds may invest in foreign securities. Each Fund may
invest directly in securities of foreign governmental and private issuers that
are denominated in and pay interest in U.S. dollars. New Asia Growth Fund and
International Stock Fund may also invest in the securities of foreign issuers
directly or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") or other
Depositary Receipts (which, together with ADRs, GDRs and EDRs, are hereinafter
collectively referred to as "Depositary Receipts") to the extent such Depositary
Receipts become available.
DEPOSITORY RECEIPTS
ADRs (which include American Depositary Shares and New York Shares) are
publicly traded on exchanges or over-the-counter ("OTC") in the United States.
GDRs, EDRs and other types of Depositary Receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a U.S. or foreign corporation. Depositary Receipts may be "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer assumes the
obligation to pay some or all of the depositary's transaction fees. In an
unsponsored arrangement, the foreign issuer assumes no obligation and the
depositary's transaction fees are paid by the holders of the Depositary
Receipts. Foreign issuers in respect of whose securities unsponsored Depositary
Receipts have been issued are not necessarily obligated to disclose material
information in the markets in which the unsponsored Depositary Receipts are
traded, and the market value of the Depositary Receipts may not be correlated
with such information.
RISKS AND SPECIAL CONSIDERATIONS OF
INVESTING IN FOREIGN SECURITIES
Investing on an international basis involves certain risks not involved
in domestic investments, including fluctuations in foreign exchange rates,
future political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respect as growth of gross national product, rates of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. Certain foreign investments may also be subject to foreign
withholding taxes.
6
<PAGE> 7
Most of the foreign securities held by the Funds will not be registered
with the Securities and Exchange Commission, nor will the issuers thereof be
subject to the reporting requirements of such agency. Accordingly, there may be
less publicly, available information about a foreign company than about a U.S.
company, and such foreign companies may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those to which
U.S. companies are subject. As a result, traditional investment measurements,
such as price/earnings ratios, as used in the United States, may not be
applicable to certain smaller capital markets. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards or to practices and requirements comparable to those applicable to
domestic companies.
Foreign markets have different settlement and clearance procedures, and
in certain markets settlements have at times failed to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
For example, delays in settlement could result in temporary periods when assets
of a Fund are uninvested and no return is earned thereon. The inability of a
Fund to make intended security purchases due to settlement problems could cause
the Fund to miss attractive investment opportunities. The inability to dispose
of a portfolio security due to settlement problems could result either in losses
to a Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. There is generally
less government supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States. The foregoing risks are
often heightened for investments in smaller capital markets and developing
countries.
To the extent a Fund invests in foreign securities, its operating
expense ratio can be expected to be higher than that of an investment company
investing exclusively in U.S. securities since certain expenses of the Fund,
such as management and advisory fees and custodial costs, may be higher.
New Asia Growth Fund and International Stock Fund will invest in
securities denominated or quoted in currencies other than the U.S. dollar.
Accordingly, changes in foreign currency exchange rates will affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments insofar as U.S. investors are concerned. New Asia Growth Fund and
International Stock Fund may also hold foreign currency in connection with the
purchase and sale of foreign securities. To the extent the foreign currency is
so held, there may be a risk due to foreign currency exchange rate fluctuations.
Such foreign currency will be held with the Funds' custodian bank or by an
approved foreign subcustodian.
INVESTING IN COUNTRIES WITH SMALLER CAPITAL MARKETS
Because New Asia Growth Fund intends to invest primarily in securities
of companies located in developing Asian countries, and International Stock Fund
may invest in securities of companies located in developing countries in Asia
and elsewhere, investors in those Funds should be aware of certain risk factors
and special considerations relating to investing in developing economies.
Consequently, these Funds should be considered as a means of diversifying an
investment portfolio and not in themselves as a balanced investment program.
SECURITIES MARKETS
The securities markets of developing Asian countries are not as large
as the U.S. securities markets and have substantially less trading volume,
resulting in a lack of liquidity and high price volatility. Certain markets,
such as those of China, are in only the earliest stages of development. There is
also a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
their region, such
7
<PAGE> 8
as in Japan. Developing country brokers typically are fewer in number and less
capitalized than brokers in the United States. These factors, combined with the
U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investments discussed below, result in potentially fewer
investment opportunities for New Asia Growth Fund and International Stock Fund
in such countries and may have an adverse impact on the investment performance
of those Funds.
POLITICAL AND SOCIAL UNCERTAINTIES
Political and social uncertainties exist for some developing countries.
In addition, the governments of many of such countries have a heavy role in
regulating and supervising the economy. Certain developing Asian countries, such
as the Philippines and India, are especially large debtors to commercial banks
and foreign governments. Another risk common to most such countries is that the
economy is heavily export oriented and, accordingly, is dependent upon
international trade. The existence of overburdened infrastructure and obsolete
financial systems also presents risks in certain countries, as do environmental
problems. Certain economics also depend to a significant degree upon exports of
primary commodities and, therefore, are vulnerable to changes in commodity
prices which, in turn, may be affected by a variety of factors.
Archaic legal systems in certain developing countries also may have an
adverse impact on New Asia Growth Fund and International Stock Fund. For
example, while the potential liability of a shareholder in a U.S. corporation
with respect to the acts of the corporation is generally limited to the amount
of the shareholder's investment, the notion of limited liability is less clear
in certain developing countries. Similarly, the rights of investors in
developing companies may be more limited than those of shareholders of U.S.
corporations.
Some of the currencies of developing Asian countries have experienced
devaluations relative to the U.S. dollar, and major adjustments have been made
periodically in certain of such currencies.
RESTRICTIONS ON FOREIGN INVESTMENTS
Some developing countries prohibit or impose substantial restrictions
on investments in their capital markets, particularly their equity markets, by
foreign entities such as the Funds. As illustrations, certain countries may
require governmental approval prior to investments by foreign persons or limit
the amount of investment by foreign persons in a particular company or limit the
investment by foreign persons to only a specific class of securities of a
company which may have less advantageous terms (including price) than securities
of the company available for purchase by nationals. Certain countries may
restrict investment opportunities in issuers or industries deemed important to
national interests.
The manner in which foreign investors may invest in companies in
certain developing countries, as well as limitations on such investments, also
may have an adverse impact on the operations of the Funds. For example, the
Funds may be required in certain of such countries to invest initially through a
local broker or other entity and then have the shares that were purchased
reregistered in the name of the Fund. Re-registration may in some instances not
be able to occur on a timely basis, resulting in a delay during which the Fund
may be denied certain of its rights as an investor, including rights as to
dividends or to be made aware of certain corporate actions. There also may be
instances where a Fund places a purchase order but is subsequently informed, at
the time of re-registration, that the permissible allocation of the investment
to foreign investors has been filled, depriving the Fund of the ability to make
its desired investment at that time.
Substantial limitations may exist in certain countries with respect to
the Fund's ability to repatriate investment income, capital or the proceeds of
sales of securities by foreign investors. The Funds could be adversely affected
by delays in or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments. In addition, even where there is no outright
restriction on repatriation of capital, the mechanics of repatriation may affect
8
<PAGE> 9
certain aspects of the operations of the Funds. For example, funds may be
withdrawn from China only in U.S. or Hong Kong dollars and only at an exchange
rate established by the government once each week.
A number of publicly traded closed-end investment companies have been
organized to facilitate indirect foreign investment in developing Asian
countries, and certain of such countries, such as Thailand and South Korea, have
specifically authorized such funds. There also are investment opportunities in
certain of such countries in pooled vehicles that resemble open-end investment
companies. The Funds' investment in these companies will be subject to certain
percentage limitations of the 1940 Act. This restriction on investments in
securities of investment companies may limit opportunities for the Funds to
invest indirectly in certain developing Asian countries. Shares of certain
investment companies may at times be acquired only at market prices representing
premiums to their net asset values.
In certain countries, banks or other financial institutions may be
among the leading companies to have actively traded securities. The 1940 Act
restricts the Funds' investments in any equity securities of an issuer which, in
its most recent fiscal year, derived more than 15% of its revenues from
"securities-related activities," as defined by the rules thereunder. These
provisions may restrict the Funds' investments in certain foreign banks and
other financial institutions.
OTHER MATTERS
Inflation accounting rules in some developing countries require, for
companies that keep accounting records in the local currency, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
company's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits for certain companies in developing countries.
Satisfactory custodial services for investment securities may not be
available in some developing countries, which may result in the Funds incurring
additional costs and delays in providing transportation and custody services for
such securities outside such countries.
REGIONAL RISK CONSIDERATIONS
In addition to the risk of investments in foreign securities and in
emerging markets described above, investments in issuers of securities in
particular regions may be subject to certain additional regional risks.
Asia. Many Asian countries may be subject to a greater degree of
social, political and economic instability than is the case in the United States
and western European countries. Such instability may result from (i)
authoritarian governments or military involvement in political and economic
decision-making; (ii) popular unrest associated with demands for improved
political, economic and social conditions; (iii) internal insurgencies; (iv)
hostile relations with neighboring countries; and (iv) ethnic, religious and
racial disaffection.
The economies of most of the Asian countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally the United
States, Japan, China and the European Community. The enactment by the United
States or other significant trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these Asian countries. Of significant immediate
concern, the current recession in the Japanese economy, which has been
complicated by substantial problems in its banking system, could substantially
worsen the economic difficulties a number of Asian countries are presently
experiencing.
Latin America. Investing in securities of Latin American issuers may
entail risks relating to the potential political and economic instability of
certain Latin American countries and a consequent resurgence
9
<PAGE> 10
of the historical risk in Latin America of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of expropriation, nationalization
or other confiscation by any country, a Fund could lose its entire investment in
any such country. In addition, there is risk that certain Latin American
countries may restrict the free conversion of their currencies into other
currencies. Certain Latin American countries such as Argentina, Brazil and
Mexico are among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared moratoria
on the payment of principal and/or interest on outstanding debt.
LIMITATIONS ON SHARE TRANSACTIONS
To permit New Asia Growth Fund to invest the net proceeds from the sale
of its shares in an orderly manner, the Fund may, from time to time, suspend the
sale of its shares, except for dividend reinvestment. The Fund also reserves the
right to limit the number of its shares that may be purchased by a person during
a specified period of time or in the aggregate.
DEBT SECURITIES
Each of the Funds may invest in debt securities issued by domestic and
foreign corporations, financial institutions, and governments.
The debt securities in which the Funds will invest (including
convertible securities, as applicable) generally will be of investment grade
(i.e., rated in the top four rating categories by a nationally recognized
securities rating organization ("NRSRO"), or, if unrated, determined to be of
comparable quality by the investment adviser). However, up to 10% of New Asia
Growth Fund's net assets may be invested in securities rated below investment
grade by an NRSRO or determined to be of comparable quality by The Asset
Management Group of Bank of Hawaii ("The Asset Management Group") or its
Sub-Adviser.
Balanced Fund, Diversified Fixed Income Fund, Growth and Income Fund,
Growth Stock Fund, Small Cap Fund, Value Fund, Short Intermediate U.S. Treasury
Securities Fund, Tax-Free Securities Fund, Tax-Free Short Intermediate
Securities Fund and U.S. Treasury Securities Fund may only invest in U.S.
dollar-denominated foreign debt securities.
U.S. GOVERNMENT OBLIGATIONS
Each of the Funds may invest in U.S. Government Obligations which
include, in addition to U.S. Treasury Securities, the obligations of the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), Student Loan Marketing Association ("SLMA"), Federal
National Mortgage Association ("FNMA"), Resolution Trust Corporation and Federal
Home Loan Mortgage Corporation ("FHLMC"). U.S. Treasury Securities and certain
other obligations of certain agencies and instrumentalities of the U.S.
Government, such as those of the GNMA, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of FNMA, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the SLMA, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government sponsored instrumentalities if it
is not obligated to do so by law. Some of these instruments may be variable or
floating rate instruments. The Funds will invest in the obligations of such
instrumentalities only when The Asset Management Group or its Sub-Adviser
believes that the credit risk with respect to the instrumentality is minimal.
Each Fund may also make limited investments (not exceeding 5% of its
net assets) in separately traded principal and interest components of securities
issued by the United States Treasury. The principal and
10
<PAGE> 11
interest components or selected securities are traded independently under the
Separate Trading of Registered Interest and Principal of Securities program
("STRIPs"). Under the STRIPs program, the principal and interest components are
individually numbered and separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the component parts
independently.
FLOATING AND VARIABLE RATE DEBT INSTRUMENTS
Each of the Funds may invest in floating and variable rate debt
instruments. Floating and variable rate debt instruments bear interest at rates
that are not fixed, but vary with changes in specified market rates or indices
or at specified intervals. Certain, of these instruments may carry a demand
feature that would permit the holder to tender them back to the issuer at a par
value prior to maturity. The floating and variable rate instruments that the
Funds may purchase include certificates of participation in such obligations
purchased from banks. The Asset Management Group or its Sub-Adviser will monitor
on an ongoing basis the ability of an issuer of a demand instrument to make
payment when due, which could be affected by events occurring between the date
the Funds elect to demand payment and the date payment is due, except when such
demand instruments permit same-day settlement. In this regard, The Asset
Management Group or its Sub-Adviser, pursuant to direction of the Board of
Trustees, will determine the liquidity of those instruments with demand features
that cannot be exercised within seven days.
SOVEREIGN DEBT
New Asia Growth Fund may invest in debt securities or obligations
issued or guaranteed by foreign governments, including their agencies,
instrumentalities and political subdivisions ("sovereign debt") and by
supernational entities (such as the World Bank, The European Community, and the
Asian Development Bank), and the other Funds may invest in Yankee Bonds
(dollar-denominated obligations issued by foreign governments).
Investment in sovereign debt involves a high degree of risk. Certain
developing countries, such as the Philippines, owe significant amounts of debt
to commercial banks and foreign governments. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also depend on
expected disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearage on their debt. The
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third party's commitments to lend funds to the governmental
entity, which may further impair such debtor's ability or willingness to timely
service its debts. Consequently, governmental entities may default on their
sovereign debt.
Issuers of sovereign debt may request the holders, including the Fund,
to participate in the rescheduling of such debt and to extend further loans to
governmental entities. No bankruptcy proceeding exists for collection in whole
or in part of sovereign debt on which a governmental entity has defaulted.
The sovereign debt instruments in which New Asia Growth Fund may invest
in some cases are the equivalent in terms of quality to high yield/high risk
securities discussed below and are subject to many of the same risks as such
securities. The Fund may have difficulty disposing of certain sovereign debt
obligations
11
<PAGE> 12
because there may be a thin trading market for such securities. New Asia Growth
Fund will not invest more than 5% of its respective total assets in sovereign
debt, including sovereign debt which is in default.
LOWEST CATEGORY OF INVESTMENT GRADE
Obligations rated in the lowest of the top four rating categories by an
NRSRO have speculative characteristics, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating category may be reduced below the minimum rating required
for purchase by the respective Fund. The investment adviser will consider such
an event in determining whether the relevant Fund should continue to hold the
obligation.
LOWER RATED DEBT SECURITIES (NEW ASIA GROWTH FUND ONLY)
New Asia Growth Fund may invest in lower rated debt securities.
Securities rated in the medium to low rating categories of NRSROs such as
Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc.
("Moody's") and unrated securities of comparable quality (referred to herein as
"high yield/high risk securities") are predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the security and generally involve greater price volatility than
securities in higher rating categories. See "Appendix A." These securities are
commonly referred to as "junk bonds."
In purchasing such securities, New Asia Growth Fund will rely on the
Sub-Adviser's judgment, analysis and experience in evaluating the
creditworthiness of the issuer. The Sub-Adviser will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters. New Asia Growth Fund is not
authorized to purchase debt securities that are in default, except that the Fund
may invest in sovereign debt which is in default, provided that not more than 5%
of the Fund's total assets are invested in sovereign debt (including sovereign
debt securities which are in default).
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities.
For example, during an economic downturn or a sustained period of
rising interest rates, issues of high yield/high risk securities may be more
likely to experience financial stress, especially if such issuers are highly
leveraged. During such periods, such issuers may not have sufficient revenues to
meet their interest payment obligations. An issuer's ability to service its debt
obligations also may be adversely affected by specific issuer 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 the
issuer is significantly greater for the holders of high yield/high risk
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
High yield/high risk securities may have call or redemption features
which would permit an issuer to repurchase the securities from New Asia Growth
Fund. If a call were exercised by the issuer during a period of declining
interest rates, New Asia Growth Fund likely would have to replace such called
securities with lower yielding securities, thus decreasing the net investment
income to the Fund and dividends to shareholders.
New Asia Growth Fund may have difficulty selling certain high
yield/high risk securities because there may be a thin trading market for such
securities. To the extent that a secondary trading market for high
12
<PAGE> 13
yield/high risk securities does exist, it is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and New Asia Growth Fund's ability to
sell particular issues to meet the Fund's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain high yield/high risk
securities also may make it more difficult for New Asia Growth Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield/high risk securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales. The Sub-Adviser will carefully consider
the factors affecting the market for high yield/high risk, lower rated
securities in determining whether any particular security is liquid or illiquid
and whether current market quotations are readily available.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect New Asia Growth Fund's net asset value. New Asia
Growth Fund may incur additional expenses if it is required to seek recovery
upon a default on a portfolio holding or participate in the restructuring of the
obligation.
CREDIT RATINGS
Credit ratings evaluate the safety of principal and interest payments,
not market value risk. The rating of an issuer is also heavily weighted by past
developments and does not necessarily reflect probable future conditions. There
is frequently a lag between the time a rating is assigned and the time it is
updated. Also, since credit rating agencies may fail to timely change credit
ratings to reflect subsequent events, The Asset Management Group or a
Sub-Adviser must monitor the issuers of bonds in the Funds' portfolios to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to assure the bonds' liquidity so
the Funds can meet redemption requests.
To the extent the rating of a debt security by an NRSRO changes as a
result of changes in such organization or its rating systems, each Fund will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in its Prospectus and in this Statement
of Additional Information. The ratings of the NRSROs currently used by the Funds
are more fully described in Appendix A to this Statement of Additional
Information.
OTHER DEBT OBLIGATIONS
LETTERS OF CREDIT AND LIQUIDITY AGREEMENTS
Each of the Funds may purchase debt obligations that are backed by an
irrevocable letter of credit or liquidity agreement of a bank, savings and loan
association or insurance company which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion of
The Asset Management Group, are of investment quality comparable to other
permitted investments of such Fund, may be used for letter of credit and
liquidity agreement backed investments.
BANK AND SAVINGS AND LOAN OBLIGATIONS
Each of the Funds may invest in bank and savings and loan obligations.
These obligations include negotiable certificates of deposit, fixed time
deposits, bankers' acceptances, and interest bearing demand accounts. The Funds
limit their bank investments to dollar-denominated obligations of U.S.,
Canadian, Asian, Australian or European banks which have more than $500 million
in total assets at the time of investment or of United States savings and loan
associations which have more than $1 billion in total assets at the time of
13
<PAGE> 14
investment and, in the case of U.S. banks, are members of the Federal Reserve
System or are examined by the Comptroller of the Currency or whose deposits are
insured by the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER
Balanced Fund, Diversified Fixed Income Fund, Growth and Income Fund,
Growth Stock Fund, Value Fund, Small Cap Fund, Short Intermediate U.S. Treasury
Securities Fund, Tax-Free Securities Fund, Tax-Free Short Intermediate
Securities Fund and U.S. Treasury Securities Fund may invest in commercial paper
that is rated at the date of purchase in the highest rating category assigned by
an NRSRO or unrated if considered by The Asset Management Group or its
Sub-Adviser to be of comparable quality. New Asia Growth Fund and International
Stock Fund may invest in commercial paper that is rated at the time of purchase
in the two highest short-term rating categories by an NRSRO or unrated if
considered by The Asset Management Group or its Sub-Adviser to be of comparable
quality. Commercial paper includes short-term unsecured promissory notes, and
variable floating rate demand notes issued by domestic and foreign bank holding
companies, corporations and financial institutions as well as similar taxable
and tax-exempt instruments issued by government agencies and instrumentalities.
MUNICIPAL SECURITIES
The Tax-Free Funds invest primarily in Municipal Obligations, and
Diversified Fixed Income Fund may also do so. Municipal Obligations include
Municipal Bonds, Municipal Notes and Municipal Commercial Paper. Under normal
market conditions, each of the Tax-Free Funds invests at least 80% of its net
assets in investment grade municipal obligations. For purposes of this
restriction, the Tax-Free Funds' investments in other investment companies which
invest exclusively in municipal securities are considered municipal obligations.
MUNICIPAL BONDS
Municipal bonds generally have a maturity at the time of issuance of up
to thirty years. They are principally classified either as "general obligation"
bonds, which are secured by the pledge of the municipality's faith, credit and
taxing power for the payment of principal and interest, or as "revenue" bonds,
which are payable only from the revenues derived from a particular project or
facility and generally are dependent solely on a specific revenue source.
General obligation securities are secured by the issuer's pledge of its
full faith, credit, and taxing power for the payment of principal and interest.
Characteristics and methods of enforcement of general obligation bonds vary
according to the law applicable to a particular issuer, and the taxes that can
be levied for the payment of debt service may be limited or unlimited as to
rates or amounts of special assessments. Revenue securities are payable only
from the revenues derived from a particular facility, a class of facilities or,
in some cases, from the proceeds of a special excise tax. Although the principal
security behind these bonds may vary, many provide additional security in the
form of a debt service reserve fund the assets of which may be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security, including partially or fully insured
mortgages, rent subsidized and collateralized mortgages, and the net revenues
from housing or other public projects. Some authorities are provided further
security in the form of a state's assistance (although without obligation) to
make up deficiencies in the debt service reserve fund.
14
<PAGE> 15
The Tax-Free Securities Fund and the Tax-Free Short Intermediate
Securities Fund may invest in municipal bonds which are covered by insurance
guaranteeing the scheduled payment of principal and interest until their
maturity ("Insured Municipal Bonds"). The insurance can be purchased either by
the issuing government entity or by the Fund purchasing the bond. This insurance
is primarily written by two organizations: Ambac Assurance Corporation (formerly
called American Municipal Bond Assurance Corporation), and Municipal Bond
Insurance Association, a pool of private insurers, but may be written by certain
other large insurance companies. This insurance feature minimizes the risks to
the Tax-Free Securities Fund and the Tax-Free Short Intermediate Securities Fund
and its shareholders associated with payment delays or defaults in these
portfolio securities, but does not guarantee the market value of these portfolio
securities or the value of the shares of the Tax-Free Securities Fund and the
Tax-Free Short Intermediate Securities Fund. An issuer would likely purchase
insurance in order to obtain a higher rating by an NRSRO than it would receive
without the insurance thereby reducing the issuer's borrowing costs. The price
paid or received for an Insured Municipal Bond may be higher than the price that
would otherwise be paid or received for the municipal bond absent the insurance.
The Tax-Free Securities Fund and the Tax-Free Short Intermediate
Securities Fund may invest in moral obligation bonds ("Moral Obligation Bonds")
which are tax-exempt bonds issued by a municipality or a state financial
intermediary and backed by the moral obligation pledge of a state government.
Under a moral obligation pledge, a state government indicates its intent to
appropriate funds in the future if the primary obligor, the municipality or
intermediary, defaults. The state's obligation to honor the pledge is moral
rather than legal because future legislatures cannot be legally obligated to
appropriate the funds required.
Industrial development bonds are a specific type of revenue bond backed
by the credit and security of a private user. Certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide privately-operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity, or sewage or solid waste
disposal. Assessment bonds, issued by a specially created district or project
area which levies a tax (generally on its taxable property) to pay for an
improvement or project, may be considered a variant of either category. There
are, of course, other variations in the types of municipal bonds, both within a
particular classification and between classifications, depending on numerous
factors.
MUNICIPAL NOTES
The Tax-Free Funds may invest in municipal notes. Municipal notes
include, but are not limited to, tax anticipation notes ("TANs"), bond
anticipation notes ("BANs"), revenue anticipation notes ("RANs") and
construction loan notes. Municipal notes generally have maturities at the time
of issuance of three years or less. Subject to its respective investment
objective and policies, the Tax-Free Securities Fund and the Tax-Free Short
Intermediate Securities Fund may invest in municipal notes that are rated at the
date of purchase in one of the two highest rating categories assigned by an
NRSRO, or not rated but are considered by The Asset Management Group to be of
comparable quality. Municipal notes generally are issued in anticipation of the
receipt of tax funds, of the proceeds of bond placements or of other revenues.
The ability of an issuer to make payments is, therefore, dependent on such tax
receipts, proceeds from bond sales or other revenues, as the case may be.
The Tax-Free Securities Fund and the Tax-Free Short Intermediate
Securities Fund also may invest in certain "Private activity" bonds or notes.
Such Funds may not be an appropriate investment for entities which are
"substantial users," or certain "related persons" of substantial users, of
facilities financed by private activity bonds. "Substantial users" are defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses a part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, or
who occupies more than 5% of the usable area of such facilities or for whom such
facilities, or a part thereof, were specifically constructed, reconstructed or
acquired. "Related persons"
15
<PAGE> 16
include certain related natural persons, affiliated corporations, partnerships
and their partners and S corporations and their shareholders.
TANs
Uncertainty in a municipal issuer's capacity to raise taxes as a result
of such events as a decline in its tax base or a rise in delinquencies could
adversely affect the issuer's ability to meet its obligations on outstanding
TANs. Furthermore, some municipal issuers mix various tax proceeds into a
general fund that is used to meet obligations other than those of the
outstanding TANs. Use of such a general fund to meet various obligations could
affect the likelihood of making payments on TANs.
BANs
The ability of a municipal issuer to meet its obligations on its BANs
primarily depends on the issuer's adequate access to the longer term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal of, and interest on, BANs.
RANs
A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
MUNICIPAL COMMERCIAL PAPER
Municipal commercial paper is a debt obligation with a stated maturity
of 270 days or less that is issued to finance seasonal working capital needs or
as short-term financing in anticipation of longer-term debt. Subject to its
respective investment objective and policies, the Tax-Free Securities Fund and
the Tax-Free Short Intermediate Securities Fund may invest in municipal
commercial paper that is rated at the date of purchase in one of the two highest
rating categories by an NRSRO or not rated but is considered by The Asset
Management Group be of comparable quality.
GENERAL CONSIDERATIONS
The values of outstanding municipal securities vary as a result of
changing market evaluations of the ability of their issuers to meet the interest
and principal payments (i.e., credit risk). Such values also change in response
to changes in the interest rates payable on new issues of municipal securities
(i.e., market risk). Should such interest rates rise, the values of outstanding
securities, including those held in the Tax-Free Funds' portfolios, will
generally decline and (if purchased at par value) they would sell at a discount.
If interest rates fall, the values of outstanding securities will generally
increase and (if purchased at par value) they would sell at a premium. Changes
in the value of municipal securities held in the Funds' portfolios arising from
these or other factors will cause changes in the net asset value per share of
the Tax-Free Funds.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore, as
a result of legislation or other conditions, the power or ability of any issuer
to pay, when due, the principal of and interest on its municipal obligations may
be materially affected.
16
<PAGE> 17
The taxable securities market is a broader and more liquid market with
a greater number of investors, issuers and market makers than the market for
municipal securities. The more limited marketability of municipal securities may
make it difficult in certain circumstances to dispose of large investments
advantageously.
SPECIAL CONCERNS FOR THE TAX-FREE FUNDS
Tax-Free Securities Fund and Tax-Free Short Intermediate Securities
Fund are non-diversified, which means that their assets may be invested among
fewer issuers and therefore the value of their assets may be subject to greater
impact by events affecting one of their investments. Since Tax-Free Securities
Fund and Tax-Free Short Intermediate Securities Fund invest significantly in
obligations of issuers located in Hawaii, the marketability, and market value of
these obligations may be affected by certain Hawaiian constitutional provisions,
legislative measures, executive orders, administrative regulations, and vote
initiatives.
The Hawaiian economy is concentrated in tourism, agriculture and
military operations. Tourism is the strongest factor with tourists from a
variety of nations cushioning any adverse economic situations in a single
country. Hawaiian agriculture is diversifying into an expanded range of
agricultural products, away from the dominant pineapple and sugar production
that has been subject to increased foreign competition.
Governmental activities, including activities usually administered on a
municipal or county level such as public education, are the responsibility of
the state. This concentration aggravates an otherwise high level of state debt
obligations. The state General Fund has operated either within planned deficits
or with ending fund balances since December 1962. Revenue is derived primarily
from general excise taxes and individual and corporate income tax.
WARRANTS AND CONVERTIBLE SECURITIES
Each of Balanced Fund, Growth and Income Fund, Growth Stock Fund, Small
Cap Fund, Value Fund, International Stock Fund and New Asia Growth Fund may
invest in warrants. A warrant gives the holder thereof the right to subscribe by
a specified date to a stated number of shares of stock of the issuer at a fixed
price. Warrants tend to be more volatile than the underlying stock, and if at a
warrant's expiration date the stock is trading at a price below the price set in
the warrant, the warrant will expire worthless. Conversely, if at the expiration
date the stock is trading at a price higher than the price set in the warrant, a
Fund can acquire the stock at a price below its market value. No Fund may invest
more than 10% of its net assets in warrants. The prices of warrants do not
necessarily correlate with the prices of the underlying securities. A Fund may
only purchase warrants on securities in which such Fund may invest directly.
Each of Balanced Fund, Growth and Income Fund, Growth Stock Fund, Small
Cap Fund, Value Fund, International Stock Fund and New Asia Growth Fund may
invest in convertible securities that provide current income and are issued by
companies with the characteristics described above. The Funds may purchase
convertible securities that are fixed income debt securities or preferred
stocks, and which may be converted at a stated price within a specified period
of time into a certain quantity of the common stock of the same or other
issuers. Convertible securities, while usually subordinated to nonconvertible
debt securities of the same issuer, are senior to common stocks in an issuer's
capital structure. Convertible securities may offer more flexibility by
providing the investor with a steady income stream (generally yielding a lower
amount than nonconvertible securities of the same issuer and a higher amount
than common stocks) as well as the opportunity to take advantage of increases in
the price of the issuer's common stock through the conversion feature.
Convertible security prices tend to be influenced by changes in the market value
of the common stock as well as changes in interest rates. Convertible securities
in which the Funds may invest are subject to the rating criteria and limitations
discussed above under "Debt Securities," except when they are purchased
primarily for their equity characteristics.
17
<PAGE> 18
GUARANTEED INVESTMENT CONTRACTS
Each of the Funds may invest up to 5% of its net assets in Guaranteed
Investment Contracts ("GICs") issued by highly rated U.S. insurance companies.
Pursuant to such contracts, the Funds make cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
to the respective Fund on a monthly basis guaranteed interest which is based on
an index. The GICs provide that this guaranteed interest will not be less than a
certain minimum rate. Generally, a GIC allows a purchaser to buy an annuity with
the monies accumulated under the contract; however, the Funds will not purchase
any such annuities. The insurance company may assess periodic charges against a
GIC for expense and service costs allocable to it, and the charges will be
deducted from the value of the deposit fund. A GIC is a general obligation of
the issuing insurance company and not a separate account. The purchase price
paid for a GIC becomes part of the general assets of the issuer, and the
contract is paid from the general assets of the issuer.
The Funds will only purchase GICs from issuers which, at the time of
purchase, are rated "A" or higher by A.M. Best Company, have assets of $1
billion or more, and meet quality and credit standards established by The Asset
Management Group. Generally, GICs are not assignable or transferable without the
permission of the issuing insurance companies, and an active secondary market
for GICs does not currently exist. Also, a Fund may not receive the principal
amount of a GIC from the insurance company on seven days' notice or less.
Therefore, GICs are considered to be illiquid investments and are subject to the
Funds' 15% limitation on investment in illiquid securities.
PREFERRED STOCK
Each of the Funds may invest in preferred stock, which is a class of
capital stock that pays dividends at a specified rate and that has preference
over common stock in the payment of dividends and the liquidation of assets.
Dividends on some preferred stock may be "cumulative," requiring all or a
portion of prior unpaid dividends to be paid before dividends are paid on the
issuer's common stock or non-cumulative, participating, or auction rate. If
interest rates rise, the fixed dividend on preferred stocks may be less
attractive, causing the price of preferred stocks to decline. Preferred stock
may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, a negative feature when interest rates decline.
Preferred stock does not ordinarily carry voting rights.
OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES
GENERAL
The Funds may use a variety of derivative financial instruments to
hedge their investments and to enhance their income or manage their cash flow
("Hedging Instruments"). In addition to the Hedging Instruments described below
The Asset Management Group and its Sub-Advisers may discover additional
opportunities in connection with options, future contracts, foreign currency
forward contracts and other hedging techniques. These new opportunities may
become available as The Asset Management Group and its Sub-Advisers develop new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts, foreign currency forward
contracts or other techniques are developed. The Asset Management Group and its
Sub-Advisers may utilize these opportunities to the extent that they are
consistent with a Fund's investment objectives and permitted by the Fund's
investment limitations and applicable regulatory authorities. The applicable
Prospectus and this Statement of Additional Information will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Prospectus.
18
<PAGE> 19
OPTIONS ON EQUITY AND DEBT SECURITIES
A call option is a short-term contract pursuant to which the purchaser
of the option, in return for a premium, has the right to buy the security or
currency underlying the option at a specified price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security or currency at the exercise price.
OPTIONS ON SECURITIES INDEXES
A securities index assigns relative values to the securities included
in the index and fluctuates with changes in the market values of those
securities. A securities index option operates in the same way as a stock
option, except that exercise of a securities index option is effected with cash
payment and does not involve delivery of securities. Thus, upon exercise of a
securities index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price and the closing price
of the securities index.
FOREIGN CURRENCY OPTIONS
A put or call option on a foreign currency gives the purchaser of the
option the right to sell or purchase a foreign currency at the exercise price
until the option expires. New Asia Growth Fund and International Stock Fund use
foreign currency options separately or in combination to control currency
volatility. Among the strategies employed to control currency volatility is an
option collar. An option collar involves the purchase of a put option and the
simultaneous sale of call option on the same currency with the same expiration
date but with different exercise (or "strike") prices. Generally the put option
will have an out-of-the-money strike price, while the call option will have
either an at-the-money strike price or an in-the-money strike price. Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Funds to reduce foreign currency risk using
such options.
INTEREST RATE FUTURES CONTRACTS
An interest rate futures contract is a bilateral agreement pursuant to
which one party agrees to make, and the other party agrees to accept, delivery
of a specified type of debt security at as specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities, in most cases, the contracts are
closed out before the settlement date without the making or taking of delivery.
STOCK INDEX FUTURES CONTRACTS
A stock index futures contract is a bilateral agreement pursuant to
which one party agrees to accept, and the other party agrees to make, delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of trading of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the stocks comprising the index is made. Generally, contracts are closed out
prior to the expiration date of the contract.
OPTIONS ON FUTURE CONTRACTS
Put and call options on futures contracts give the purchaser the right
(but not the obligation), for a specified price, to sell or to purchase the
underlying futures contract, respectively, upon exercise of the option, at any
time during the option period.
19
<PAGE> 20
FORWARD CONTRACTS ON FOREIGN CURRENCIES
A forward contract on a foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any number of days
agreed upon by the parties from the date of the contract at a price set on the
date of the contract.
HEDGING STRATEGIES
Hedging strategies can be broadly categorized as short hedges and long
hedges. A short hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held by a Fund. Thus, in a short hedge a Fund takes a position in a
Hedging Instrument whose price is expected to move in the opposite direction of
the price of the investment being hedged. For example, a Fund might purchase a
put option on a security to hedge against a potential decline in the value of
that security. If the price of the security declines below the exercise price of
the put, the Fund could exercise the put and thus limit its loss below the
exercise price to the premium paid plus transaction costs. In the alternative,
because the value of the put option can be expected to increase as the value of
the underlying security declines, a Fund might be able to close out the put
option and realize a gain to offset the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge a Fund takes a position in a Hedging Instrument whose price is expected to
move in the same direction as the price of the prospective investment being
hedged. For example, the Fund might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, the Fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively, a
Fund might be able to offset the price increase by closing out an appreciated
call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund owns
or intends to acquire. Hedging Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which a Fund has invested or expects to invest. Hedging Instruments
on debt securities may be used to hedge either individual securities or broad
fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of
the Commission, the several options and futures exchanges upon which they are
traded and the Commodity Futures Trading Commission ("CFTC"). (See "Limitations
on the Use of Futures.") In addition, a Fund's ability to use Hedging
Instruments will be limited by tax considerations. See "Federal and Hawaiian Tax
Information."
OPTIONS
Each of the Funds other than New Asia Growth Fund and International
Stock Fund may purchase put and call options and write covered put and call
options on securities in which such Fund may invest, provided the value of the
securities underlying such options do not exceed 5% of the Fund's net assets in
the aggregate and (1) are traded on registered domestic securities exchanges or
(2) result from separate privately negotiated transactions in the OTC market
with primary U.S. government securities dealers recognized by the Board of
Governors of the Federal Reserve System. These options may be employed to hedge
a Fund's portfolio against market risk or to enhance income (e.g., to attempt to
realize through the receipt of premiums a greater current return than would be
realized on the underlying securities alone).
20
<PAGE> 21
New Asia Growth Fund and International Stock Fund may each purchase put
and call options and write covered put and call options on securities,
securities indexes and on currencies that are traded on U.S. or foreign
securities exchanges or in the OTC market. Options which these Funds may
purchase and/or write in the OTC market include privately negotiated
transactions with primary U.S. Government securities dealers to hedge the Fund's
portfolio. Each such Fund may purchase put options in an effort to protect the
value of securities (or currencies) that it owns against a decline in market
value and purchase call options in an effort to protect against an increase in
the price of securities (or currencies) it intends to purchase. Each such Fund
may also purchase put and call options to offset previously written put and call
options of the same series. The aggregate value of the exercise price or strike
price of call options written by each such Fund may not exceed 25% of the Fund's
net asset value.
The purchase of call options serves as a long hedge, and the purchase
of put options serves as a short hedge. Writing covered put or call options can
enable a Fund to enhance income by reason of the premiums paid by the purchasers
of such options. However, if the market price of the security underlying a
covered put option declines to less than the exercise price of the option, minus
the premium received, a Fund would expect to suffer a loss. Writing covered call
options serves as a limited short hedge, because declines in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher than
the exercise price of the call option, it can be expected that the option will
be exercised and a Fund will be obligated to sell the security at less than its
market value.
Options may be used to enhance income since the receipt of premiums by
a Fund's options positions may enable the Fund to realize a greater return than
would be realized on the underlying securities alone. In return for the premium
received for a call option, a Fund forgoes the opportunity for profit from a
price increase in the underlying security above the exercise price so long as
the option remains open, but retains the risk of loss should the price of the
security decline. In return for the premium received for a put option, a Fund
assumes the risk that the price of the underlying security will decline below
the exercise price, in which case the put would be exercised and the Fund would
suffer a loss. A Fund may purchase put options in an effort to protect the value
of a security it owns against a possible decline in market value.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may terminate
its obligation under a call option that it had written by purchasing an
identical call option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction.
Currently, many options on equity securities are
exchange-traded. Exchange markets for options on debt securities and foreign
currencies exist but are relatively new, and these instruments are primarily
traded on the OTC market. Exchange-traded options in the United States are
issued by a clearing organization affiliated with the exchange on which the
option is listed which, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between a Fund and its contra party (usually a securities dealer or a bank, as
required by the Fund's policies) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it relies on the party from whom
it purchased the option or to whom it has written the option (the contra party)
to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by a Fund as well as the loss of any expected benefits of the
transaction.
21
<PAGE> 22
Generally, foreign currency options (New Asia Growth Fund and
International Stock Fund only) and OTC debt options used by a Fund may be
European-style options or American-style options. A European-style option is
only exercisable immediately prior to its expiration. American-style options are
exercisable at any time prior to the expiration date of the option.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, a Fund might be unable to close out an OTC option position at
anytime prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
The staff of the Commission has taken the position that purchased
options not traded on registered domestic securities exchanges and the assets
used as cover for written options not traded on such exchanges are generally
illiquid securities. However, the staff has also opined that, to the extent a
mutual fund sells an OTC option to a primary dealer that it considers
creditworthy and contracts with such primary dealer to establish a formula price
at which the fund would have the absolute right to repurchase the option, the
fund would only be required to treat as illiquid the portion of the assets used
to cover such option equal to the formula price minus the amount by which the
option is "in-the-money." In accordance with this view, the Funds will treat
such options and, except to the extent permitted through the procedure described
in the preceding sentence, assets as subject to such Fund's limitation on
investments in securities that are not readily marketable.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds may enter into contracts for the future delivery of
specific securities, classes of securities and financial indices, may purchase
or sell exchange-listed or OTC options on any such futures contracts and may
engage in related closing transactions. In addition, New Asia Growth Fund and
International Stock Fund may engage in currency futures contracts and related
options. A financial futures contract is an agreement to purchase or sell an
agreed amount of securities or currency at a set price for delivery in the
future. A futures contract on a securities index is an agreement obligating
either party to pay, and entitling the other party to receive, while the
contract is out standing, cash payments based on the level of a specified
securities index. The acquisition of put and call options on futures contracts
will, respectively, give the Fund the right (but not the obligation), for a
specified price, to sell or to purchase the underlying futures contract, upon
exercise of the option, at any time during the option period.
Each Fund may engage in futures contracts and related options in an
effort to hedge against market (or, with respect to New Asia Fund and
International Stock Fund, currency) risks. For example, with respect to market
risk, when interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for the Fund than might later be available in the market when it
effects anticipated purchases. With respect to currency risk, by entering into
currency futures and options thereon on U.S. and foreign exchanges, each of New
Asia Growth Fund and
22
<PAGE> 23
International Stock Fund can seek to establish the rate at which it will be
entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, a Fund can seek to establish the number of dollars it
will receive at delivery for a certain amount of a foreign currency. In this
way, whenever New Asia Growth Fund or International Stock Fund anticipates a
decline in the value of a foreign currency against the U.S. dollar, the Fund can
attempt to "lock in" the U.S. dollar value of some or all of the securities held
in its portfolio that are denominated in that currency. By purchasing currency
futures, a Fund can establish the number of dollars it will be required to pay
for a specified amount of a foreign currency in a future month. Thus if a Fund
intends to buy securities in the future and expects the U.S. dollar to decline
against the relevant foreign currency during the period before the purchase is
effected, the Fund can attempt to "lock in" the price in U.S. dollars of the
securities it intends to acquire.
Futures may also be used to manage cash flows into and out of the
Funds. For example, The Asset Management Group or its Sub-Adviser may wish to be
fully invested in a particular asset class. Through the use of futures, it can
achieve this objective immediately while temporarily deferring industry and
security selection, in the interest of timeliness.
Futures strategies also can be used to manage the average duration of a
Fund. If the investment adviser wishes to shorten the average duration of a
Fund, the Fund may sell a futures contract or a call option thereon, or purchase
a put option on that futures contract. If the investment adviser wishes to
lengthen the average duration of a Fund, the Fund may buy a futures contract or
a call option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, initial margin consisting of cash, U.S. Government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature of
a performance bond or good-faith deposit that is returned to a Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent variation margin payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
marking to market. Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Funds intend to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time. Secondary markets for options on futures are currently in the
development stage, and a Fund will not trade options on futures on any exchange
or board of trade unless, in The Asset Management Group or its Sub-Adviser's
opinion, the markets for such options have developed sufficiently that the
liquidity risks for such options are not greater than the corresponding risks
for futures.
23
<PAGE> 24
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related option can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, program trading and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES
Each Fund is subject to the limitations set forth in the Commodity
Futures Trading Commission ("CFTC") regulations with respect to the futures
contracts and related options in which it may invest. Accordingly, each Fund may
not purchase and sell futures contracts and related options for other than bona
fide hedging purposes (as defined in CFTC regulations) if, immediately
thereafter, aggregate initial margin deposits for futures contracts, and
premiums paid for related options, would exceed five percent (5%) of the
liquidation value of the Fund's total assets. Each Fund may purchase and sell
futures contracts and related options, without limitation, for bona fide hedging
purposes. As a matter of operating policy, however, aggregate initial margin
deposits for futures contracts, and premiums paid for related options, may not
exceed 5% of the total assets of the respective Fund, and the value of
securities that are the subject of such futures and options (both for receipt
and delivery) may not exceed one-third of the market value of each Fund's total
assets. Futures transactions will be limited to the extent necessary to maintain
a Fund's qualification as a regulated investment company.
Futures transactions involve brokerage costs and require a Fund to
segregate assets to cover its obligations under futures, or to cover its
obligations by owning the assets underlying open futures contracts. A Fund may
lose the expected benefit of futures transactions if interest rates, exchange
rates or securities prices move in an unanticipated manner. Such losses are
potentially significant and unanticipated changes may result in poorer overall
performance than if the Fund had not entered into any futures transactions. In
addition, the value of a Fund's futures positions may not prove to be perfectly
or even highly correlated with the value of its portfolio securities, limiting
the Fund's ability to hedge effectively against interest rate, exchange rate
and/or market risk and giving rise to additional risks. There is no assurance of
liquidity in the secondary market for purposes of closing out future positions.
Where a liquid secondary market does not exist, a Fund is unlikely to be able to
control losses by closing out futures positions. Gains and losses on investments
in options and futures depend on The Asset Management Group's ability to predict
correctly the direction of stock prices, interest rates and other economic
factors. Certain futures exchanges or boards of trade have established daily
limits on the amount that the price of futures contracts or related options may
vary, either up or down, from
24
<PAGE> 25
the previous day's settlement price. These daily limits may restrict a Fund's
ability to purchase or sell certain futures contracts or related options on any
particular day. For additional discussion of certain risks associated with the
use of futures contracts and options thereon, see "Additional Risk
Disclosure--Risks of Hedging Strategies."
FOREIGN CURRENCY TRANSACTIONS
FOREIGN CURRENCY HEDGING STRATEGIES -- SPECIAL CONSIDERATIONS
New Asia Growth Fund and International Stock Fund may use options and
futures on foreign currencies, and foreign currency forward contracts as
described below, to hedge against movements in the values of the foreign
currencies in which the Fund's securities are denominated. Such currency hedges
can protect against price movements in a security that the Fund owns or intends
to acquire that are attributable to changes in the value of the currency in
which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.
A Fund might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on other currencies, the
values of which its Sub-Adviser believes will have a high degree of positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Hedging Instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of Hedging Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Hedging
Instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Hedging Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might
be required to take place within the country issuing the underlying currency.
Thus, a Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FOREIGN CURRENCY FORWARD CONTRACTS
New Asia Growth Fund and International Stock Fund may enter into
foreign currency forward contracts to purchase or sell foreign currencies for a
fixed amount of U.S. dollars or another foreign currency. Each such Fund also
may use foreign currency forward contracts for cross-hedging. Under this
strategy, a Fund would increase its exposure to foreign currencies that the
investment adviser believes might rise in value relative to the U.S. dollar, or
shift its exposure to foreign currency fluctuations from one country to another.
For example, if a Fund owned securities denominated in a foreign currency and
the investment adviser
25
<PAGE> 26
believed that currency would decline relative to another currency, it might
enter into a forward contract to sell an appropriate amount of the first foreign
currency, with payment to be made in the second foreign currency.
The cost to a Fund from engaging in foreign currency forward contracts
varies with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because foreign currency
forward contracts are usually entered into on a principal basis, no fees or
commissions are involved. When a Fund enters into a foreign currency forward
contract, it relies on the other party to the transaction to make or take
delivery of the underlying currency at the maturity of the contract. Failure by
the other party to do so would result in the loss of any expected benefit of the
transaction.
As is the case with futures contracts, holders and writers of foreign
currency forward contracts can enter into offsetting closing transactions,
similar to closing transactions on futures, by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Secondary markets generally do not exist for foreign currency forward contracts,
with the result that closing transactions generally can be made for foreign
currency forward contracts only by negotiating directly with the other party.
Thus, there can be no assurance that a Fund will in fact be able to close out a
foreign currency forward contract at a favorable price prior to maturity. In
addition, in the event of insolvency of the other party, a Fund might be unable
to close out a foreign currency forward contract at any time prior to maturity.
In either event, the Fund would continue to be subject to market risk with
respect to the position, and would continue to be required to maintain a
position in securities denominated in the foreign currency or to maintain cash
or securities in a segregated account.
The precise matching of foreign currency forward contract amounts and
the value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change after
the foreign currency forward contract has been established. Thus, a Fund might
need to purchase or sell foreign currencies in the spot (cash) market to the
extent such foreign currencies are not covered by forward contracts. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FOREIGN CURRENCY FORWARD CONTRACTS
New Asia Growth Fund and International Stock Fund may enter into
foreign currency forward contracts or maintain a net exposure to such contracts
only if (1) completion of the contracts would not obligate the Fund to deliver
an amount of foreign currency in excess of the value of its portfolio securities
or other assets denominated in that currency or (2) the Fund maintains cash,
U.S. Government securities or liquid debt or equity securities in a segregated
account in an amount not less than the value of its total assets committed to
the consummation of the contract and not covered as provided in (1) above, as
marked to market daily. Under normal circumstances, consideration of currency
fluctuations will be incorporated into the longer term investment decisions made
with regard to over all diversification strategies. However, the investment
adviser believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of a Fund will be
served.
COVER FOR HEDGING STRATEGIES
Transactions using Hedging Instruments, other than purchased options,
expose a Fund to an obligation to another party. A Fund will not enter into any
such transactions unless, to the extent required by law, it (1) owns an
offsetting covered position in securities or other options or futures contracts
or (2) segregates liquid assets with a value sufficient at all times to cover
its potential obligations to the extent not covered as provided in (1) above.
Each Fund will comply with Commission guidelines regarding cover for hedging
transactions.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Hedging Instrument is open, unless they
are replaced with similar assets. As a result, the
26
<PAGE> 27
commitment of a large portion of a Fund's assets to cover or to segregated
accounts could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Instruments involves special considerations and
risks, including those described below.
Successful use of most Hedging Instruments depends upon the investment
adviser's ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
price of individual securities. There can be no assurance that any particular
hedging strategy adopted will succeed.
There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded. The effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because the investment adviser projected a decline in the price of a
security held by the Fund, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the Hedging Instrument. Moreover, if the price of the Hedging
Instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss. In either such case, the Fund would have been in a
better position had it not hedged at all.
As described above, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If a Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair a Fund's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Hedging Instrument prior to expiration or maturity depends on the existence of
a liquid secondary market or, in the absence of such a market, the ability and
willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
ASSET BACKED SECURITIES
Each of the Funds may invest in Asset Backed Securities. Asset Backed
Securities arise through the grouping by governmental, government- related, and
private organizations of loans, receivables, and other assets originated by
various lenders. Asset Backed Securities acquired by a Fund consist of both
mortgage and non-mortgage backed securities. Interests in pools of these assets
differ from other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal paid at maturity or
specified call dates. Instead, Asset Backed Securities provide periodic payments
which generally consist of both interest and principal payments.
27
<PAGE> 28
The life of an Asset Backed Security varies with the prepayment
experience with respect to the underlying debt instruments. The rate of such
prepayments, and hence the life of an Asset Backed Security, will be primarily a
function of current market interest rates, although other economic and
demographic factors may be involved. For example, falling interest rates
generally result in an increase in the rate of prepayments of mortgage loans,
while rising interest rates generally decrease the rate of prepayments. An
acceleration in prepayments in response to sharply falling interest rates will
shorten the security's average maturity and limit the potential appreciation in
the security's value relative to a conventional debt security. Consequently,
Asset Backed Securities are not as effective in locking in high, long-term
yields. Conversely, in periods of sharply rising rates, prepayments generally
slow, increasing the security's average life and its potential for price
depreciation.
MORTGAGE BACKED SECURITIES
Mortgage Backed Securities represent an ownership interest in a pool of
residential mortgage loans, the interest in which is in most cases issued and
guaranteed by an agency or instrumentality of the U.S. Government, though not
necessarily by the U.S. Government itself.
Mortgage Backed Securities include GNMA Certificates, FNMA Certificates
and FHLMC Participation Certificates. GNMA Certificates are backed as to the
timely payment of principal and interest by the full faith and credit of the
U.S. Government. The principal and interest of FNMA Certificates are guaranteed
only by FNMA itself, not by the full faith and credit of the U.S. Government. An
FHLMC Participation Certificate is guaranteed by FHLMC as to timely payment of
principal and interest. However, like a FNMA security, it is not guaranteed by
the full faith and credit of the U.S. Government. Mortgage Backed Securities
issued by private issuers, whether or not such obligations are subject to
guarantees by the private issuer, may entail greater risk than obligations
directly or indirectly guaranteed by the U.S. Government. Such securities will
be purchased for the Funds only when The Asset Management Group or its
Sub-Adviser determines that they are readily marketable at the time of purchase.
The average life of Mortgage Backed Securities varies with the
maturities of the underlying mortgage instruments, which have maximum maturities
of 40 years. The average life is likely to be substantially less than the
original maturity of the mortgage pools underlying the securities as the result
of mortgage prepayments, mortgage refinancings, and foreclosures. The rate of
mortgage prepayments, and hence the average life of the certificates, will be a
function of the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Such prepayments are passed through to the registered holder with the regular
monthly payments of principal and interest and have the effect of reducing
future payments. As a result of the pass-through of prepayments of principal on
the underlying securities, Mortgage Backed Securities are often subject to more
rapid prepayments of principal than their stated maturity would indicate.
Because the prepayment characteristics of the underlying mortgages vary, it is
not possible to predict accurately the realized yield or the average life of a
particular issue of pass-through certificates. As a result of these principal
payment features, Mortgage Backed Securities are generally more volatile than
other U.S. Government securities.
The estimated average life of Mortgage-Backed Securities will be
determined by The Asset Management Group or its Sub-Adviser and used for the
purpose of determining the average weighted maturity of the Funds' portfolios.
Various independent mortgage backed securities dealers publish average remaining
life data using proprietary models and, in making such determinations for the
Funds, The Asset Management Group or its Sub-Adviser might deem such data
unreasonable if such data appears to present a significantly different average
remaining expected life for a security when compared to data relating to the
average remaining life of comparable securities as provided by other independent
mortgage backed securities dealers.
28
<PAGE> 29
NON-MORTGAGE BACKED SECURITIES
The Funds also may invest in non-mortgage backed securities including
interests in pools of receivables, such as motor vehicle installment purchase
obligations and credit card receivables. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pool of assets. Such securities also may be debt
instruments, which also are known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owing such assets and issuing such debt.
Non-mortgage backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. However, the payment of
principal and interest on any such obligation may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) that is not
affiliated with the issuer of the obligation. Non-mortgage backed securities
will be purchased by the Funds only when such securities are readily marketable
and rated at the time of purchase in one of the two highest rating categories
assigned by an NRSRO or, if unrated, are considered by The Asset Management
Group or its Sub-Adviser to be of comparable quality. In addition, such
securities generally will have remaining estimated lives at the time of purchase
of five years or less.
The purchase of non-mortgage backed securities involves considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue Asset Backed Securities relating to motor
vehicle installment purchase obligations perfect their interest in the
underlying obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody of
them. In such circumstances, if the servicer were to sell the same obligations
to another party, in violation of its duty to do so, there is a risk that such
party could acquire an interest in the obligations superior to that of the
holders of the Asset Backed Securities. Also, although most such obligations
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to perfect the security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the obligations underlying the
Asset Backed Securities, usually is not amended to reflect the assignment of the
seller's security interest for the benefit of the holders of the Asset Backed
Securities. Therefore, recoveries on repossessed collateral might not, in some
cases, be available to support payments on those securities. In addition,
various state and Federal laws give the motor vehicle owner the right to assert
against the holder of the owner's obligation certain defenses the owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the related Asset Backed Securities.
Similarly, in the case of Asset-Backed Securities relating to credit
card receivables, credit card holders are entitled to the protection of a number
of state and Federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit cards,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other Asset Backed Securities, credit card receivables are unsecured obligations
of the cardholders.
ILLIQUID SECURITIES
Each of the Funds may invest in illiquid securities. The Funds will not
knowingly invest more than 15% of the value of their respective net assets in
securities that are illiquid. Repurchase agreements with a duration of seven
days or more, time deposits that do not provide for payment to a Fund within
seven days after notice and Guaranteed Investment Contracts ("GICs") and most
commercial paper issued in reliance upon the exemption in Section 4(2) of the
Securities Act of 1933 (the "1933 Act") (other than variable amount master
demand notes with maturities of nine months or less) are subject to this 15%
limit.
If otherwise consistent with its investment objective and policies, any
of the Funds may purchase securities which are not registered under the 1933 Act
but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. Any such security will not be considered illiquid
so long
29
<PAGE> 30
as it is determined by The Asset Management Group, acting under guidelines and
procedures that are developed, established and monitored by the Board of
Trustees, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of illiquidity
in a Fund during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities.
The staff of the Commission has taken the position that OTC options
that are purchased and the assets used as cover for written OTC options should
generally be treated as illiquid securities. However, if a dealer recognized by
the Federal Reserve Bank as a primary dealer in U.S. Government securities is
the other party to an option contract written by a Fund and the Fund has the
absolute right to repurchase the option from the dealer at a formula price
established in a contract with the dealer, the Commission staff has agreed that
the Fund needs to treat as illiquid only that amount of the cover assets equal
to the formula price less the amount by which the market value of the security
subject to the option exceeds the exercise price of the option (the amounts by
which the option is in-the-money). Although The Asset Management Group does not
believe that OTC options are generally illiquid, pending resolution of this
issue, each Fund will conduct their operations in conformity with the views of
the Commission staff.
BORROWINGS
Each Fund (except New Asia Growth Fund and International Stock Fund)
may borrow from banks up to 20% of the current value of its net assets for
temporary purposes only in order to meet redemptions, and these borrowings may
be secured by the pledge of up to 20% of the current value of its net assets
(but investments may not be purchased while such outstanding borrowings in
excess of 5% of its net assets exists).
New Asia Growth Fund and International Stock Fund may borrow an amount
equal to no more than 33% of the value of its total assets (calculated at the
time of the borrowing) from banks for temporary, extraordinary or emergency
purposes, for the clearance of transactions, to hedge against currency movements
or for investment purposes. Each such Fund may pledge up to 33% of its total
assets to secure these borrowings. If a Fund's asset coverage for borrowings
falls below 300%, the Fund will take prompt action to reduce its borrowings. If
the 300% asset coverage should decline as a result of market fluctuations or
other reasons, the Fund may be required to sell portfolio securities to reduce
the debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
Borrowing for investment purposes is generally known as "leveraging."
Leveraging may exaggerate the effect on net asset value of any increase or
decrease in the market value of the Fund's portfolio. Money borrowed for
leveraging will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased. In addition, a Fund may be required
to maintain minimum average balances in connection with such borrowing or pay a
commitment fee to maintain a line of credit, which would increase the cost of
borrowing over the stated interest rate.
Each Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements which are considered to be borrowings under the
Investment Company Act of 1940 (the " 1940 Act"). At the time a Fund enters into
a reverse repurchase agreement (an agreement under which the Fund sells
portfolio securities and agrees to repurchase them at an agreed-upon date and
price), it will place in a segregated custodial account cash or liquid assets
having a value equal to or greater than the repurchase price (including accrued
interest) and will subsequently monitor the account so that such value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by a Fund may decline below the price of the securities
it is obligated to repurchase. The Funds would pay interest on amounts obtained
pursuant to a reverse repurchase agreement.
LOANS OF PORTFOLIO SECURITIES
Each of the Funds may lend securities from its portfolio to brokers,
dealers and financial institutions (but not individuals) if liquid assets equal
to the current market value of the securities loaned (including
30
<PAGE> 31
accrued interest thereon) plus the interest payable to the Fund with respect to
the loan is maintained with the Fund. In determining whether to lend a security
to a particular broker, dealer or financial institution, The Asset Management
Group or its Sub-Adviser will consider all relevant facts and circumstances,
including the creditworthiness of the broker, dealer or financial institution.
Any loans of portfolio securities will be fully collateralized based on values
that are marked to market daily by The Asset Management Group or its
Sub-Adviser. No Fund will enter into any portfolio security lending arrangement
having a duration of longer than one year. Any securities that a Fund may
receive as collateral will not become part of such Fund's portfolio at the time
of the loan and, in the event of a default by the borrower, the Fund will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which such Fund may invest. During the time securities are on
loan, the borrower will pay the Fund any accrued income on those securities, and
the Fund may invest the cash collateral and earn additional income or receive an
agreed-upon fee from a borrower that had delivered cash-equivalent collateral.
No Fund will lend securities having a value that exceeds 30% (33% with respect
to New Asia Growth Fund and International Stock Fund) of the current value of
its total assets. Loans of securities by a Fund will be subject to termination
at the Fund's or the borrower's option. The Funds may pay reasonable
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or the placing broker. Borrowers and placing brokers
may not be affiliated, directly or indirectly, with the Trust, The Asset
Management Group, BISYS, or, the Sub-Advisers.
REPURCHASE AGREEMENTS
Each of the Funds may enter into repurchase agreements wherein the
seller of a security to the Fund agrees to repurchase that security from the
Fund at a mutually agreed-upon time and price. The period of maturity is usually
quite short, often overnight or a few days, although it may extend over a number
of months. A Fund may enter into repurchase agreements only with respect to
obligations that could otherwise be purchased by the Fund. All repurchase
agreements will be fully collateralized based on values that are marked to
market daily by The Asset Management Group or its Sub-Adviser. If the seller
defaults and the value of the underlying securities has declined, the Fund may
incur a loss. In addition, if bankruptcy proceedings are commenced with respect
to the seller of the security, the Fund's disposition of the security may be
delayed or limited.
OTHER INVESTMENT COMPANIES
In connection with the management of its daily cash position, each Fund
may also invest in securities issued by other investment companies, including
(to the extent permitted by the 1940 Act) other investment companies managed by
The Asset Management Group. New Asia Growth Fund and International Stock Fund
may also invest in securities issued by other investment companies by purchasing
the securities of certain foreign investment funds or trusts called passive
foreign investment companies.
Securities of other investment companies will be acquired by a Fund
within the limits prescribed by the 1940 Act. Each of the Funds intends to limit
its investments so that, as determined immediately after a securities purchase
is made: (a) not more than 5% of the value of its total assets will be invested
in the securities of any one investment company; (b) not more than 10% of the
value of its total assets will be invested in the aggregate in securities of
investment companies as a group; (c) not more than 3% of the outstanding voting
stock of any one investment company will be owned by the Fund, and (d) the Fund,
together with other investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10% of the total
stock of any one closed-end company.
As a shareholder of another investment company, a Fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. Accordingly, in addition to bearing
their proportionate share of the relevant Fund's expenses (i.e., management fees
and operating expenses), shareholders will also indirectly bear similar expenses
of such other investment companies or trusts. However, The Asset Management
Group has undertaken to waive or reimburse the Funds its advisory fees with
respect to Fund assets so invested (except when such purchase is part of a plan
of merger,
31
<PAGE> 32
consolidation, reorganization or acquisition).
Investments by New Asia Growth Fund or International Stock Fund in
wholly-owned investment entities created under the laws of certain countries
will not be deemed the making of an investment in other investment companies.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS
Each of the Funds may invest in Real Estate Mortgage Investment
Conduits ("REMICs"). REMICs are a pass-through vehicle created to issue
multiclass Mortgage Backed Securities. REMICs may be organized as corporations,
partnerships, or trusts and those meeting certain qualifications are not subject
to double taxation. Interests in REMICs may be senior or junior, regular (debt
instruments) or residual (equity interests).
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each of the Funds may purchase securities on a "when-issued" basis and
may also purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit a Fund to lock-in a price or yield on
a security it owns or intends to purchase, regardless of future changes in
interest rates. When issued and forward commitment transactions involve the
risk, however, that the yield obtained in a transaction may be less favorable
than the yield available in the market when the securities delivery takes place.
The Funds do not intend to engage in when-issued purchases and forward
commitments for speculative purposes but only in furtherance of their investment
objectives. The forward commitments and when-issued purchases are not expected
to exceed 25% of the value of any of the Funds' total assets absent unusual
market conditions.
The Funds will not start earning interest or dividends on when-issued
securities until they are received. The value of the securities underlying a
when-issued purchase or a forward commitment to purchase securities, and any
subsequent fluctuations in their value, is taken into account when determining
the net asset value of a Fund starting on the date such Fund agrees to purchase
the securities. Each Fund will establish a segregated account in which it will
maintain liquid assets in an amount at least equal in value to such Fund's
commitment to purchase securities on a when-issued or forward commitment basis.
If the value of these assets declines, the Fund will replace additional liquid
assets in the account on a daily basis so that the value of the assets in the
account is equal to the amount of such commitments.
MANAGEMENT
TRUSTEES AND OFFICERS
The business of the Trust is managed under the direction and control of
its Board of Trustees. The name, age and principal occupations during the past
five years of each of the Trustees and executive officers of the Trust are
listed below. The address of each, unless otherwise indicated, is 3435 Stelzer
Road, Columbus, Ohio 43219. Trustees deemed to be "interested persons" of the
Trust for purposes of the 1940 Act are indicated by an asterisk (*).
Walter J. Laskey* (58), Trustee and Chairperson - Executive Vice
President of Bank of Hawaii - Private Client and Institutional Services
(1993-present).
Irimga McKay* (39), Trustee and President - 1230 Columbia Street, San
Diego, California 92101. Senior Vice President of BISYS Fund Services
(1994-present); Senior Vice President of Concord Financial Group (1986-1994).
32
<PAGE> 33
Douglas Philpotts* (68), Trustee - Financial Plaza of the Pacific, P.O.
Box 3170, Honolulu, Hawaii 96802. Chairman of the Board of Directors
(1992-1994), President (1986-1992) and Director (1984-present) of Pacific
Century Trust; Director of Victoria Ward; Director of Bishop Insurance of
Hawaii, Inc.; Trustee of The Strong Foundation and Seabury Hall; Trustee of Cash
Assets Trust, U.S. Treasuries Cash Assets Trust, Hawaiian Tax-Free Trust and
Tax-Free Cash Assets Trust (1992-present); Affiliated with The Pacific Club,
Oahu Country Club, Maui Country Club, Punahou O-Mens Club, and University of
Hawaii Foundation President's Club. Formerly a Director and Officer of various
cultural, educational, community and professional organizations.
Richard W. Gushman II (53), Trustee - 700 Bishop Street, Suite 200,
Honolulu, Hawaii 96813. President and Chief Executive Officer of OKOA, INC., a
private Hawaii corporation involved in commercial real estate (1985- present);
Adviser to RAMPAC, Inc., a wholly owned subsidiary of the Bank of Hawaii,
involved with commercial real estate finance; Trustee of Cash Assets Trust,
Tax-Free Cash Assets Trust and U.S. Treasuries Cash Assets Trust (1993-
present); Member of the Boards of Aloha United Way Downtown Improvement
Association, Boys and Girls Club of Honolulu and Oceanic Cablevision, Inc.
Stanley W. Hong (63), Trustee - 1132 Bishop Street, Honolulu, Hawaii
96813. President and Chief Executive Officer of the Chamber of Commerce of
Hawaii (1996-present); Business Consultant (1994-present); Senior Vice President
of McCormack Properties, Ltd. (1993-1995); President and Chief Executive Officer
of the Hawaii Visitors Bureau (1984-1993); Vice President, General Counsel and
Corporate Secretary at Theo Davies & Co., Ltd., a multiple business company
(1973-1984); formerly Legislative Assistant to U.S. Senator Hiram L. Fong;
Member of the Boards of Directors of several community organizations; Trustee of
Cash Assets Trust, Tax-Free Cash Assets Trust and U.S. Treasuries Cash Assets
Trust (1993-present); Director of Central Pacific Bank (1995-present); Trustee
of the Nature Conservancy of Hawaii (1990-present); Regent of Chaminade
University of Honolulu (1990-present).
Russell K. Okata (55), Trustee - 888 Mililani Street, Suite 601,
Honolulu, Hawaii 96813-2991. Executive Director, Deputy Executive Director,
Administration Officer or Research Statistician of Hawaii Government Employees
Association AFSCME Local 152, AFL-CIO (1970-present); Trustee of Cash Assets
Trust, Tax-Free Cash Assets Trust and U.S. Treasuries Cash Assets Trust (1993-
present); Chairman of the Royal State Insurance Group (1988-present); Trustee of
several charitable organizations.
Oswald K. Stender (68), Trustee - 925 Bethel Street, Suite 101,
Honolulu, Hawaii 96813. Trustee of Bernice Pauahi Bishop Estate (1990-1999);
Director of Hawaiian Electric Industries, Inc., a public utility holding company
(1993-present); Senior Advisor to the Trustees of The Estate of James Campbell
(1987-1989); and Chief Executive Officer (1976-1988); Director of several
housing and real estate associations; Director, member or trustee of several
community organizations; Trustee of Cash Assets Trust, Tax-Free Cash Assets
Trust and U.S. Treasuries Cash Assets Trust (1993-present).
Craig Warren (37), Treasurer - 111 South King Street, Honolulu, Hawaii
96813. Vice President of Bank of Hawaii - Product and Asset Acquisition
(1994-present); Senior Financial Analyst of Federal Home Loan Bank of San
Francisco Marketing Strategies and Analysis Division (1993-1994); Chief
Financial Officer of Wells Fargo Securities, Inc. (1990-1992); Vice President of
Wells Fargo Bank - Private Banking Group (1987-1992).
Gregory Maddox (31), Secretary - 1230 Columbia Street, San Diego,
California 92101. Director of BISYS Fund Services (1991-present).
Alaina Metz (32), Vice President - Chief Administrative Officer of
BISYS Fund Services - Blue Sky Compliance (1995-present); Alliance Capital
Management, L.P. (1989-1995).
33
<PAGE> 34
William J. Tomko (40), Vice President - Senior Vice President of BISYS
Fund Services (1987-present).
Nancy Wiser (31), Vice President - Vice President of Fund Accounting of
BISYS Fund Services (1998 - present); Manager of Investment Accounting of AEFA
(1994-1998). Senior Operations Analyst for IBT (1990-1994).
Frank Deutchki (45), Treasurer - Vice President, Financial Services,
BISYS Fund Services, (Nov. 1997-present); Registration and Compliance Officer,
BISYS Fund Services (April 1996 through Nov. 1997); Vice President and Audit
Director, Chase Global Fund Services (Sept. 1995 through April 1996); Vice
President and Audit Director, Mutual Fund Service Company, a subsidiary of U.S.
Trust Company of New York (1989 through Sept. 1995).
As of the date of this SAI, Trustees and officers of the Trust as a
group beneficially owned less than 1% of the outstanding shares of each Fund,
with the exception of Douglas Philpotts, who owned beneficially approximately
5.70% of the outstanding shares of the Class A shares of the Tax-Free Securities
Fund and 2.21% of the Class A shares of the Growth and Income Fund.
Trustees of the Trust who are not officers or employees of the Trust,
BISYS, The Asset Management Group or its Sub-Advisers are entitled to receive
from the Trust a quarterly retainer and a fee for each Board of Trustees meeting
attended. All Trustees are reimbursed for all reasonable out-of-pocket expenses
relating to attendance at meetings. The following table sets forth the fees and
expenses paid by each Fund to the Trustees for the fiscal year ended July 31,
1999:
<TABLE>
<CAPTION>
Aggregate Trustees' Fees and
Expenses for the Fiscal Year
Fund Ended July 31, 1999
---- -------------------
<S> <C>
Diversified Fixed Income Fund $ 13,872
Growth and Income Fund 12,964
Growth Stock Fund 29,066
New Asia Growth Fund 1,223
Short Intermediate U.S. Treasury Securities Fund 2,152
Tax-Free Securities Fund 33,040
Tax-Free Short Intermediate Securities Fund 3,921
U.S. Treasury Securities Fund 1,840
International Stock Fund 2,741
Value Fund 2,589
Small Cap Fund 1,622
Balanced Fund 3,608
</TABLE>
The following table sets forth the aggregate compensation paid by the
Trust to the Trustees who are not officers and employees of the Trust, BISYS,
The Asset Management Group or its Sub-Advisers and the aggregate compensation
paid to such Trustees by all investment companies (including the Trust) advised
by The Asset Management Group for the periods indicated.
34
<PAGE> 35
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits Estimated from Trust and
Compensation Accrued as Benefits Other Funds
From Part of Fund Upon Advised by
Name of Trustee Trust (1) Expenses Retirement The Asset Management Group(2)
-------------------- ----------------- ---------------- ------------- -----------------------------
<S> <C> <C> <C> <C>
Richard W. $ 16,750 None None $ 51,808
Gushman II
Stanley W. Hong $ 16,750 None None $ 53,355
Russell K. Okata $ 16,750 None None $ 51,711
Douglas Philpotts $ 16,750 None None $ 47,347
Oswald K. Stender $ 16,750 None None $ 51,250
</TABLE>
(1) Provided for the fiscal year ended July 31, 1999.
(2) Provided for the calendar year ended December 31, 1998. In addition to
the Trust, each of the Trustees served on the boards of one other
investment company advised by The Asset Management Group, comprising
four separate funds.
Officers, trustees, directors, employees and retired employees of the
Trust, The Asset Management Group and its affiliates, and BISYS and its
affiliates, and their spouses and children, may purchase Class A shares of the
Funds with no sales charge, as the Board of Trustees believes that sales to such
persons do not involve the normal types of sales efforts associated with
distribution of the Trust's shares. In addition, from time to time Bank of
Hawaii may enter into normal investment management, commercial banking and
lending arrangements with one or more of the Trustees of the Trust and their
affiliates. It currently has such arrangements with Mr. Gushman and certain of
his affiliated companies.
INVESTMENT ADVISER
Pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"), each of the Funds is advised by The Asset Management Group of Bank
of Hawaii, a department of Pacific Century Trust (a division of Bank of Hawaii).
Subject to the supervision of the Board of Trustees (and, in the case of the New
Asia Growth Fund, Small Cap Fund and International Stock Fund, the delegation of
certain of its duties to Sub-Advisers), The Asset Management Group provides a
continuous investment program for the Funds, including investment research and
management with respect to all securities and investments and cash equivalents
in the Funds. The Asset Management Group provides services under the Advisory
Agreement in accordance with each of the Funds' investment objectives, policies,
and restrictions.
For its services under the Advisory Agreement, The Asset Management
Group receives compensation from each Fund based on a percentage of the Fund's
average daily net assets. The rate of advisory fees payable by each Fund to The
Asset Management Group is set forth in the prospectus. The following table sets
forth the aggregate fees paid by
35
<PAGE> 36
each Fund pursuant to its Advisory Agreement for the fiscal years ended July 31,
1999, July 31, 1998, and July 31, 1997:
<TABLE>
<CAPTION>
Compensation Paid to The Asset Management Group
Under the Advisory Agreement
For the Fiscal Year Ended For the Fiscal Year Ended For the Fiscal Year Ended
July 31, 1999 July 31, 1998 July 31, 1997
------------------------------- ------------------------------- -------------------------------
Aggregate Aggregate Aggregate
Advisory Fee Advisory Fee Advisory Fee
Paid (After Paid (After Paid (After
Waiver as Aggregate Waiver as Aggregate Waiver as Aggregate
Fund applicable) Fee Waived applicable) Fee Waived applicable) Fee Waived
------ --------------- -------------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Diversified $ 832,870 $ 277,623 $ 761,240 $135,988 $ 867,869 N/A
Fixed Income
Fund
Growth and $1,407,043 N/A $1,153,390 N/A $ 768,642 N/A
Income Fund
Growth Stock $3,174,082 N/A $2,468,860 N/A $1,499,559 N/A
Fund
New Asia $ 149,051 N/A $ 137,423 $ 27,534 $ 141,522 $ 7,778
Growth Fund
Short $ 85,277 $ 54,052 $ 89,917 $ 59,920 $ 71,646 $ 47,940
Intermediate
U.S. Treasury
Securities Fund
Tax-Free $1,922,008 $ 640,669 $1,872,274 $365,137 $1,756,304 N/A
Securities Fund
Tax-Free Short $ 200,190 $ 50,048 $ 207,167 $ 31,564 $ 195,480 N/A
Intermediate
Securities Fund
U.S. Treasury $ 81,078 $ 57,912 $ 104,486 $ 33,161 $ 145,470 N/A
Securities Fund
International $ 405,835 $ 40,593 N/A N/A N/A N/A
Stock Fund
Value Fund $ 317,642 N/A N/A N/A N/A N/A
Small Cap Fund $ 204,585 $ 20,458 N/A N/A N/A N/A
Balanced Fund $ 149,582 $ 21,369 N/A N/A N/A N/A
</TABLE>
36
<PAGE> 37
The Advisory Agreement provides that The Asset Management Group will
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the performance of the Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard of its obligations and duties under the
Advisory Agreement.
The Advisory Agreement will continue in effect with respect to each
Fund provided the continuance is approved annually (i) by the holders of a
majority of the Fund's outstanding voting securities or by the Trust's Board of
Trustees and (ii) by a majority of the Trustees of the Trust who are not parties
to the Advisory Agreement or "interested persons" (as defined in the 1940 Act)
of any such party. The Advisory Agreement may be terminated with respect to any
Fund on 60 days' written notice by either party and will terminate automatically
if assigned.
The Asset Management Group has advised the Trust that The Asset
Management Group should be able to perform the services contemplated by the
Advisory Agreement without violation of the Glass-Steagall Act. However, there
are no controlling judicial or administrative interpretations or decisions, and
future judicial or administrative interpretations of, or decisions relating to,
present federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as future
changes in federal or state statutes and regulations and judicial or
administrative decisions or interpretations thereof, could prevent The Asset
Management Group from continuing to perform, in whole or in part, such services.
If The Asset Management Group were prohibited from performing any of such
services, the Trust expects that new agreements would be entered into with
another entity or entities qualified to perform such services.
From time to time, the Funds, to the extent consistent with their
investment objectives, policies and restrictions, may invest in securities of
companies with which The Asset Management Group has a lending relationship.
SUB-ADVISERS
Nicholas Applegate Capital Management serves as Sub-Adviser to
International Stock Fund and Small Cap Funds. CMG First State (Hong Kong) LLC
serves as Sub-Adviser to New Asia Growth Fund. Pursuant to sub-advisory
agreements with The Asset Management Group (each a "Sub-Advisory Agreement"),
each Sub-Adviser provides a continuous investment program, including investment
research and management with respect to all securities and investments and cash
equivalents in the Funds, subject to supervision of The Asset Management Group
and the Board of Trustees.
For its services, The Asset Management Group pays the Sub-Advisers a
fee, computed daily and payable quarterly, equal on an annual basis, to 0.65% of
the average daily net assets of International Stock Fund, 0.60% of the average
daily net assets of Small Cap Fund and 0.50% of New Asia Growth Fund's average
daily net assets. The Sub-Advisers' fees are paid by The Asset Management Group,
and the Funds do not pay any incremental fees for the services of the
Sub-Advisers. For the fiscal years ended July 31, 1999, July 31, 1998 and July
31, 1997, The Asset Management Group paid sub-advisory fees to the Sub-Advisers
and their predecessors in the amount of $82,806, $91,615, and $141,522,
respectively, for services provided to New Asia Growth Fund; $264,683, $0 and
$0, respectively, for services provided to International Stock Fund; and
$122,751, $0 and $0, respectively, for services provided to Small Cap Fund.
Each Sub-Advisory Agreement has provisions limiting the liability of
the Sub-Adviser similar to those in the Advisory Agreement. The Sub-Advisory
Agreements will continue in effect beyond their initial two year terms, provided
their continuance is approved annually in the same manner as the Advisory
Agreement. Each Sub-Advisory Agreement may be terminated at any time with
respect to a Fund without penalty on 60 days' written notice by either party, by
the Board of Trustees or by the vote of a majority of the Fund's outstanding
voting securities. Each Sub-Advisory Agreement will terminate automatically if
assigned.
37
<PAGE> 38
ADMINISTRATOR AND DISTRIBUTOR
Under its Administration Agreement with the Trust, BISYS Fund Services
Ohio, Inc. ("BISYS Ohio") furnishes the Trust with office facilities, together
with those ordinary clerical and bookkeeping services that are not being
furnished by The Asset Management Group. BISYS and BISYS Ohio are each a
wholly-owned subsidiary of The BISYS Group, Inc. For expenses assumed and
services provided as administrator pursuant to the Administration Agreement,
BISYS Ohio is entitled to receive a fee from each Fund, computed daily and paid
monthly, at an annual rate equal to 0.20% of the average daily net assets of the
Fund. BISYS served the Trust as administrator under the predecessor to the
current Administration Agreement. The following table sets forth the aggregate
fees paid, after giving effect to fee waivers, by each Fund to BISYS for
services provided pursuant to the predecessor to the current Administration
Agreement for the fiscal years ended July 31, 1999, July 31, 1998, and July 31,
1997:
Compensation Paid to BISYS
Under the Administration Agreement
(after waivers)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Fund July 31, 1999 July 31, 1998 July 31, 1997
---- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Diversified Fixed Income $296,134 $239,145 $231,432
Fund
Growth and Income Fund $281,411 $230,680 $153,729
Growth Stock Fund $634,822 $493,777 $299,912
New Asia Growth Fund $ 24,842 $ 27,517 $ 24,883
Short Intermediate U.S. $ 42,639 $ 44,959 $ 35,823
Treasury Securities Fund
Tax-Free Securities Fund $683,385 $596,120 $468,348
Tax-Free Short Intermediate $ 75,071 $ 71,559 $ 58,644
Securities Fund
U.S. Treasury Securities $ 37,064 $ 36,713 $ 38,792
Fund
International Stock Fund $ 64,936 N/A N/A
Value Fund $ 63,529 N/A N/A
Small Cap Fund $ 32,734 N/A N/A
Balanced Fund $ 34,191 N/A N/A
</TABLE>
38
<PAGE> 39
The Administration Agreement contains provisions limiting the liability
of BISYS Ohio and requiring its indemnification by the Trust similar to those in
the Advisory Agreement. The Administration Agreement will continue in effect
until December 31, 2001, and from year to year thereafter, unless terminated at
any time by either party for cause (as defined in the Agreement), or at the end
of any such period, on 60 days' written notice. If the Agreement is terminated
by the Trust prior to the end of any such period for any reason other than
cause, the Trust is required to make a one-time liquidated damages payment to
BISYS Ohio equal to the lesser of one year's fees or the fees due for the
balance of the term.
The Trust has also retained BISYS Ohio to provide the Trust with
certain fund accounting services pursuant to a Fund Accounting Agreement. For
services provided under the Agreement, BISYS Ohio is entitled to receive a fee
from each Fund, computed and paid monthly, at an annual rate equal to 0.03% of
the average daily net assets of the Fund up to $300 million, 0.025% of the next
$250 million of average daily net assets, and 0.02% of the Fund's average daily
net assets in excess of $550 million. The term of the Agreement, and its
provisions regarding termination, limitation of liability, and indemnification,
are similar to those of the Trust's Administration Agreement with BISYS Ohio.
The following table sets forth the aggregate fees paid by each Fund to
BISYS Ohio for fund accounting services for the fiscal years ended July 31,
1999, July 31, 1998 and July 31, 1997 under the predecessor to the current Fund
Accounting Agreement.
Compensation Paid to BISYS Ohio
Under the Fund Accounting Agreement
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
Fund July 31, 1999 July 31, 1998 July 31, 1997
------ ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Diversified Fixed $ 63,480 $ 50,336 $ 48,581
Income Fund
Growth and Income $ 57,307 $ 46,806 $ 31,379
Fund
Growth Stock Fund $117,822 $ 95,895 $58,423
New Asia Growth Fund $ 13,599 $ 15,396 $ 11,733
Short Intermediate $ 10,544 $ 11,124 $ 8,990
U.S. Treasury
Securities Fund
Tax-Free Securities Fund $144,718 $140,761 $ 98,573
Tax-Free Short $ 21,449 $ 19,894 $ 17,205
Intermediate
Securities Fund
U.S. Treasury $ 9,234 $ 8,904 $ 8,369
Securities Fund
International Stock Fund $ 21,774 N/A N/A
Value Fund $ 14,721 N/A N/A
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C> <C> <C>
Small Cap Fund $ 9,600 N/A N/A
Balanced Fund $ 7,781 N/A N/A
</TABLE>
BISYS Fund Services Limited Partnership d/b/a/ BISYS Fund Services
("BISYS") has also entered into a Distribution Agreement with the Trust pursuant
to which it engages in a continuous distribution of shares of the Funds. For its
services, BISYS is entitled to a distribution fee, as set forth in the
Distribution and Shareholder Service Plans for each of the Class A and Class B
shares ("Class A Distribution Plan" and "Class B Distribution Plan,"
respectively). The Class A Distribution Plan and the Class B Distribution Plan
have been adopted pursuant to Rule 12b-1 under the 1940 Act. See "Distribution
and Shareholder Service Plans" below.
Pursuant to the Distribution Agreement, BISYS has agreed to use
appropriate efforts to solicit orders for sales of shares of the Funds, but is
not obligated to sell and specified number of shares. The Distribution Agreement
contains provisions with respect to renewal and termination similar to those in
the Advisory Agreement. Pursuant to the Distribution Agreement, the Trust has
agreed to indemnify BISYS to the extent permitted by applicable law against
certain liabilities under the Securities Act and the 1940 Act.
BISYS Ohio and Cantor Fitzgerald & Co. have also entered into a
Securities Lending Agreement with the Trust, pursuant to which BISYS Ohio
provides certain administrative services in connection with the Trust's
securities lending program, which is implemented through Cantor Fitzgerald as
lending agent. Pursuant to the Agreement, the Trust pays BISYS Ohio 35% of the
total monthly earnings derived from the lending program, and BISYS Ohio pays
Cantor Fitzgerald's fees.
As of the date of this Statement of Additional Information the Trust's
lending program has not commenced operations. Pursuant to the Securities Lending
Agreement, the Trust has agreed to indemnify BISYS Ohio against certain
liabilities other than those arising as a result of its gross negligence or
willful misconduct.
TRANSFER AGENT
BISYS Fund Services, Inc., also a wholly-owned subsidiary of The BISYS
Group, Inc., serves as Transfer Agent for each of the Funds.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under
Rule 17j-1 of the Investment Company Act (the"Code"). The Code restricts the
investing activities of Fund officers, Trustees and advisory persons and, as
described below, imposes additional, more onerous restrictions on Fund
investment personnel.
All persons covered by the Code are required to preclear any personal
securities investment (with limited exceptions, such as government securities)
and must comply with ongoing requirements concerning recordkeeping and
disclosure of personal securities investments. The preclearance requirement and
associated procedures are designed to identify any prohibition or limitation
applicable to a proposed investment. In addition, all persons covered by the
Code are prohibited from purchasing or selling any security which, to such
person's knowledge, is being purchased or sold (as the case maybe), or is being
considered for purchase or sale, by a Fund. Investment personnel are subject to
additional restrictions such as a ban on acquiring securities in an initial
public offering, "blackout periods" which prohibit trading by investment
personnel of a Fund within periods of trading by the Fund in the same security
and a ban on short-term trading in securities.
40
<PAGE> 41
DISTRIBUTION AND SHAREHOLDER SERVICE PLANS
The Trust has adopted for the Class A and Class B shares of each of the
Funds the Class A Distribution Plan and the Class B Distribution Plan under
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. The Class A
Distribution Plan and the Class B Distribution Plan of each of the Funds were
adopted by the Board of Trustees, including a majority of the trustees who were
not "interested persons" (as defined in the 1940 Act) of the Funds and who had
no direct or indirect financial interest in the operation of the Distribution
Plans or in any agreement related to the Distribution Plans (the "Qualified
Trustees").
The Board of Trustees approved the Plans to stimulate sales of shares
of the Funds in the face of competition from a variety of other investment
companies and financial products, in view of the potential advantages to
shareholders of the Funds of continued growth of the asset bases of the Funds,
including greater liquidity, more investment flexibility and achievement of
greater economies of scale.
The Class A Distribution Plan provides that BISYS is entitled to
receive from each Fund a fee in an amount not to exceed on an annual basis 0.75%
of the average daily net asset value of the Fund attributable to the Fund's
Class A shares. The Class B Distribution Plan provides that BISYS is entitled to
receive from each Fund a fee in an amount not to exceed on an annual basis 1.00%
of the average daily net asset value of the Fund attributable to the Fund's
Class B shares. The distribution fee compensates BISYS for the following: (a)
payments BISYS makes to banks and other institutions and industry professionals,
such as broker/dealers, including The Asset Management Group, BISYS and their
affiliates or subsidiaries, pursuant to agreements in connection with providing
sales and/or administrative support services to the holders of a Fund's Class A
and Class B shares; and (b) payments to financial institutions and industry
professionals (such as insurance companies, investment counselors, and BISYS'
affiliates and subsidiaries) for distribution services provided and expenses
assumed in connection with distribution assistance, including, but not limited
to, printing and distributing prospectuses to persons other than current Class A
and Class B shareholders of a Fund, printing and distributing advertising and
sales literature and reports to Class A and Class B shareholders in connection
with the sale of a Fund's shares, and providing personnel and communication
equipment used in servicing shareholder accounts and prospective Class A and
Class B shareholder inquiries.
Until further notice, BISYS voluntarily intends to waive a portion of
the Class A distribution fee for the current fiscal year to limit the fee to
0.25% of the average daily net assets value attributed to Class A shares on an
annual basis. The distribution fees are paid to BISYS only to compensate or
reimburse it for actual payments or expenses incurred as described above. The
distribution fees paid by the Funds to BISYS for services provided under the
Class A and Class B Distribution Plans for the fiscal year ended July 31,1999,
restated to reflect fee waivers, are set forth in the table below.
41
<PAGE> 42
Distribution fees paid under the Class A and Class B Distribution Plans
were as follows:
<TABLE>
<CAPTION>
Aggregate Distribution Fees Paid
for Fiscal Year Ended July 31, 1999
(after waiver)
-------------------------------------------
Class A Class B
------------------- -------------------
Retained Retained
by Paid to by Paid to
Fund BISYS Others BISYS Others
------ -------- --------- -------- --------
<S> <C> <C> <C> <C>
Diversified Fixed Income Fund $ 570 $ 5,073 $1,226 $ 8,392
Growth and Income Fund 1,710 20,035 6,908 39,491
Growth Stock Fund 6,986 32,499 4,477 37,216
New Asia Growth Fund 147 4,359 186 1,013
Short Intermediate U.S. Treasury 53 1,684 N/A N/A
Securities Fund
Tax-Free Securities Fund 5,899 4,664 1,025 5,305
Tax-Free Short Intermediate Securities 125 1,793 N/A N/A
Fund
U.S. Treasury Securities Fund - 3,057 N/A N/A
International Stock Fund 8 59 7 153
Value Fund 11 137 8 1,260
Small Cap Fund 8 80 11 259
Balanced Fund 5 6 8 122
</TABLE>
The Class A Distribution Plan and Class B Distribution Plan will
continue in effect from year to year if such continuance is approved by a
majority vote of both the Trustees of the Trust and the Qualified Trustees. Each
Distribution Plan may be terminated at any time with respect to any Fund,
without payment of any penalty, by a vote of a majority of the outstanding
voting securities of the appropriate class of the Fund. A Distribution Plan may
not be amended to increase materially the amounts payable thereunder by a Fund
without the approval of a majority of the outstanding voting securities of the
appropriate class of the Fund, and no material amendment to the Distribution
Plans may be made except by a majority of both the Trustees of the Trust and the
Qualified Trustees.
42
<PAGE> 43
CALCULATION OF YIELD AND TOTAL RETURN
YIELD
The Funds may advertise certain yield information. As and to the extent
required by the Commission, yield will be calculated based on a 30-day (or one
month) period, computed by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[( a-b ) to the 6th power - 1]
---
cd
where a = dividends and interest earned during the period; b = expenses accrued
for the period (net of reimbursements); c = the average daily number of shares
outstanding during the period that were entitled to receive dividends; and d =
the maximum offering price per share on the last day of the period. The net
investment income of the Funds includes actual interest income, plus or minus
amortized purchase discount (which may include original issue discount) or
premium, less accrued expenses. Realized and unrealized gains and losses on
portfolio securities are not included in the Funds' net investment income. For
purposes of sales literature, yield on Class A shares also may be calculated on
the basis of the net asset value per share rather than the public offering
price, provided that the yield data derived pursuant to the calculation
described above also are presented.
The tax-equivalent yield for the Tax-Free Funds also may be computed by
dividing that portion of the yield of the Funds which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Funds that is not tax-exempt.
The yields for the Funds will fluctuate from time to time, unlike bank
deposits or other investments that pay a fixed yield for a stated period of
time, and do not provide a basis for determining future yields since they are
based on historical data. Yield is a function of portfolio quality, composition,
maturity and market conditions as well as the expenses allocated to the Funds.
In addition, investors should recognize that changes in the net asset
values of shares of the Funds will affect the yields of such Funds for any
specified period, and such changes should be considered together with a Fund's
yield in ascertaining the Fund's total return to shareholders for the period.
Yield information for the Funds may be useful in reviewing the performance of
the Funds and for providing a basis for comparison with investment alternatives.
The yield of a Fund, however, may not be comparable to the yields from
investment alternatives because of differences in the foregoing variables and
differences in the methods used to value portfolio securities, compute expenses
and calculate yield.
TOTAL RETURN
The Funds may advertise certain total return information. As and to the
extent required by the Commission, an average annual compound rate of return
("T") will be computed by using the value at the end of a specified period
("ERV") of a hypothetical initial investment ("P") over a period of years ("n")
according to the following formula:
ERV = P(1+T) to the Nth Power
Aggregate total return will be calculated similarly to average annual total
return except that the return figure will be aggregated over the relevant period
rather than annualized. In addition, the Funds may also, at times, calculate
total return of Class A shares based on net asset value per share (rather than
the public offering price), in which case the figures would not reflect the
effects of any sales charges that would have been paid
43
<PAGE> 44
by an investor, or based on the assumption that a sales charge other than the
maximum sales charge (reflecting a volume discount) was assessed, provided that
total return data for the Class A shares derived pursuant to the calculation
described above also are presented.
OTHER INFORMATION
From time to time, the Trust may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of compounding and the benefits of dollar-cost averaging); (2)
discussions of general economic trends; (3) presentations of statistical data to
supplement such discussions; (4) descriptions of past or anticipated portfolio
holdings for one or more of the Funds; (5) descriptions of investment strategies
for one or more of the Funds; (6) descriptions or comparisons of various savings
and investment products (including, but not limited to, insured bank products,
annuities, qualified retirement plans and individual stocks and bonds), which
may or may not include the Funds; (7) comparisons of investment products
(including the Funds) with relevant market or industry indices or other
appropriate benchmarks; (8) discussions of Fund rankings or ratings by
recognized rating organizations; and (9) testimonials describing the experience
of persons that have invested in one or more of the Funds. The Trust may also
include calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any of the Funds.
From time to time, the Trust may also quote the Funds' performance in
advertising and other types of literature as compared to the performance of the
S&P 500 Index, the Dow Jones Industrial Average, indices of bonds, stocks or
government securities, and other mutual funds or mutual fund portfolios with
comparable investment objectives and policies. This information may be based on
data relating to various mutual fund or market indices such as those prepared by
Dow Jones & Co., Inc. and Standard & Poor's Corporation or data prepared by
Lipper. Comparisons may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Institutional Investor, Pensions and
Investments, USA Today, Fortune, CDA/Wiesenberger, Ibbotson Associates, Inc.,
Morningstar and local newspapers and periodicals.
The S&P 500 Index and the Dow Jones Industrial Average are unmanaged
indices of selected common stock prices. The investment results of the Funds
also may be compared, in reports and promotional literature, to the performance
of the Consumer Price Index, the Salomon One Year Treasury Benchmark Index, the
Ten Year U.S. Government Bond Average, S&P's Corporate Bond Yield Averages, the
Schabacker Investment Management Indices, the Salomon Brothers High Grade Bond
Index, the Lehman Brothers Long-Term High Quality Government/Corporate Bond
Index, the Lehman Brothers 20+ Treasury Index, the Lehman Brothers 5-7 Year
Treasury Index, and Bank Averages (which are calculated from figures supplied by
the U.S. League of Savings Institutions based on effective annual rates of
interest on both passbook and certificate accounts). This comparative
performance could be expressed as a ranking prepared by Lipper Analytical
Services, Inc., CDA/Wiesenberger or Morningstar, Inc., independent services
which monitor the performance of mutual funds. The Funds' performance will be
calculated by relating net asset value per share at the beginning of a stated
period to the net asset value of the investment, assuming reinvestment of all
gains distributions and dividends paid, at the end of the period. Any such
comparisons may be useful to investors who wish to compare a Fund's past
performance with that of its competitors. Of course, past performance cannot be
a guarantee of future results.
The Trust also may discuss in advertising and other types of literature
that one or more of the Funds has been assigned a rating by an NRSRO such as
Standard & Poor's Corporation. Such rating would assess the creditworthiness of
the investments held by a Fund. The assigned rating would not be a
recommendation to purchase, sell or hold the Fund's shares since the rating
would not comment on the market price of the Fund's shares or the suitability of
the Fund for a particular investor. In addition, the assigned rating would be
subject to change, suspension or withdrawal as a result of changes in, or
unavailability of, information relating
44
<PAGE> 45
to a Fund or its investments. The Trust may compare a Fund's performance with
other investments which are assigned ratings by NRSROs. Any such comparisons may
be useful to investors who wish to compare the Fund's past performance with
other rated investments.
PAST PERFORMANCE OF THE FUNDS
The tables below set forth total return and yield information for the
Class A, Class B and Class Y shares of the Funds. Information for Class B shares
of the Funds, other than Balanced Fund, Value Fund, International Stock Fund and
Small Cap Fund, is based on the information for the Class A Shares (adjusted for
deferred sales loads), because these shares were not offered until March 1998.
Information for Class B shares of these Funds for periods prior to their
commencement of operations in March 1998 has not been adjusted for expenses
applicable to the Class B shares, specifically the difference in 12b-1 fees
charged to Class A and Class B shares. Future performance for Class B shares
will be affected by the difference in 12b-1 fees charged.
DIVERSIFIED FIXED INCOME FUND
The average annual and aggregate total return for the Diversified Fixed
Income Fund includes the performance of a common trust fund ("Commingled")
account advised by The Asset Management Group and managed the same as the Fund
in all material respects, for periods dating back to October 31, 1977, and prior
to commencement of operations of the Fund's Class A, B and Y shares. Such
performance is adjusted to reflect the expenses associated with the Fund. The
Commingled account was not registered with the Commission under the 1940 Act,
and therefore was not subject to the investment restrictions imposed by law on
registered mutual funds. If the Commingled account had been registered, the
Commingled account's performance may have been adversely affected.
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
------------------------------- ------------------------------ ----------------------------------
Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a value of a as a value of a as a value of a
percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000 based on a $1000
hypothetical investment hypothetical investment hypothetical investment
$1000 at the end $1000 at the end $1000 at the end
Period investment of the period investment of the period investment of the period
-------- -------------- ---------------- ------------- ------------- ------------- ---------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
One year ended
July 31, 1999 -2.98% $ 970 -3.55% $ 965 1.10% $ 1,011
Five years ended
July 31, 1999 5.40% $ 1,301 5.90% $ 1,332 6.63% $ 1,378
Ten years ended
July 31, 1999 6.46% $ 1,869 6.79% $ 1,929 7.20% $ 2,004
Inception* to
July 31, 1999 3.86% $ 2,278 4.00% $ 2,349 4.33% $ 2,512
</TABLE>
45
<PAGE> 46
Aggregate Total Return
(including maximum applicable sales charge)**
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
One year ended
July 31, 1999 -2.98% $ 970 -3.55% $ 965 1.10% $1,011
Five years ended
July 31, 1999 30.06% $1,301 33.20% $1,332 37.80% $1,378
Ten years ended
July 31, 1999 86.93% $1,869 92.91% $1,929 100.41% $2,004
Inception* to
July 31, 1999 127.81% $2,278 134.86% $2,349 151.23% $2,512
</TABLE>
Yield
(including maximum applicable sales charge)**
<TABLE>
<S> <C> <C> <C>
30 Days ended
July 31, 1999 5.31% 4.78% 5.79%
--------------------------------
</TABLE>
* Class A and Class Y shares of the Fund commenced operation on October
4, 1994. The Class B shares of the Fund commenced operation on March 2,
1998.
** The maximum applicable sales charge on the Class A shares is 4.0%. The
maximum deferred sales charge on the Class B shares is 5.0%. There is
no sales charge imposed in connection with the purchase of Class Y
shares.
GROWTH AND INCOME FUND
The average annual and aggregate total return for the Growth and Income
Fund includes the performance of a common trust fund ("Commingled") account
advised by The Asset Management Group and managed the same as the Fund in all
material respects, for periods dating back to October 31, 1977, and prior to
commencement of operations of the Fund's Class A, B and Y shares. Such
performance is adjusted to reflect the expenses associated with the Fund. The
Commingled account was not registered with the Commission under the 1940 Act,
and therefore was not subject to the investment restrictions imposed by law on
registered mutual funds. If the Commingled account had been registered, the
Commingled account performance may have been adversely affected.
46
<PAGE> 47
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
----------------------------------- --------------------------------- -------------------------------
Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a value of a as a value of a as a value of a
percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000 based on a $1000
hypothetical investment hypothetical investment hypothetical investment
$1000 at the end $1000 at the end $1000 at the end
Period investment of the period investment of the period investment of the period
------ --------------- ------------- ------------ ------------- --------------- ----------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
One year ended
July 31, 1999 9.12% $ 1,091 8.59% $ 1,086 13.69% $ 1,137
Five years ended
July 31, 1999 20.67% $ 2,558 21.28% $ 2,624 21.89% $ 2,691
Ten years ended
July 31, 1999 13.14% $ 3,437 13.46% $ 3,536 13.85% $ 3,659
Inception * to
July 31, 1999 11.27% $10,203 11.41% $10,493 11.73% $11,165
Aggregate Total Return
(including maximum applicable sales charge)**
One year ended
July 31, 1999 9.12% $ 1,091 8.59% $ 1,086 13.69% $ 1,137
Five years ended
July 31, 1999 155.84% $ 2,558 162.41% $ 2,624 169.09% $ 2,691
Ten years ended
July 31, 1999 243.70% $ 3,437 253.63% $ 3,536 295.93% $ 3,659
Inception* to
July 31, 1999 920.33% $10,203 949.32% $10,493 1,016.47% $11,165
Yield
(including maximum applicable sales charge)**
30 Days ended
July 31, 1999 -0.12% -0.89% 0.13%
----------------------------
</TABLE>
* Class A and Class Y shares of the Fund commenced operation on October
14, 1994. The Class B shares of the Fund commenced operation on March 2,
1998.
** The maximum applicable sales charge on the Class A shares is 4.0%. The
maximum deferred sales
47
<PAGE> 48
charge on the Class B shares is 5.0%. There is no sales charge imposed
in connection with the purchase of Class Y shares.
GROWTH STOCK FUND
The average annual and aggregate total return for the Growth Stock Fund
includes the performance of a common trust fund ("Commingled") account advised
by The Asset Management Group and managed the same as the Fund in all material
respects, for periods dating back to October 31, 1977, and prior to commencement
of operations of the Fund's Class A, B and Y shares. Such performance is
adjusted to reflect the expenses associated with the Fund. The Commingled
account was not registered with the Commission under the 1940 Act, and therefore
was not subject to the investment restrictions imposed by law on registered
mutual funds. If the Commingled account had been registered, the Commingled
account's performance may have been adversely affected.
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
------------------------------- ---------------------------------- -------------------------------
Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a value of a as a value of a as a value of a
percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000 based on a $1000
hypothetical investment hypothetical investment hypothetical investment
$1000 at the end $1000 at the end $1000 at the end
Period investment of the period investment of the period investment of the period
------ -------------- --------------- -------------- ---------------- ---------------- ---------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
One year ended
July 31, 1999 12.70% $ 1,127 12.65% $ 1,127 17.72% $ 1,177
Five years ended
July 31, 1999 20.90% $ 2,583 21.58% $ 2,657 22.20% $ 2,725
Ten years ended
July 31, 1999 15.23% $ 4,128 15.60% $ 4,263 16.01% $ 4.414
Inception* to
July 31, 1999 13.19% $14,792 13.35% $15,254 13.71% $16,345
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
------------------------------- ------------------------------- -------------------------------
Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a value of a as a value of a as a value of a
percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000 based on a $1000
hypothetical investment hypothetical investment hypothetical investment
$1000 at the end $1000 at the end $1000 at the end
Period investment of the period investment of the period investment of the period
------ ------------ ------------- ------------ ------------- ------------ -------------
Aggregate Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
One year ended
July 31, 1999 12.70% $ 1,127 12.65% $ 1,127 17.72% $ 1,177
Five years ended
July 31, 1999 158.29% $ 2,583 165.68% $ 2,657 172.53% $ 2,725
Ten years ended
July 31, 1999 312.82% $ 4,128 326.32% $ 4,263 341.39% $ 4,414
Inception* to
July 31, 1999 1,379.25% $14,792 1,425.40% $15,254 1,534.49% $16,345
Yield
(including maximum applicable sales charge)**
30 Days ended
July 31, 1999 -0.68% -1.46% -0.44%
-----------------------------------------
</TABLE>
* Class A and Class Y shares of the Fund commenced operation on October
14, 1994. The Class B shares of the Fund commenced operation on March 2,
1998.
** The maximum applicable sales charge on the Class A shares is 4.0%. The
maximum deferred sales charge on the Class B shares is 5.0%. There is no
sales charge imposed in connection with the purchase of Class Y shares.
49
<PAGE> 50
SHORT INTERMEDIATE U.S. TREASURY SECURITIES FUND
<TABLE>
<CAPTION>
Class A* Class Y*
---------------------------------- ------------------------------------
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000
hypothetical investment hypothetical investment
$1000 at the end $1000 at the end
Period investment of the period investment of the period
------ --------------- ---------------- ------------ ----------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C>
One year ended
July 31, 1999 0.49% $1,005 3.05% $1,031
Five years ended
July 31, 1999 4.73% $1,260 5.50% $1,037
Inception* to
July 31, 1999 3.68% $1,225 4.35% $1,271
</TABLE>
<TABLE>
<CAPTION>
Class A* Class Y*
----------------------------------- ------------------------------------
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000
hypothetical investment hypothetical investment
$1000 at the end $1000 at the end
Period investment of the period investment of the period
------ --------------- --------------- --------------- ----------------
Aggregate Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C>
One year ended
July 31, 1999 0.51% $ 1,005 3.07% $ 1,031
Five years ended
July 31, 1999 25.98% $ 1,260 30.69% $ 1,307
Inception* to
July 31, 1999 22.52% $ 1,225 27.09% $ 1,271
Yield
(including maximum applicable sales charge)**
30 Days ended
July 31, 1999 4.84% 5.21%
-----------------------------------------
</TABLE>
50
<PAGE> 51
* Class A shares of the Fund commenced operation on December 13, 1993.
Class Y shares of the Fund commenced operation on October 14, 1994.
** The maximum applicable sales charge on the Class A shares of the Fund is
2.25%. The maximum deferred sales charge on the Class B shares is 5.0%.
There is no sales charge imposed in connection with the purchase of
Class Y shares of either Fund.
NEW ASIA GROWTH FUND
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
------------------------------- ------------------------------- -------------------------------
Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a value of a as a value of a as a value of a
percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000 based on a $1000
hypothetical investment hypothetical investment hypothetical investment
$1000 at the end $1000 at the end $1000 at the end
Period investment of the period investment of the period investment of the period
------ -------------- --------------- -------------- --------------- --------------- ----------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
One year ended 58.26% $1,583 61,66% $1,617 67.38% $1,674
July 31, 1999
Inception* to
July 31, 1999 3.50% $1,166 4.14% $1,198 4.97% $1,241
Aggregate Total Return
(including maximum applicable sales charge)**
One year ended
July 31, 1999 58.26% $1,583 61.66% $1,617 67.38% $1,674
Inception* to
July 31, 1999 16.56% $1,166 19.81% $1,198 24.10% $1,241
-----------------------------------------
</TABLE>
* The Class A and Class Y shares of the Fund commenced operation on
February 15, 1995. Class B shares of the Fund commenced operation on
March 2, 1998.
** The maximum applicable sales charge on the Class A shares of the Fund is
5.25%. The maximum deferred sales charge on Class B shares is 5.0%.
There is no sales charge imposed in connection with the purchase of
Class Y shares of either Fund.
51
<PAGE> 52
TAX FREE SECURITIES FUND
The average annual and aggregate total return for the Tax Free
Securities Fund includes the performance of a common trust fund ("Commingled")
account advised by The Asset Management Group and managed the same as the Fund
in all material respects, for periods dating back to October 31, 1977, and prior
to commencement of operations of the Fund's Class A, B and Y shares. Such
performance is adjusted to reflect the expenses associated with the Fund. The
Commingled account was not registered with the Commission under the 1940 Act,
and therefore was not subject to the investment restrictions imposed by law on
registered mutual funds. If the Commingled account had been registered, the
Commingled account's performance may have been adversely affected.
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
---------------------------------- ------------------------------- -------------------------------
Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a value of a as a value of a as a value of a
percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000 based on a $1000
hypothetical investment hypothetical investment hypothetical investment
$1000 at the end $1000 at the end $1000 at the end
Period investment of the period investment of the period investment of the period
------ -------------- ---------------- -------------- --------------- --------------- --------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
One year ended
July 31, 1999 -2.07% $ 979 -2.47% $ 975 -2.26% $1,023
Five years ended
July 31, 1999 4.85% $1,267 5.41% $1,301 6.06% $1,342
Ten years ended
July 31, 1999 5.77% $1,752 6.13% $1,814 6.51% $1,879
Inception* to
July 31, 1999 2.81% $1,826 2.97% $1,890 3.27% $2,014
Aggregate Total Return
(including maximum applicable sales charge)**
One year
ended July
31, 1999 -2.07% $ 979 -2.47% $ 975 -2.26% $1,023
Five years
ended July
31, 1999 26.68% $1,267 30.14% $1,301 34.16% $1,342
Ten years
ended July
31, 1999 75.22% $1,752 81.36% $1,814 87.90% $1,879
Inception* to
July 31, 1999 82.57% $1,826 89.03% $1,890 101.44% $2,014
</TABLE>
52
<PAGE> 53
Yield
(including maximum applicable sales charge)**
30 Days Ended
July 31, 1999 4.00% 3.43% 4.42%
-----------------------------------------
* Class A and Class Y shares of the Fund commenced operation on October
14, 1994. Class B shares of the Fund commenced operation on March 2,
1998.
** The maximum applicable sales charge on the Class A shares is 4.0%. The
maximum deferred sales charge on the Class B shares is 5.0%. There is no
sales charge imposed in connection with the purchase of Class Y shares.
TAX FREE SHORT INTERMEDIATE SECURITIES FUND
The average annual and aggregate total return for the Tax Free
Short-Intermediate Securities Fund includes the performance of a common trust
fund ("Commingled") account advised by The Asset Management Group and managed
the same as the Fund in all material respects, for periods dating back to March
31, 1988, and prior to commencement of operations of the Fund's Class A and Y
shares. Such performance is adjusted to reflect the expenses associated with the
Fund. The Commingled account was not registered with the Commission under the
1940 Act, and therefore was not subject to the investment restrictions imposed
by law on registered mutual funds. If the Commingled account had been
registered, the Commingled account's performance may have been adversely
affected.
53
<PAGE> 54
<TABLE>
<CAPTION>
Class A* Class Y*
------------------------------- -------------------------------
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000
hypothetical investment hypothetical investment
$1000 at the end $1000 at the end
Period investment of the period investment of the period
------ --------------- --------------- --------------- ----------------
Aggregate Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C>
One year ended
July 31, 1999 0.16% $1,002 3.91% $1,211
Five years ended
July 31, 1999 3.10% $1,165 2.60% $1,026
Ten years ended
July 31, 1999 4.19% $1,507 4.73% $1,587
Inception* to
July 31, 1999 4.07% $1,572 4.58% $1,661
Aggregate Total Return
(including maximum applicable sales charge)**
One year ended
July 31, 1999 0.16% $1,002 2.60% $1,026
Five years ended
July 31, 1999 16.46% $1,165 21.14% $1,211
Ten years ended
July 31, 1999 50.69% $1,507 58.68% $1,587
Inception* to
July 31, 1999 57.23% $1,572 66.06% $1,661
Yield
(including maximum applicable sales charge)**
30 days ended
July 31, 1999 3.23% 3.56%
-----------------------------------------
</TABLE>
* Class A and Class Y shares of the Fund commenced operation on October
14, 1994. Class B shares of the Fund commenced operation on March 2,
1998.
** The maximum applicable sales charge on the Class A shares is 4.0%. The
maximum deferred sales charge on the Class B shares is 5.0%. There is no
sales charge imposed in connection with the purchase of Class Y shares.
54
<PAGE> 55
U.S. TREASURY SECURITIES FUND
The average annual and aggregate total return for the U.S. Treasury
Securities Fund includes the performance of a common trust fund ("Commingled")
account advised by The Asset Management Group and managed the same as the Fund
in all material respects, for periods dating back to December 31, 1984, and
prior to commencement of operations of the Fund's Class A and Y shares. Such
performance is adjusted to reflect the expenses associated with the Fund. The
Commingled account was not registered with the Commission under the 1940 Act,
and therefore was not subject to the investment restrictions imposed by law on
registered mutual funds. If the Commingled account had been registered, the
Commingled account's performance may have been adversely affected.
<TABLE>
<CAPTION>
Class A* Class Y*
------------------------------- -------------------------------
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1000 based on a $1000
hypothetical investment hypothetical investment
$1000 at the end $1000 at the end
Period investment of the period investment of the period
------ --------------- --------------- --------------- ----------------
Average Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C>
One year ended
July 31, 1999 -2.64% $ 974 1.65% $1,017
Five years ended
July 31, 1999 5.39% $1,300 6.53% $1,372
Ten years ended
July 31, 1999 6.28% $1,838 6.92% $1,952
Inception* to
July 31, 1999 7.87% $3,017 8.38% $3,232
Aggregate Total Return
(including maximum applicable sales charge)**
One year ended
July 31, 1999 -2.64 $ 974 1.65% $1,017
Five years ended
July 31, 1999 30.02% $1,300 37.18% $1,372
Ten years ended
July 31, 1999 83.81% $1,838 95.21% $1,952
Inception* to
July 31, 1999 201.66% $3,017 223.22% $3,232
</TABLE>
55
<PAGE> 56
Yield
(including maximum applicable sales charge)**
30 days ended
July 31, 1999 4.90% -- 5.35%
-----------------------------------------
* Class A and Class Y shares of the Fund commenced operation on October
14, 1994. Class B shares of the Fund commenced operation on March 2,
1998.
** The maximum applicable sales charge on the Class A shares is 4.0%. The
maximum deferred sales charge on the Class B shares is 5.0%. There is no
sales charge imposed in connection with the purchase of Class Y shares.
INTERNATIONAL STOCK FUND
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
------------------------------ ------------------------------ -----------------------------------
Redeemable Redeemable Redeemable
Expressed as value of a Expressed as value of a Expressed as value of a
a percentage hypothetical a percentage hypothetical a percentage hypothetical
based on a $1,000 based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at hypothetical investment
$1,000 the end of $1,000 the end of $1,000 at the end
Period investment the period investment the period investment of the period
---------------- -------------- --------------- -------------- --------------- -------------- ----------------
Average Annual Total Return
(including maximum applicable sales charge)**
Inception* to
<S> <C> <C> <C> <C> <C> <C>
July 31, 1999 20.83% $1,134 21.85% $1,140 31.49% $1,199
Aggregate Total Return
(including maximum applicable sales charge)**
Inception* to
July 31, 1999 13.36% $1,134 14.00% $1,140 19.90% $1,199
-----------------------------------------------------------------
</TABLE>
* The Class A, B and Y shares of the Fund commenced operations on
December 8, 1998, December 20, 1998 and December 2, 1998, respectively.
** The maximum applicable sales charge on the Class A shares of the Fund
is 5.25%. The maximum deferred sales charge on Class B shares is 5.0%.
There is no sales charge imposed in connection with the purchase of
Class Y shares.
56
<PAGE> 57
VALUE FUND
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
------------------------------ ------------------------------ -----------------------------------
Redeemable Redeemable Redeemable
Expressed as value of a Expressed as value of a Expressed as value of a
a percentage hypothetical a percentage hypothetical a percentage hypothetical
based on a $1,000 based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at hypothetical investment
$1,000 the end of $1,000 the end of $1,000 at the end
Period investment the period investment the period investment of the period
---------------- -------------- --------------- -------------- --------------- -------------- ----------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
Inception* to
July 31, 1999 6.01% $1,039 4.38% $1,029 13.19% $1,086
Aggregate Total Return
(including maximum applicable sales charge)**
Inception* to
July 31, 1999 3.95% $1,039 2.88% $1,029 8.56% $1,086
Yield
(including maximum applicable sales charge)**
30 Days ended
July 31, 1999 -0.17% -0.87% -0.05%
----------------------------------------------------------------
</TABLE>
* The Class A, B and Y shares of the Fund commenced operations on
December 8, 1998, December 13, 1998 and December 3, 1998, respectively.
** The maximum applicable sales charge on the Class A shares of the Fund
is 4.00%. The maximum deferred sales charge on Class B shares is 5.0%.
There is no sales charge imposed in connection with the purchase of
Class Y shares of either Fund.
57
<PAGE> 58
SMALL CAP FUND
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
-------------------------------------------------------------------------------------------------
Redeemable Redeemable Redeemable
Expressed as value of a Expressed as value of a Expressed as value of a
a percentage hypothetical a percentage hypothetical a percentage hypothetical
based on a $1,000 based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at hypothetical investment
$1,000 the end of $1,000 the end of $1,000 at the end
Period investment the period investment the period investment of the period
---------------- -------------- --------------- -------------- --------------- -------------- ----------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
Inception* to
July 31, 1999 1.63% $1,011 1.71% $1,011 10.35% $1,067
Aggregate Total Return
(including maximum applicable sales charge)**
Inception* to
July 31, 1999 1.08% $1,011 1.13% $1,011 6.75% $1,067
Yield
(including maximum applicable sales charge)**
30 Days ended
July 31, 1999 -0.24% -0.99% 0.01%
----------------------------------------------------------------
</TABLE>
* The Class A, B and Y shares of the Fund commenced operations on
December 8, 1998, December 20, 1998 and December 3, 1998, respectively.
** The maximum applicable sales charge on the Class A shares of the Fund
is 5.25%. The maximum deferred sales charge on Class B shares is 5.0%.
There is no sales charge imposed in connection with the purchase of
Class Y shares.
58
<PAGE> 59
BALANCED FUND
<TABLE>
<CAPTION>
Class A* Class B* Class Y*
------------------------------ ------------------------------ -------------------------------
------------------------- ---------------------- -----------------------
Redeemable Redeemable Redeemable
Expressed as value of a Expressed as value of a Expressed as value of a
a percentage hypothetical a percentage hypothetical a percentage hypothetical
based on a $1,000 based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at hypothetical investment
$1,000 the end of $1,000 the end of $1,000 at the end
Period investment the period investment the period investment of the period
---------------- -------------- --------------- -------------- --------------- -------------- ----------------
Average Annual Total Return
(including maximum applicable sales charge)**
<S> <C> <C> <C> <C> <C> <C>
Inception* to
July 31, 1999 -41.86% $941 -47.49% $930 -16.04% $981
Aggregate Total Return
(including maximum applicable sales charge)**
Inception* to
July 31, 1999 -5.91% $941 -6.98% $930 -1.94% $981
Yield
(including maximum applicable sales charge)**
30 Days ended
July 31, 1999 1.56% 1.00% 1.91%
----------------------------------------------------------------
</TABLE>
* The Class A, B and Y shares of the Fund commenced operations on June
21, 1999.
** The maximum applicable sales charge on the Class A shares of the Fund
is 5.25%. The maximum deferred sales charge on Class B shares is 5.0%.
There is no sales charge imposed in connection with the purchase of
Class Y shares.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of the Class A, Class B and Class Y shares
for each Fund is determined on each day that the New York Stock Exchange (the
"Exchange") is open for trading and any other day (other than a day on which no
Shares of that Fund are tendered for redemption and no order to purchase shares
is received) during which there is sufficient trading in the Fund's portfolio
securities that the Fund's net asset value per share might be materially
affected. The Exchange is closed on the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, Christmas Day and Good Friday.
59
<PAGE> 60
Securities for which market quotations are available are valued at
latest reported prices. Securities for which the primary market is a national
securities exchange or the National Association of Securities Dealers Automated
Quotations National Market System are valued at last reported sale prices. In
the absence of any sale of such securities on the valuation date and in the case
of other securities, including U.S. Government securities but excluding money
market instruments maturing in 60 days or less, the valuations are based on the
mean between the bid and asked prices. Money market instruments and other debt
securities maturing in 60 days or less are valued at amortized cost. The assets
of the Funds, other than debt securities maturing in 60 days or less, are valued
at the mean between the bid and asked prices. Futures contracts and options
listed on a national exchange are valued at the last sale price on the exchange
on which they are traded at the close of the Exchange or, in the absence of any
sale on the valuation date, at mean between the bid and asked prices. Options
not listed on a national exchange are valued at the mean between the bid and
asked prices. Quotation of foreign securities in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained from a
recognized bank or dealer. Foreign currency exchange contracts are valued at the
current cost of covering or offsetting such contracts.
In all cases, bid prices are furnished by reputable independent pricing
services approved by the Board of Trustees. Prices provided by an independent
pricing service may be determined without exclusive reliance on quoted prices
and may 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. All other securities and
other assets of the Funds for which current market quotations are not readily
available are valued at fair value as determined in good faith by The Asset
Management Group in accordance with procedures adopted by the Trustees and
subject to ratification by the Trustees. If The Asset Management Group is unable
to make such a determination in accordance with such procedures, the securities
and assets will be valued at fair value as determined in good faith by the
Trustees.
PURCHASE OF SHARES
Reference is made to "Purchasing and Adding to Your Shares" in the
Prospectuses for certain information as to the purchase of Fund shares. The
various sales charge reductions and waivers described in the Prospectuses have
been implemented to reflect the economies of scale associated with distribution
activities as the amount of a sale increases, and to reflect the lower level of
such activities necessary for sales to persons who are members of organized
groups, participants in retirement plans, or associated with the Trust and its
affiliates.
Various sales charge reductions are available to certain qualified
groups. A qualified group is a group or association or a category of purchasers
which (i) is represented by a fiduciary, professional or other representative
(other than a registered broker-dealer); (ii) satisfies uniform criteria which
enable the Distributor to realize economies of scale in its costs of
distributing shares; (iii) gives its endorsement or authorization to an
investment program to assist solicitation of its membership by a broker or
dealer; and (iv) complies with the conditions of purchase in any agreement
entered into between the Trust and the group, representative or broker or
dealer. At the time of purchase, you must furnish the Transfer Agent, either
directly or through a broker or dealer, with information sufficient to permit it
to verify that the purchase qualifies for a reduced sales charge.
Each Fund offers three classes of shares: Shares of Class A are sold
with an initial sales charge, shares of Class B are sold with a contingent
deferred sales charge ("CDSC") and shares of Class Y are sold to eligible
investors without a sales charge. Class A and Class B shares each have exclusive
voting rights with respect to the Rule 12b-1 distribution plan adopted with
respect to such Class. Class B shares automatically convert to Class A shares
after approximately eight years.
60
<PAGE> 61
CLASS Y SHARES
Class Y shareholders of any Fund who terminate their qualified trust
account, employee benefit account or other qualifying relationship with an
institution are no longer eligible to make additional investments in the Fund's
Class Y shares. The Board of Trustees has approved an automatic conversion
feature whereby Class Y shares held by shareholders who have terminated their
qualifying relationship on or after February 15, 1997 will be converted to Class
A shares of the same Fund on the basis of the relative net asset values of the
shares of the two classes on the conversion date, without incurring any fee,
sales load or other charge. As Class A shareholders in a Fund, such former Class
Y shareholders will be able to reinvest dividends and distributions relating to
their shareholdings, but will be subject to the higher expenses associated with
Class A shares. A conversion of Class Y shares for Class A shares will be a
tax-free transaction for any Class Y shareholder involved in such conversion.
Class Y shareholders who plan to terminate their qualified trust account,
employee benefit account or other qualifying relationship and who do not wish to
have their holdings converted to Class A shares may redeem their shares.
Class Y shareholders whose qualified trust account, employee benefit
account or other qualifying relationship was terminated prior to February 15,
1997 are permitted to remain as Class Y shareholders. However, such shareholders
may not make additional purchases of Class Y shares, nor may they reinvest
dividends and distributions in respect of their Class Y shareholdings.
SPECIMEN PRICE MARK-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of Growth Stock Fund, Growth and Income Fund, Value
Fund, Balanced Fund, Diversified Fixed Income Fund, U.S. Treasury Securities
Fund and Tax-Free Securities Fund are sold at a maximum sales charge of 4.00%.
Class A shares of New Asia Growth Fund, International Stock Fund and Small Cap
Fund are sold at a maximum sales charge of 5.25%. Class A shares of Short
Intermediate U.S. Treasury Securities Fund and Tax-Free Short Intermediate
Securities Fund are sold at a maximum sales charge of 2.25%. Class B and Class Y
shares are sold at net asset value. Using the Growth Stock Fund's net asset
value at July 31, 1999, an example of the determination of the maximum offering
price of the Fund's shares is as follows:
Class A
Net asset value........................................ $17.45
Maximum sales charge (4.00% of offering price)......... 0.73
------
Offering price to public............................... $18.18
======
Class B
Net asset value and offering price to public........... $17.28
======
Class Y
Net asset value and offering price to public........... $17.58
======
REDEMPTION OF SHARES
The Trust will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Trust uses the following
procedures to process telephone redemptions: (1) obtaining some or all of the
following information: account number, name(s), social security number
61
<PAGE> 62
registered to the account, and personal identification; (2) recording all
telephone transactions; and (3) sending written confirmation of each transaction
to the registered owner.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of a Fund redeemed, but
the Trust reserves the right to make payment wholly or partly in shares of
readily marketable investment securities. In such cases, a shareholder may incur
brokerage costs in converting such securities to cash. However, the Trust has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act,
pursuant to which it is obligated to pay in cash all request for redemptions by
any shareholder of record, limited in amount with respect to each shareholder
during any 90-day period to the lesser of $250,000 or 1% of the net asset value
of the Trust at the beginning of such period.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any broker-dealer or group of
broker-dealers to execute transactions in its portfolio securities. In
connection with its duties to arrange for the purchase and sale of each Fund's
portfolio securities, The Asset Management Group and its Sub-Advisers select
such broker-dealers ("Broker-Dealers") as will, in their judgment, implement the
policy of the Trust to achieve quality execution at the most favorable prices
through responsible Broker-Dealers, and in the case of agency transactions, at
competitive commission rates. The Asset Management Group and its Sub-Advisers
deal directly with the selling or purchasing principal or market maker without
incurring brokerage commissions unless they determine that better price or
execution may be obtained by paying such commissions.
In allocating transactions to Broker-Dealers, The Asset Management
Group and its Sub-Advisers are authorized to consider, in determining whether a
particular Broker-Dealer will provide best execution, the Broker-Dealer's
reliability, integrity, financial condition and risk in positioning the
securities involved, as well as the difficulty of the transaction in question,
and thus need not pay the lowest spread or commission where it is believed that
another Broker-Dealer would offer greater reliability or provide a better price
or execution. In addition, The Asset Management Group and its Sub-Advisers have
each adopted a brokerage allocation policy in reliance on Section 28(e) of the
Securities and Exchange Act of 1934, permitting them to cause a Fund to pay
commission rates in excess of those another Broker-Dealer would have charged if
The Asset Management Group or the relevant Sub-Adviser determines in good faith
that the amount of commission is reasonable in relation to the value of the
brokerage and research services provided by the Broker-Dealer, viewed either in
terms of the particular transaction or The Asset Management Group or the
Sub-Adviser's overall responsibilities as to the accounts over which it
exercises investment discretion. Such research may be in written form or through
direct contact with individuals and may include quotations on portfolio
securities and information on particular issuers and industries, as well as on
market, economic or institutional activities. If, on the foregoing basis, the
transaction in question could be allocated to two or more Broker-Dealers, The
Asset Management Group and its Sub-Advisers are authorized, in allocating
portfolio trades, to consider whether a Broker-Dealer has sold shares of the
Trust or any other investment company or companies having The Asset Management
Group as its investment adviser or having the same administrator or principal
underwriter as the Trust.
Each year, The Asset Management Group assesses the contribution of the
brokerage and research services provided by the Broker-Dealers, and attempts to
allocate a portion of its brokerage business in response to these assessments.
Research analysts, counselors, and various investment committees each seek to
evaluate the brokerage and research services they receive from Broker-Dealers
and make judgments as to the level of business which would recognize such
services. In addition, Broker-Dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and research services
they provide. Actual brokerage received by any firm may be less than the
suggested allocations but can, and often does, exceed the suggestions, because
the total business is allocated on the basis of all the considerations described
62
<PAGE> 63
above. In no case is a Broker-Dealer excluded from receiving business from
The Asset Management Group because it has not been identified as providing
research services.
Purchases and sales of debt securities are usually principal
transactions. Each of the Funds may also purchase portfolio securities in
underwritten offerings and may purchase securities directly from the issuer.
Generally, debt securities, taxable money market securities and over the counter
equities are traded on a net basis and do not involve brokerage commissions. The
cost of executing these securities transactions will consist primarily of dealer
spreads and underwriting commissions.
Purchases and sales of equity securities on a securities exchange are
effected through brokers who charge a negotiated commission for their services.
In the over-the-counter market, securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
that includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount.
Although the Investment Adviser and Sub-Advisers make investment
decisions for the Trust independently from those of their other accounts,
investments of the kind made by the Funds may often also be made by such other
accounts. When the Investment Adviser or a Sub-Adviser buys or sells the same
security at substantially the same time on behalf of the Funds and one or more
other accounts managed by the Investment Adviser or Sub-Adviser, the Investment
Adviser or Sub-Adviser allocates available investments by such means as, in its
judgment, result in fair treatment. The Investment Adviser or Sub-Adviser
aggregates orders for purchases and sales of securities of the same issuer on
the same day among the Funds and its other managed accounts, and the price paid
to or received by the Funds and those accounts is the average obtained in those
orders. In some cases, such aggregation and allocation procedures may affect
adversely the price paid or received by the Funds or the size of the position
purchased or sold by the Funds.
As a result of its investment policies, each Fund may engage in a
substantial number of portfolio transactions. Accordingly, while each Fund
anticipates that its annual portfolio turnover rate should not exceed 100% under
normal conditions, it is impossible to predict portfolio turnover rates. A high
turnover rate for a Fund's portfolio involves correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions, which
are borne directly by the Fund. The portfolio turnover rate will not be a
limiting factor when The Asset Management Group or a Sub-Adviser deems portfolio
changes appropriate.
For the fiscal years ended July 31, 1999, July 31, 1998, and July 31,
1997, purchase and sale transactions by U.S. Treasury Securities Fund, Short
Intermediate U.S. Treasury Securities Fund, Diversified Fixed Income Fund,
Tax-Free Securities Fund and Tax-Free Short Intermediate Securities Fund did not
involve brokerage commissions. The total brokerage commissions paid by the other
Funds for the fiscal years ended July 31, 1999, July 31, 1998, and July 31,
1997, are set forth in the table below:
<TABLE>
<CAPTION>
Brokerage Commissions Paid by Certain Funds
-------------------------------------------
Total Commissions Total Commissions Total Commissions
Paid for Fiscal Paid for Fiscal Paid for Fiscal
Year Ended Year Ended Year Ended
Fund July 31, 1999 July 31, 1998 July 31, 1997
------ ----------------------- ----------------------- ------------------------
<S> <C> <C> <C>
Growth and Income Fund $367,994 $325,674 $237,637
Growth Stock Fund $869,241 $730,536 $241,913
New Asia Growth Fund $243,344 $233,961 $243,253
</TABLE>
63
<PAGE> 64
<TABLE>
<S> <C> <C> <C>
International Stock Fund $597,077 N/A N/A
Value Fund $302,756 N/A N/A
Small Cap Fund $246,490 N/A N/A
Balanced Fund $ 36,235 N/A N/A
</TABLE>
For the fiscal year ended July 31, 1997, New Asia Growth Fund paid
brokerage commissions of $10,992 to Credit Lyonnais Securities, an affiliate of
Credit Lyonnais, which served as sub-adviser to the Fund until July 31, 1997.
CMG First State (Hong Kong) LLC, the current Sub-Adviser to the New Asia Growth
Fund is not affiliated with any broker-dealer which effects portfolio
transactions for the Funds. For the fiscal year ended July 31, 1997, the
percentage of the Fund's aggregate brokerage commissions paid to Credit Lyonnais
Securities was 4.5%, and the percentage of the aggregate dollar amount of Fund
transactions involving the payment of commissions effected through Credit
Lyonnais Securities was 8.5%.
The percentage of total portfolio transactions placed with, and related
commissions paid to, firms which provided research, statistical, or other
services to The Asset Management Group and the Sub-Advisers in connection with
the management of the Funds, for the fiscal year ended July 31, 1999 are set
forth below:
<TABLE>
<CAPTION>
Total Commission Paid to
Providers of Research,
Percentage of Total Statistical and Other
Fund Portfolio Transactions Services
------ ---------------------- --------------------------
<S> <C> <C>
Growth Stock Fund 88.13% $766,065
Growth and Income Fund 74.63% $274,631
Value Fund 82.24% $248,993
Balanced Fund 65.64% $ 23,784
New Asia Growth Fund 100% $243,344
International Stock Fund 3.8% $ 22,689
Small Cap Fund 17.8% $ 43,875
</TABLE>
During the fiscal year ended July 31, 1999, the Funds did not acquire
securities of their regular broker-dealers or of their parents, as such terms
are defined in Rule 10b-1 under the 1940 Act.
During the fiscal years ended July 31, 1998 and 1999, there was no
significant variation in the Funds' portfolio turnover rates and The Asset
Management Group does not anticipate any significant variation for the fiscal
year ended July 31, 2000.
64
<PAGE> 65
FEDERAL AND HAWAIIAN TAX INFORMATION
The Prospectus describes generally the federal and certain Hawaiian tax
treatment of distributions by the Funds. This section of the SAI includes
certain additional information concerning federal and Hawaiian income taxes.
FEDERAL TAX INFORMATION
Qualification as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code") generally requires, among other
things, that (a) at least 90% of each Fund's annual gross income be derived from
interest, payments with respect to securities loans, dividends, gains from the
sale or other disposition of securities or options thereon, and certain related
income; and (b) each Fund diversifies its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash, U.S. Government securities, securities of other
regulated investment companies and other securities limited in respect of any
one issuer to an amount not greater than 5% of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government securities and the securities of other regulated investment
companies), or of two or more issuers which the Fund controls (i.e., owns,
directly or indirectly, 20% of the voting stock) and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses. As regulated investment companies, the Funds will not be subject to
federal income tax on their net investment income and net capital gains
distributed to their shareholders, provided that they distribute to their
shareholders at least 90% of their net investment income and tax-exempt income
earned in each year.
A 4% nondeductible excise tax will be imposed on each Fund to the
extent it does not meet certain minimum distribution requirements on a calendar
year basis. This excise tax would not apply to tax-exempt income of the Tax-Free
Funds. For this purpose, any income or gain retained by a Fund that is subject
to tax will be considered to have been distributed by year-end. In addition,
dividends and distributions declared payable as of a date in October, November
or December of any calendar year are deemed under the Code to have been received
by the shareholders on December 31 of that calendar year (and also will be
taxable to shareholders in such year) if the dividend is actually paid in the
following January. Each Fund intends to distribute substantially all of its net
investment income and net capital gains and, thus, expects not to be subject to
the excise tax.
Income and dividends received by any of the Funds from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Shareholders may be able to claim U.S. foreign
tax credits with respect to such taxes, subject to certain conditions and
limitations contained in the Code. For example, certain retirement accounts
cannot claim foreign tax credits on investments in foreign securities held in
the Fund. Because each of Balanced Fund, Growth and Income Fund, Growth Stock
Fund, Small Cap Fund, Diversified Fixed Income Fund, Short Intermediate U.S.
Treasury Fund, Tax-Free Securities Fund, Tax-Free Short Intermediate Securities
Fund and U.S. Treasury Securities Fund is expected to limit their investment in
foreign securities, these Funds will not be eligible to elect to "pass through"
foreign tax credits to shareholders. New Asia Growth Fund and International
Stock Fund invest primarily in foreign securities. If more than 50% in value of
either such Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible and intends to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from such Fund's election described in this paragraph but may not be
able to claim a credit or deduction against
65
<PAGE> 66
such U.S. tax for the foreign taxes treated as having been paid by such
shareholder. New Asia Growth Fund and International Stock Fund will report
annually to their respective shareholders the amount per share of such
withholding taxes.
Gains or losses on sales of portfolio securities by a Fund will be
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where a Fund acquires a put or
writes a call thereon or otherwise engages in a transaction that "tolls" the
Fund's holding period. Other gains or losses on the sale of securities will be
short-term capital gains or losses. The amount of tax payable by an individual
or corporation will be affected by a combination of tax laws covering, for
example, deductions, credits, deferrals, exemptions, sources of income and other
matters.
A capital gains distribution or dividend will be a return of invested
capital to the extent the net asset value of an investor's shares is thereby
reduced below his or her cost, even though the distribution would be taxable to
the shareholder. A redemption of shares by a shareholder under these
circumstances could result in a capital loss for federal income tax purposes.
If a shareholder exchanges or otherwise disposes of shares of a Fund
within 90 days of having acquired such shares, and if, as a result of having
acquired those shares, the shareholder subsequently pays a reduced sales charge
for shares of the Fund, or of a different fund, the sales charge previously
incurred acquiring the Fund's shares will not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales charges)
for the purpose of determining the amount of gain or loss on the exchange, but
will be treated as having been incurred in the acquisition of such other shares.
Any loss realized on a redemption or exchange of shares of a Fund will
be disallowed to the extent shares are reacquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If an option written by a Fund lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction.
If securities are sold by a Fund pursuant to the exercise of a call
option written by it, the Fund will add the premium received to the sale price
of the securities delivered in determining the amount of gain or loss on the
sale. If securities are purchased by a Fund pursuant to the exercise of a put
option written by it, the Fund will subtract the premium received from its cost
basis in the securities purchased.
The amount of any gain or loss realized by a Fund on closing out a
futures contract will generally result in a realized capital gain or loss for
tax purposes. Regulated futures contracts held at the end of each fiscal year
will be required to be "marked to market" for federal income tax purposes. In
this regard, they will be deemed to have been sold at market value. Sixty
percent of any net gain or loss recognized on these deemed sales and 60% of any
net realized gain or loss from any actual sales, will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. Transactions that qualify as designated hedges are excepted from
the marked to market rule and the "60%/40%" rule. Newly-enacted Code Section
1259 will require the recognition of gain (but not loss) if a Fund makes a
"constructive sale" of an appreciated financial position (e.g., debt instruments
and stock). A Fund generally will be considered to make a constructive sale of
an appreciated financial position if it sells the same or substantially
identical property short, enters into a futures or forward contract to deliver
the same or substantially identical property, or enters into certain other
similar transactions.
Currency transactions may be subject to Section 988 of the Code, under
which foreign currency gains or losses would generally be computed separately
and treated as ordinary income or losses. The Funds will attempt to monitor
Section 988 transactions to avoid an adverse tax impact.
66
<PAGE> 67
CLASS B SHAREHOLDERS
No gain or loss will be recognized by a shareholder upon the conversion
of Class B shares to Class A shares.
FOREIGN SHAREHOLDERS
Under the Code, distributions of net investment income (including
distributions of short-term capital gains) by a Fund to a nonresident alien
individual, nonresident alien fiduciary of a trustor estate, foreign
corporation, or foreign partnership (a "foreign shareholder") will be subject to
U.S. withholding tax (at the rate of 30% or a lower treaty rate). Withholding
will not apply if a dividend paid by a Fund to a foreign shareholder is
"effectively connected" with a U.S. trade or business, in which case the
reporting and withholding requirements applicable to U.S. citizens or domestic
corporations will apply. Distributions of net capital gains derived by
non-resident aliens or foreign entities that are not effectively connected with
a U.S. trade or business are not subject to tax withholding, but in the case of
a foreign shareholder who is a nonresident alien individual, such distributions
ordinarily will be subject to U.S. income tax if the individual is physically
present in the U.S. for more than 182 days during the taxable year (in which
case the individual may be treated as a U.S. resident in any event).
OTHER MATTERS
Investors should be aware that the investments to be made by the Funds
may involve sophisticated tax rules such as the original issue discount, marked
to market and real estate mortgage investment conduit ("REMIC") rules that would
result in income or gain recognition by the Funds without corresponding current
cash receipts. Although the Funds will seek to avoid significant noncash income,
such noncash income could be recognized by the Funds, in which case a Fund may
distribute cash derived from other sources in order to meet the minimum
distribution requirements described above.
SPECIAL TAX CONSIDERATIONS FOR NEW ASIA GROWTH FUND AND
INTERNATIONAL STOCK FUND
Due to investment laws in certain developing countries in Asia, it is
anticipated that investments by New Asia Growth Fund and International Stock
Fund in equity securities in such countries will consist primarily of shares of
investment companies (or similar investment entities) organized under foreign
law or of ownership interests in special accounts, trusts or partnerships, and
International Stock Fund may make similar investments. Each such Fund may invest
up to 10% of its total assets in securities of closed-end investment companies.
If a Fund purchases shares of an investment company (or similar investment
entity) organized under foreign law, the Fund will be treated as owning shares
in a passive foreign investment company ("PFIC") for U.S. federal income tax
purposes. The Fund may be subject to U.S. federal income tax, and an additional
tax in the nature of interest, on a portion of the distributions from such a
company and on gain from the disposition of the shares of such company
(collectively referred to as "excess distributions"), even if such excess
distributions are paid by the Fund as a dividend to its shareholders. A Fund may
be eligible to make an election with respect to certain PFICs in which it owns
shares that will allow it to avoid the taxes on excess distributions. However,
such election may cause the Fund to recognize income in a particular year in
excess of the distributions received from such PFICs. Alternatively, a Fund may
elect to "mark-to-market" at the end of each taxable year all shares that it
holds in PFICs. If it makes this election, the Fund will recognize as ordinary
income any increase in the value of such shares. Unrealized losses, however,
will not be recognized. By making the mark-to-market election, a Fund can avoid
imposition of the interest charge with respect to its distributions from PFICs,
but in any particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
stock.
67
<PAGE> 68
SPECIAL TAX CONSIDERATIONS FOR THE TAX-FREE FUNDS
FEDERAL TAX INFORMATION
The portion of total dividends paid by each of the Tax-Free Funds with
respect to any taxable year that qualifies for exclusion from gross income
("exempt-interest dividends") will be the same for all shareholders of the Fund
receiving dividends during such year. In order for a Tax-Free Fund to pay
exempt-interest dividends during any taxable year, at the close of each fiscal
quarter at least 50% of the aggregate value of the Fund's assets must consist of
tax-exempt securities. In addition, the Fund must distribute 90% of the
aggregate interest excludable from gross income (net of non-deductible expenses)
and 90% of the investment company taxable income earned by it during the taxable
year. Within 60 days after the close of its taxable year, each Tax-Free Fund
will notify its shareholders of the portion of the dividends paid with respect
to such taxable year which constitutes exempt-interest dividends. The aggregate
amount of dividends so designated cannot exceed the excess of the amount of
interest excludable from gross income under Section 103(a) of the Code received
by such Fund during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. In addition, market discount
earned on tax-exempt obligations will not qualify as tax-exempt income.
The Code treats interest on private activity bonds, as defined therein,
as an item of tax preference subject to an alternative minimum tax on
individuals and corporations at the applicable tax rates. Further,
exempt-interest dividends are includable in adjusted current earnings in
calculating corporate alternative minimum taxable income. Except for temporary
defensive purposes, the Trust will not invest in the types of Municipal
Obligations which would give rise to interest that would be treated as a
preference subject to alternative minimum taxation if more than 20% of its net
assets would be so invested, and may refrain from investing in that type of bond
completely.
In addition, any loss realized by a shareholder upon the sale or
redemption of shares of a Fund held less than six months is disallowed to the
extent of any exempt-interest dividends received by the shareholder.
Shareholders who may be "substantial users" (or related persons of
substantial users) with respect to municipal securities held by a Tax-Free Fund
should consult their tax advisers to determine whether exempt-interest dividends
paid by the Fund with respect to such obligations retain their federal
exclusions.
HAWAIIAN TAX INFORMATION
The Tax-Free Funds, and dividends and distributions made by the
Tax-Free Funds to Hawaii residents, will generally be treated for Hawaii income
tax purposes in the same manner as they are treated under the Code for federal
income tax purposes. If at the close of each quarter of a Tax-Free Fund's
taxable year at least 50% of the value of its total assets consists of
obligations the interest on which, if such obligations were held by an
individual, would be exempt from Hawaii personal income tax (under either the
laws of Hawaii or of the United States), the Fund will be entitled to pay
dividends to its shareholders which will be exempt from Hawaii personal income
tax. Similar exemptions may be available in other states with regard to the
portion of tax-exempt dividends attributable to interest exempt from state
taxation under federal law. Under Hawaii law, however, interest derived from
obligations of states (and their political subdivisions) other than Hawaii will
not be exempt from Hawaii income taxation. (Interest derived from bonds or
obligations issued by or under the authority of the following is exempt from
Hawaii income taxation: Guam, Northern Mariana Islands, Puerto Rico, and the
Virgin Islands.)
Interest on Hawaiian Municipal Obligations, tax-exempt obligations of
states other than Hawaii and their political subdivisions, and obligations of
the United States or its possessions is not exempt from the Hawaii franchise
tax. This tax applies to banks, building and loan associations, industrial loan
companies, financial corporations, and small business investment companies.
68
<PAGE> 69
Persons or entities who are not Hawaii residents should not be subject
to Hawaii income taxation on dividends and distributions made by the Trust but
will be subject to other state and local taxes.
OTHER MATTERS
Shares of the Tax-Free Funds would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R.10 plans and IRAs since such plans and accounts are
generally tax-exempt and, therefore, would not benefit from the exempt status of
dividends from such Funds. Such dividends would be ultimately taxable to the
beneficiaries when distributed to them.
GENERAL INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on October
30, 1992, and currently consists of twelve separately managed series. The Board
of Trustees may establish additional series in the future. Each series has
unlimited transferable shares of beneficial interest, with no par value. When
issued in accordance with the terms and procedures described in their respective
Prospectuses, shares of the Funds are fully paid, non-assessable and freely
transferable.
Each series is comprised of three classes of shares -- Class Y, Class
A, and Class B. The Classes generally have identical rights with respect to the
series of which they are a part, but there are certain matters which affect one
class but not another. Currently, the only such matters are the existence of
Distribution and Shareholder Service Plans with respect to each of Class A and
Class B shares but not Class Y shares, the absence of any sales load with regard
to the purchase of the Class Y shares, and the fact that a salesperson or any
other person entitled to receive compensation for selling or servicing Class A,
Class B or Class Y shares may receive different compensation with respect to one
such Class over the other Class in the same Fund. Class A and Class B shares
have different sales charges and other expenses which may affect performance.
The Trust has a Prospectus for Class Y shares and separate Prospectuses for
Class A and B shares of various Funds. Prospectuses may be obtained by calling
the telephone number listed on the first page of the Prospectus.
VOTING
Shareholders have the right to vote on the election of Trustees and on
any and all matters as to which, by law or the provisions of the Declaration of
Trust of the Trust, they may be entitled to vote. All shares of the Trust have
equal voting rights and will be voted in the aggregate, and not by class or
series, except where voting by class or series is required by law or where the
matter involved affects only one class or series.
When certain matters affect one class but not another, the shareholders
will vote as a class regarding such matters. Subject to the foregoing, on any
matter submitted to a vote of shareholders, all shares then entitled to vote
will be voted separately by Fund unless otherwise required by the 1940 Act, in
which case all shares will be voted in the aggregate. For example, a change in a
Fund's fundamental investment policies would be voted upon only by shareholders
of the Fund involved. Additionally, approval of the advisory agreement is a
matter to be determined separately by Fund. Approval by the shareholders of one
Fund is effective as to that Fund whether or not sufficient votes are received
from the shareholders of the other Funds to approve the proposal as to those
Funds.
As used in the Prospectus and in this SAI, the term "majority," when
referring to approvals to be obtained from shareholders of a Fund, means the
vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting
if the holders of more than 50% of the outstanding shares of the Fund are
present in
69
<PAGE> 70
person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund.
The term "majority," when referring to the approvals to be obtained from
shareholders of the Trust as a whole means the vote of the lesser of (i) 67% of
the Trust's shares represented at a meeting if the holders of more than 50% of
the Trust's outstanding shares are present in person or by proxy, or (ii) more
than 50% of the Trust's outstanding shares. Shareholders are entitled to one
vote for each full share held and fractional votes for fractional shares held.
The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the 1940 Act. However,
the Trust undertakes to hold a special meeting of its shareholders for the
purpose of voting on the question of removal of a Trustee or Trustees if
requested in writing by the holders of at least 10% of the Trust's outstanding
voting securities, and to assist in communicating with other shareholders as
required by Section 16(c) of the 1940 Act.
Each share of a class of a Fund represents an equal proportional
interest in that Fund or portfolio with each other share of the same class and
is entitled to such dividends and distributions out of the income earned on the
assets belonging to that Fund or portfolio as are declared in the discretion of
the Trustees. In the event of the liquidation or dissolution of the Trust,
shareholders of a Fund are entitled to receive the assets attributable to that
Fund that are available for distribution, and a distribution of any general
assets not attributable to a particular Fund that are available for
distribution, in such manner and on such basis as the Trustees in their sole
discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and non-assessable by the Trust.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders of the Funds could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust. The Declaration of Trust provides for
indemnification out of a Fund's property for any losses and expenses of any
shareholder of such Fund held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which a Fund would be
unable to meet its obligations.
PRINCIPAL SHAREHOLDERS
As of October 30, 1999 the persons set forth below were known by the
Trust to own of record or beneficially 5% or more of the Class A, Class B or
Class Y shares, as applicable, of the indicated Fund. Unless otherwise
indicated, the address of STROBRO, REINCO and HAWCO is Pacific Century Trust,
P.O. Box 3170, Honolulu, HI 96802. In addition, unless otherwise indicated, the
address of BHC Securities, Inc. is Attn: Mutual Funds, 1 Commerce Street, 2005
Market Street, Suite 12000, Philadelphia, PA 19103.
Percentage of Shares Held
of Record orBeneficially
------------------------
CLASS Y SHARES
--------------
DIVERSIFIED FIXED INCOME SECURITIES FUND
STROBRO 74.96%
HAWCO 22.83%
GROWTH AND INCOME FUND
STROBRO 66.49%
70
<PAGE> 71
HAWCO 25.40%
GROWTH STOCK FUND
STROBRO 81.18%
HAWCO 9.94%
REINCO 5.41%
NEW ASIA GROWTH FUND
Vanguard Fiduciary Trust Company 24.43%
P.O. Box 2600
V.M. 421
Valley Forge, PA 19482
HAWCO 13.75%
REINCO 15.09%
STROBRO 46.64%
SHORT INTERMEDIATE U.S. TREASURY
SECURITIES FUND
REINCO 5.53%
HAWCO 29.36%
STROBRO 63.39%
TAX-FREE SECURITIES FUND
STROBRO 98.29%
TAX-FREE SHORT INTERMEDIATE SECURITIES
FUND
STROBRO 97.29%
U.S. TREASURY SECURITIES FUND
REINCO 95.79%
SMALL CAP FUND
STROBRO 48.56%
HAWCO 50.24%
VALUE FUND
71
<PAGE> 72
STROBRO 76.81%
HAWCO 22.96%
INTERNATIONAL STOCK FUND
STROBRO 69.58%
HAWCO 13.02%
REINCO 17.40%
BALANCED FUND
STROBRO 100.00%
CLASS A SHARES
--------------
DIVERSIFIED FIXED INCOME FUND
BHC Securities Inc. 75.84%
First Hawaiian Bank 7.18%
Sakiko Kishimoto
P.O. Box 3708
Honolulu, HI 96811
Donaldson Lufkin Jenrette 9.75%
Securities Corporation
P.O. Box 2052
Jersey City, NJ 07303-9998
GROWTH AND INCOME FUND
BHC Securities Inc. 82.94%
GROWTH STOCK FUND
BHC Securities Inc. 75.75%
Arrow & Co. 7.36%
[INSERT ADDRESS]
NEW ASIA GROWTH FUND
Merrill Lynch Pierce Fenner & Smith 11.11%
Incorporated
4800 Deer Lake Drive East, 3rd Floor
Mutual Fund Operations
Jacksonville, Florida 32246
72
<PAGE> 73
BHC Securities, Inc. 82.83%
SHORT INTERMEDIATE U.S. TREASURY
SECURITIES FUND
BHC Securities, Inc. 80.53%
Merrill Lynch Pierce Fenner & Smith 7.50%
Incorporated
4800 Deer Lake Drive East, 3rd Floor
Mutual Fund Operations
Jacksonville, Florida 32246
STROBRO 5.14%
TAX-FREE SHORT INTERMEDIATE SECURITIES
FUND
BHC Securities, Inc. 95.10%
U.S. TREASURY SECURITIES FUND
BHC Securities, Inc. 83.14%
Merrill Lynch Pierce Fenner & Smith 8.38%
Incorporated
4800 Deer Lake Drive East, 3rd Floor
Mutual Fund Operations
Jacksonville, Florida 32246
TAX-FREE SECURITIES FUND
Douglas Philpotts 5.70%
TRST Douglas Philpotts Trust I
DTD 4/28/92
206 Oluolu PL
Kula, Hawaii 96790
Arrow & Co. 11.57%
MO 2-1
P.O. Box 30010
Durham, North Carolina 27702-3010
BHC Securities, Inc. 61.20%
Mechanics Bank 5.93%
Evelyn Johnson Insurance Trust
3170 Hilltop Mall Road
Richmond, CA 94806
SMALL CAP FUND
BHC Securities Inc. 91.92%
73
<PAGE> 74
VALUE FUND
BHC Securities, Inc. 97.70%
INTERNATIONAL STOCK FUND
BHC Securities Inc. 9.18%
BALANCED FUND
BISYS Fund Services Ohio Inc. 22.43%
3435 Stelzer Rd.
Columbus, OH 43219
BHC Securities Inc. 77.42%
CLASS B SHARES
--------------
NEW ASIA GROWTH FUND
Merrill Lynch Pierce Fenner & Smith 7.38%
Mutual Fund Operations
4800 Deer Lake Dr East, 3rd Floor
Jacksonville, Florida 32246
BHC Securities Inc. 39.21%
TAX-FREE SECURITIES FUND
BHC Securities Inc. 64.40%
SMALL CAP FUND
BHC Securities Inc. 61.14%
VALUE FUND
BHC Securities Inc. 24.39%
INTERNATIONAL STOCK FUND
BHC Securities Inc. 57.98%
BALANCED FUND
BISYS Fund Services Ohio Inc. 5.66%
3435 Stelzer Rd.
Columbus, OH 43219
BHC Securities Inc. 45.77%
74
<PAGE> 75
CUSTODIAN
Union Bank of California, ("Bank of California") has been retained as
Custodian for New Asia Growth Fund and International Stock Fund. Bank One Trust
Company, N.A. ("Bank One") has been retained as Custodian for the other Funds.
With regard to each Fund, the relevant Custodian, among other things, maintains
a custody account or accounts in the name of the Fund; receives and delivers all
assets for the Fund upon purchase and upon sale or maturity; collects and
receives all income and other payments and distributions on account of the
assets of each Fund and pays all expenses of the Fund. For its services as
Custodian, Bank One and Bank of California, each receives an asset-based fee.
INDEPENDENT AUDITORS AND COUNSEL
Ernst & Young LLP serves as the independent auditors for the Trust.
Ernst & Young LLP provides audit services, tax return preparation and assistance
and consultation in connection with certain Commission filings. Its office is
located at One Columbus, Suite 2300, 10 West Broad Street, Columbus, Ohio 43215.
Paul, Hastings, Janofsky & Walker LLP serves as legal counsel for the
Trust. Its office is located at 555 South Flower Street, Los Angeles, California
90071.
FINANCIAL INFORMATION
The Trust's 1999 Annual Report to Shareholders accompanies this SAI.
The financial statements in such Annual Report are incorporated in this SAI by
reference. Such financial statements have been audited by the Trust's
independent auditors, Ernst & Young LLP, whose report thereon appears in such
Annual Report. Such financial statements have been incorporated herein in
reliance upon such report given upon their authority as experts in accounting
and auditing. Additional copies of the Trust's 1999 Annual Report to
Shareholders may be obtained at no charge by telephoning the Trust at the number
on the front page of this SAI.
REGISTRATION STATEMENT
The Registration Statement, including the Prospectus, the Statement of
Additional Information and the exhibits filed therewith, may be examined at the
office of the Commission in Washington, D.C. Statements contained in the
Prospectus or the Statement of Additional Information as to the contents of any
contract or other document referred to herein or in the Prospectus are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
75
<PAGE> 76
APPENDIX A
RATINGS OF FIXED INCOME SECURITIES
The following is a description of the ratings given by Moody's Investor
Service, Inc. ("Moody's"), Duff & Phelps, Inc. ("D&P"), Fitch Investor Service
("Fitch"), Standard & Poor's Corporation ("S&P"), IBCA Limited("IBCA") and
Thompson Bank Watch ("Thompson"), each an NRSRO, to corporate bonds and
commercial paper.
CORPORATE BOND RATINGS
MOODY'S:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-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 rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risk appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes, and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds 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.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any longer period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues maybe in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-1
<PAGE> 77
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
S&P:
AAA - This is the highest rating assigned by Standard &Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capability to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.
BB - Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC - Bonds rated CCC have a currently identifiable vulnerability to
default and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, they are not
likely to have the capacity to pay interest and repay principal.
CC - The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied
CCC -- debt rating. The Crating may be used to cover a situation where
a bankruptcy petition has been filed but debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
A-2
<PAGE> 78
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L - The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp. and interest is adequately collateralized.
* - Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR - Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Debt Obligations of Issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
D&P:
AAA - Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- - High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.
A+, A, A- - Protection factors are average but adequate. However, risk
factors are more variable in periods of greater economic stress.
BBB+, BBB, BBB - Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- - Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions. Overallquality may move up or down
frequently within this category.
B+, B, B- - Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
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 arrearages.
A-3
<PAGE> 79
FITCH IBCA:
AAA - Highest credit quality. "AAA" ratings denote the lowest
expectation of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA - Very high credit quality. "AA" ratings denote a very low
expectation of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
A - High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB - Good credit quality. "BBB" ratings indicate that there is
currently a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
BB - Speculative. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B - Highly speculative. "B" ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C - High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of some
kind appears probable. "C" ratings signal imminent default.
DDD, DD, D - Default. The ratings of obligations in this category are
based on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values are
highly speculative and cannot be estimated with any precision, the following
serve as general guidelines. 'DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. 'DD'
indicates potential recoveries in the range of 50%-90%, and 'D' the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated 'DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated 'DD' and 'D' are generally undergoing a formal
reorganization or liquidation process; those rated 'DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated 'D' have a
poor prospect for repaying all obligations.
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC", or to short-term ratings other than
"F1'.
NR - indicates that Fitch IBCA does not rate the issuer or issue in
question.
A-4
<PAGE> 80
Withdrawn - A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert - Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
THOMSON:
Thomson rates only bank debt.
AAA - Bonds rated AAA have a very high ability to pay interest and
principal on a timely basis.
AA - Bonds rated AA have a superior ability to pay interest and repay
principal with limited incremental risk versus AAA bonds.
A - Bonds rated A have a strong ability to repay principal and
interest, but could be more vulnerable to adverse internal and external
developments.
BBB - Bonds rated BBB have an acceptable capacity to pay interest and
repay principal and are more vulnerable to risk than higher-rated obligations.
BB, B, CCC, and CC, designations are assigned by Thomson to
non-investment grade long-term debt. Such issues are regarded as having
speculative characteristics regarding the likelihood of timely payment of
principal and interest. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. The D designation indicates that the long-term
debt is in default.
The ratings from AAA through CC may include a plus or minus sign
designation which indicates where within the respective category the issue is
placed.
CORPORATE COMMERCIAL PAPER RATINGS
MOODY'S:
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
A-5
<PAGE> 81
P-1 (Prime-1) - Issuers rated P-1 have a superior capacity for
repayment of short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics:
Leading market positions in well established industries
High rates of return on funds employed
Conservative capitalization structures with moderate reliance
on debt and ample asset protection
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation
- Well established access to a range of financial markets and
assured sources of alternate liquidity
P-2 (Prime-2) - Issuers rated P-2 have a strong capacity for repayment
of short-term promissory obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be subject to more variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
P-3 (Prime-3) - Issuers rated P-3 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 level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, then the
name or names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote referring the
reader to another page for the name or names of the supporting entity or
entities. In assigning ratings to such issuers, Moody's evaluates the financial
strength of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment. Moody's makes no representation and gives no opinion on
the legal validity or enforceability of any support arrangement. You are
cautioned to review with your counsel any questions regarding particular support
arrangements.
S&P:
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. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
A - Issues rated A are regarded as having the greatest capacity for
timely payment. Bonds in this category are delineated with the numbers 1, 2 and
3 to indicate the relative degree of safety.
A-1 - Issues rated A-1 indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Commercial paper with
overwhelming safety characteristics will be rated A-1+.
A-2 - Issues rated A-2 have a strong capacity for timely payments on
issues. However, the relative degree of safety is not as high as for issues
designated "A-1."
A-3 - Issues rated A-3 have a satisfactory capacity for timely payment.
They are, however,
A-6
<PAGE> 82
somewhat more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B - Issues rated B are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C - Issues rated C are short-term debt obligations with a doubtful
capacity for payment.
D - This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
D&P:
Duff 1+ - The Duff 1+ rating for corporate commercial paper indicates
the highest certainty of timely payment. Corporate commercial paper with very
high certainty of payment, excellent liquidity and minor risk will be rated Duff
1. Corporate commercial paper with high certainty of timely payment, strong
liquidity and very small risk will be rated Duff 1- .
Duff 2 - The Duff 2 rating for corporate commercial paper indicates
good certainty of timely payment. Liquidity factors and company fundamentals are
sound. Although ongoing funding needs may enlarge total financing requirements,
access to capital market is good. Risk factors are small.
FITCH IBCA:
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for US public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 - Highest credit quality. Indicates the Best capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 - Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3 - Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
B - Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
C - High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D - Default. Denotes actual or imminent payment default.
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC", or to short-term ratings other than
"F1'.
NR - indicates that Fitch IBCA does not rate the issuer or issue in
question.
Withdrawn - A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
A-7
<PAGE> 83
RatingAlert - Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
THOMSON:
TBW-1 - The TBW-1 rating reflects a very high degree of likelihood that
principal and interest will be timely repaid and paid.
TBW-2 - Bank commercial paper rated TBW-2 has a strong degree of safety
regarding payment.
TBW-3 - Bank commercial paper rated TBW-3 is the lowest investment
grade category, reflecting an adequate capacity to timely service principal and
interest but more exposure to adverse internal and external developments than
higher-rated issues.
TBW-4 - Bank commercial paper rated TBW-4 indicates that the debt is
regarded as non-investment grade and therefore speculative.
CORPORATE NOTE RATINGS
S&P:
The two highest ratings for corporate notes are SP-1 and SP-2.
SP-1 - Notes rated SP-1 reflect a very strong or strong capacity to pay
principal and interest. Note issues with overwhelming safety characteristics
will be rated SP-1+.
SP-2 - Notes rated SP-2 reflect a satisfactory capacity to pay
principal and interest.
D&P:
D-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.
D-1 - Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
D-1- - High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
D-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.
D-3 - Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D-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.
D-5 - Issuer failed to meet scheduled principal and/or interest
payments.
A-8
<PAGE> 84
TAX EXEMPT BOND RATINGS
MOODY'S:
Moody's ratings for U.S. Tax Exempt Municipal Bonds range from Aaa to C
and utilize substantially the same definitional elements as are set forth under
the Moody's section of the Corporate Bond Ratings descriptions on page A-1.
S&P:
S&P's ratings for U.S. Tax Exempt Municipal Bonds range from AAA to D
and utilize substantially the same definitional elements as are set forth under
the Moody's section of the Corporate Bond Ratings descriptions on page A-2.
D&P:
D&P's ratings for U.S. Tax Exempt Municipal Bonds range from AAA to DP
and utilize substantially the same definitional elements as are set forth under
the D&P section of the Corporate Bond Ratings descriptions on page A-3.
FITCH IBCA:
Fitch IBCA's ratings for U.S. Tax Exempt Municipal Bonds range from AAA
to D and utilize substantially the same definitional elements as are set forth
under the D&P section of the Corporate Bond Ratings descriptions on page A-3.
TAX EXEMPT NOTE RATINGS
MOODY'S:
MIG 1/VMIG 1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3 - This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4 - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG - This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
In the case of variable rate demand obligations (VRDOs), a
two-component rating is assigned. The first element represents an evaluation of
the degree of risk associated with scheduled principal and interest payments,
and the other represents an evaluation of the degree of risk associated with the
demand feature. The short-term rating assigned to the demand feature of VRDOs is
designated as VMIG. When
A-9
<PAGE> 85
either the long- or short-term aspect of a VRDO is not rated, that piece is
designated NR, e.g., Aaa/NR or NR/VMIG 1.
Issues that are subject to a periodic reoffer and resale in the
secondary market in a "dutch auction" are assigned a long-term rating based only
on Moody's assessment of the ability and willingness of the issuer to make
timely principal and interest payments. Moody's expresses no opinion as to the
ability of the holder to sell the security in a secondary market "dutch
auction." Such issues are identified by the insertion of the words "dutch
auction" into the name of the issue.
Issues or the features associated with MIG or VMIG ratings are
identified by date of issue, date of maturity or maturities or rating expiration
date and description to distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other similar issue of the
same obligor. MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issue's specific structural or
credit features.
S&P:
Municipal notes with maturities of three years or less are usually
given note ratings to distinguish more clearly the credit quality of notes as
compared to bonds.
SP-1 - Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a plus
designation.
SP-2 - Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 - Speculative capacity to pay principal and interest.
D&P:
D&P's ratings for U.S. Tax Exempt Notes range from D-1+ to D-5 and
utilize substantially the same definitional elements as are set forth under the
D&P section of the Corporate Notes Ratings descriptions on page A-9.
FITCH IBCA:
Fitch IBCA's ratings for U.S. Tax Exempt Notes range from F-1 to D and
utilize substantially the same definitional elements as are set forth under the
D&P section of the Corporate Notes Ratings descriptions on page A-9.
A-10
