<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer is not permitted.
Deutsche Asset Management
Mutual Fund
Prospectus
September 29, 2000
Premier Class
Total Return Bond
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
(Deutsche Bank Group logo)
1
<PAGE>
Total Return Bond--Premier Class
Overview of Total Return Bond
00 Goal
00 Core Strategy
00 Investment Policies and Strategies
00 Principal Risks of Investing in the Fund
00 Who Should Consider Investing in the Fund
00 Total Returns, After Fees and Expenses
00 Annual Fund Operating Expenses
A Detailed Look at Total Return Bond
00 Objective
00 Strategy
00 Principal Investments
00 Investment Process
00 Other Investments
00 Prior Performance of a Similar Composite Portfolio
00 Risks
00 Management of the Fund
00 Calculating the Fund's Share Price
00 Performance Information
00 Dividends and Distributions
00 Tax Considerations
00 Buying and Selling Fund Shares
00 Financial Highlights
2
<PAGE>
Overview
of Total Return Bond--Premier Class
Goal: The Fund seeks total return.
Core Strategy: The Fund invests primarily in U.S. dollar-denominated investment
grade bonds of U.S. and foreign issuers.
INVESTMENT POLICY AND STRATEGIES
The Fund seeks to achieve its objective by investing in a core "asset class"
consisting of U.S. dollar-denominated, investment grade fixed income securities.
The Fund allocates its remaining assets among foreign investment grade fixed
income securities and below investment grade fixed income securities (high yield
or "junk" bonds) of U.S. and foreign issuers, including those in countries with
new or emerging securities markets. Securities may be denominated in U.S. or
foreign currencies. The investment adviser employs a team approach in
allocating the Fund's assets among the various fixed income sectors or "asset
classes." The Fund will revert to a core portfolio of U.S. dollar-denominated
investment grade fixed income securities if the team believes the core asset
class will add value relative to the other asset classes.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. An issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline. This risk is higher
for below investment grade bonds.
. The issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest. This risk is higher for below investment
grade bonds.
. Interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
. The lower rated debt securities in which the Fund invests are considered
speculative and subject to greater volatility and risk of loss than
investment grade securities, particularly in deteriorating economic
periods.
. Since the Fund is non-diversified and may invest a greater percentage of
its assets in a particular issuer than a diversified fund, the Fund may be
more susceptible to developments affecting any single issuer of portfolio
securities.
Beyond the risks common to all investing, an investment in the Fund could also
lose money or underperform alternative investments as a result of risks in the
foreign countries in which the
3
<PAGE>
Fund invests. These risks are more severe for securities of issuers in emerging
market countries. For example:
. adverse political, economic or social developments could undermine the
value of the Fund's investments or prevent the Fund from realizing their
full value;
. foreign accounting and financial reporting standards differ from those in
the U.S. and could convey incomplete information when compared to
information typically provided by U.S. companies; or
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
WHO SHOULD CONSIDER INVESTING IN THE FUND
Total Return Bond--Premier Class requires a minimum investment of $5 million.
You should consider investing in the Fund if you are seeking total return higher
than U.S. investment grade bond funds provide over most time periods. Moreover,
you should be willing to accept significantly greater short-term fluctuation in
the value of your investment than you would typically experience investing in
investment grade bond or money market funds. You should not consider investing
in Total Return Bond if you are pursuing a short-term financial goal or if you
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, afford exposure to investment opportunities not available to an
investor in U.S. investment grade fixed income securities alone. Diversifying
your investments may improve your long-run investment return and lower the
volatility of your overall investment portfolio.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
4
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The Fund does not have a full calendar year of annual operating performance to
report.
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and estimated
expenses that you may pay if you buy and hold shares of Total Return Bond--
Premier Class.
Expense Example. The example below illustrates the expenses incurred on a
$10,000 investment in the Fund. It assumes that the Fund earned an annual return
of 5% over the periods shown, the Fund's operating expenses remained the same
and you sold your shares at the end of the period.
You may use this hypothetical example to compare the Fund's expense ratio with
other funds. The example does not represent an estimate of future returns or
expenses. Actual costs may be higher or lower.
ANNUAL FEES AND EXPENSES
------------------------------------------------------------------
Percentage of Average
Daily Net Assets
------------------------------------------------------------------
Management Fees 0.45%
------------------------------------------------------------------
Distribution and Service (12b-1) Fees None
------------------------------------------------------------------
Other Expenses 0.33%
------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.78%
------------------------------------------------------------------
Less: Fee Waiver or Expense Reimbursement (0.33)%/1/
------------------------------------------------------------------
Net Expenses 0.45%
------------------------------------------------------------------
EXPENSE EXAMPLE/2/
--------------------------------
1 year 3 years
--------------------------------
$xxx $xxx
--------------------------------
__________________
/1/ The investment adviser and administrator have agreed, for the period from
September 29, 2000 to February 28, 2001, to waive their fees and reimburse
expenses so that total expenses will not exceed 0.45%.
/2/ For the first year, the expense example takes into account fee waivers and
reimbursements.
5
<PAGE>
A detailed look
at Total Return Bond--Premier Class
OBJECTIVE
The Fund seeks total return. While we seek total return, we cannot offer any
assurance of achieving this objective. The Fund's objective is not a fundamental
policy. We must notify shareholders before we change it, but we do not require
their approval to do so.
STRATEGY
The Fund attempts to produce a total return higher than that of mutual funds
that invest only in U.S. investment grade fixed income securities. The Fund does
this by investing in a core "asset class" consisting of U.S. dollar-denominated,
investment grade fixed income securities. The Fund allocates its remaining
assets among foreign investment grade fixed income securities and below
investment grade fixed income securities (high yield or "junk" bonds) of U.S.
and foreign issuers, including those in countries with new or emerging
securities markets. Securities may be denominated in U.S. or foreign currencies
and may be of any maturity.
CALL OUT: Maturity measures the time remaining until an issuer must repay a
bond's principal in full.
The investment adviser employs a team approach in allocating the Fund's assets
among the various asset classes. Using risk/return analysis, the team evaluates
foreign markets, high yield and emerging debt opportunities relative to the U.S.
investment grade fixed income market and sets allocation targets monthly for
each asset class. Sector specialists then evaluate the relative value of
purchase candidates given the distinct characteristics of the relevant asset
class. The Fund will revert to a core portfolio of U.S. dollar-denominated
investment grade fixed income securities if the team believes the core asset
class will add value relative to the other asset classes. In implementing these
strategies, the Fund may experience a high portfolio turnover rate.
CALL OUT: The portfolio turnover rate measures the frequency with which the Fund
sells and replaces its securities within a given period. High turnover can
increase the Fund's transaction costs, thereby lowering its returns. It may also
increase distributions from the Fund which may be subject to taxation.
The Fund has applied for an exemptive order with the Securities and Exchange
Commission which would permit it to invest in the Deutsche High Yield Bond
Portfolio and the Deutsche Emerging Markets Debt fund to gain exposure to U.S.
and foreign high yield bonds, including high yield bonds of issuers in emerging
markets. There is no assurance that such an order will be granted. The Deutsche
High Yield Bond Portfolio invests primarily in U.S.-dollar denominated high
yield bonds of domestic and foreign issuers. The Deutsche Emerging Markets Debt
fund invests primarily in high yield bonds of issuers located in countries with
new or emerging securities markets. The strategies, principal investments and
investment processes described below for the Fund's investments in high yield
bonds and emerging debt opportunities are
6
<PAGE>
substantially similar to those used by the High Yield Bond Portfolio and
Emerging Markets Debt fund.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
U.S. dollar-denominated investment grade fixed income securities. The remainder
of the Fund's assets may be allocated among fixed income securities of foreign
issuers, high yield bonds of U.S. and foreign issuers, including high yield
bonds of issuers in countries with new or emerging securities markets, or, to
maintain liquidity, in cash or money market instruments.
CALL OUT: Fixed income securities are investment grade if, at the time of
purchase:
. They are rated in one of the top four long-term rating categories by a
nationally recognized statistical rating organization;
. They have received a comparable short-term or other rating; or
. They are unrated securities that the investment adviser believes to be of
comparable quality to rated investment grade securities.
The Fund may choose not to sell securities that are downgraded after their
purchase below the Fund's minimum acceptable credit rating. The Fund's credit
standards also apply to counterparties of over-the-counter derivative contracts.
The Fund may invest up to 25% of its total assets in foreign investment grade
fixed income securities. The Fund may invest up to 17% of its total assets in
below investment grade fixed income securities (high yield or "junk" bonds) of
U.S. and foreign issuers. Up to 7% of the Fund's total assets may be invested in
high yield bonds of sovereign debt issuers located in new or emerging markets.
The Fund considers an emerging securities market to be one where the sovereign
debt issued by the government in local currency terms is rated below investment
grade. Securities may be denominated in U.S. or foreign currencies.
CALL OUT: Fixed income securities are rated below investment grade or are
considered high yield if they are rated below the top four long-term rating
categories by a nationally recognized statistical rating organization or, if
unrated, are determined to be of equivalent quality by the investment adviser.
These securities are considered speculative. If a security receives different
ratings from different rating organizations, the Fund will treat the security as
having the highest rating given.
Fixed income investments include bonds, notes (including structured notes),
mortgage-related securities, asset-backed securities, convertible securities,
eurodollar and Yankee dollar instruments, preferred stocks, non-convertible
preferred stocks and money market instruments. Fixed income securities may be
issued by U.S. and foreign corporations or entities; U.S. and foreign banks; the
U.S. government, its agencies, authorities, instrumentalities or sponsored
enterprises; state and municipal governments; supranational organizations; and
foreign governments and their subdivisions. These securities may have all types
of interest rate payment
7
<PAGE>
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in-kind and auction rate features.
The Fund's high yield component may also consist of performing and non-
performing loans, Eurobonds, Brady Bonds (dollar-denominated securities used to
refinance foreign government bank loans) and other fixed income securities of
foreign governments and their agencies. With respect to emerging market debt
investments, the Fund invests primarily in sovereign debt. The Fund may invest
in fixed income securities of any credit quality, including securities not
paying interest currently, zero coupon bonds, pay-in-kind securities and
securities in default.
INVESTMENT PROCESS
The investment adviser employs a team approach to allocate the Fund's assets
among the various asset classes. The team includes members from the investment
adviser and the sub-adviser. We refer to both as the investment adviser.
The asset allocation team meets formally on a monthly basis to determine
relative value across asset classes, drawing on input from sector and market
specialists. Once allocation targets for each broad fixed income sector are set,
sector specialists consider the relative value of purchase candidates given the
distinct characteristics of that particular asset class. Company research and
fundamental analysis are used to select the best securities within each asset
class. The techniques used by the sector specialists in evaluating each asset
class are described below:
U.S. Investment Grade Securities. In selecting these securities for investment,
the investment adviser:
. assigns a relative value to each bond, based on creditworthiness, cash flow
and price;
. determines the intrinsic value of each issue by examining credit,
structure, option value and liquidity risks. We look to exploit any
inefficiencies between intrinsic value and market trading price;
. uses credit analysis to determine the issuer's ability to fulfill its
contracts; and
. uses a bottom-up approach which subordinates sector weightings to
individual bonds that the adviser believes may add above-market value.
The investment adviser generally sells these securities when they reach their
target price or when there is a negative change in their outlook relative to the
other securities held by the Fund. Bonds may also be sold to facilitate the
purchase of an issue with more attractive risk/return characteristics.
Foreign Investment Grade Securities and Emerging Markets High Yield Securities.
In selecting these securities for investment, the investment adviser considers
macro-economic factors such as inflation, interest rates, monetary and fiscal
policies, taxation, and political climate. The investment adviser seeks to
identify those securities that will offer, in its opinion, the greatest
potential for capital appreciation on a three-month outlook. The investment
adviser sells securities or exchanges currencies when they meet their target
price objectives or when the investment adviser revises price objectives
downward. In selecting emerging market securities,
8
<PAGE>
the investment adviser also considers short-term factors such as market
sentiment, capital flows, and new issue programs.
High Yield Securities (Excluding Emerging Market Sovereign Debt). In selecting
these securities for investment, the investment adviser:
. analyzes economic conditions for improving or undervalued sectors and
industries;
. uses independent credit research and on-site management visits to evaluate
individual issues' debt service, growth rate, and both downgrade and
upgrade potential;
. assesses new issues versus secondary market opportunities; and
. seeks issues within attractive industry sectors and with strong long-term
fundamentals and improving credits.
OTHER INVESTMENTS
The Fund may use mortgage dollar rolls to finance the purchase of additional
investments. The Fund may also purchase securities on a when-issued basis and
engage in short sales.
The Fund may use various instruments commonly known as "derivatives" as
secondary investments. In particular, the Fund may use forward currency
transactions and currency options. The Fund may, but is not required to, use
derivative contracts for any of the following purposes:
. when we believe they offer an economical means of gaining exposure to a
particular securities market or index (e.g., as a substitute for purchasing
or selling securities or foreign currencies);
. to attempt to reduce the Fund's exposure or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the
market;
. to hedge against adverse changes in the market value of securities held by
or to be bought for the Fund. These changes may be caused by changing
interest rates, security prices or currency exchange rates;
. to shorten or lengthen the effective maturity or duration of the Fund's
fixed income portfolio; or
. in non-hedging situations, to attempt to profit from anticipated market
developments. This is commonly referred to as "leveraging."
CALL OUT: Forward currency transactions involve the purchase or sale of a
foreign currency at an exchange rate established currently, but with payment and
delivery at a specified future time. Forward currency transactions may be used
in an attempt to hedge against losses, or where possible, to add to investment
returns.
CALL OUT: A derivative contract will obligate or entitle the Fund to deliver or
receive an asset or a cash payment that is based on the change in value of a
designated security, index or currency. Examples of derivative contracts are
futures contracts, options, forward contracts, and swaps.
9
<PAGE>
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S. money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objective.
PRIOR PERFORMANCE OF A SIMILAR COMPOSITE PORTFOLIO
Set forth below is certain composite information regarding the performance for
certain periods of separate accounts, each of which is advised by Deutsche Asset
Management, Inc. ("DAMI"), the Fund's investment adviser. These accounts are
collectively referred to as the Enhanced Core Fixed -- Fully Enhanced Composite
or "Composite." In managing the Fund, the investment adviser will employ
substantially the same investment objectives, policies and strategies that are
employed in managing the Composite. However, in managing the Fund, we are
subject to certain rules (e.g., limits on the percentage of assets invested in
securities of issuers in a single industry and requirements on distributing
income to shareholders) that do not apply to the Composite. In addition, the
continuous offering of the Fund's shares and the Fund's obligation to redeem its
shares will likely cause the Fund to experience cash flows which are different
from those of the Composite. Moreover, the way of calculating the performance of
the Composite, which values its assets at the end of each month, differs from
the method employed by mutual funds, which among other things value their assets
on a daily basis. All of these factors may affect the performance of the Fund
and cause it to differ from that of the Composite. Certain of these factors may
adversely affect the Fund's performance.
The Composite is comprised of all separate accounts managed on a fully
discretionary basis by DAMI that employ substantially the same investment
objectives, policies and strategies that will be employed in managing the Fund.
In order to be included in the Composite, accounts must have greater than $25
million in assets.
The performance information presented below for the Composite includes the
combined performance of the separate accounts over various periods of time since
December 1994 (the first full calendar year of operations for the oldest of the
accounts included in the composite was 1995). Of the accounts comprising the
Composite over the periods shown, none have been operational for the entire six
year period indicated. Accounts over $25 million were added to the composite at
their inception or at the time when their investment objectives became
substantially similar to those of the Fund. Eligible new separate accounts were
added to the Composite immediately following the first complete month the
account was managed by DAMI. Accounts were deleted from the Composite when
their investment mandate changed or when the account was terminated.
Expenses incurred in the operation of the Composite are paid directly by its
investors rather than by the Composite. Accordingly, the performance results
for the Composite have been adjusted to reflect an overall expense ratio of
0.45%, which is the same as that expected to be borne by the Premier Class
shares of the Fund. Returns of the Composite are compared to the Lehman Brothers
Aggregate Bond Index. Unlike the Composite's returns, those of the Index do not
10
<PAGE>
reflect fees and expenses. Both the returns of the Composite and the Index
reflect the reinvestment of dividends and distributions.
CALL OUT: The Lehman Brothers Aggregate Bond Index represents U.S. domestic
taxable investment grade bonds which include securities from the following
sectors: U.S. Treasuries, agencies, corporate, mortgage-backed and asset-backed
securities. The Index includes over 5,500 publicly issued securities with a
minimum one year to final maturity and $150 million par amount outstanding. The
average maturity and duration of the Index is in the intermediate range.
Calendar Year Performance
(each full calendar year since inception)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Year Composite Index Returns Difference Number of Composite
Returns with Separate Assets at End
Fees Accounts at of Period
End of Period/1/
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
--------------------------------------------------------------------------------------------------------
1998
--------------------------------------------------------------------------------------------------------
1997
--------------------------------------------------------------------------------------------------------
1996
--------------------------------------------------------------------------------------------------------
1995
--------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Since its inception in December 1994, the Composite has been composed of as
few as one and as many as seven separate accounts depending on the time period.
For example, for the period since inception to October 1996, the Composite was
composed of only one separate account.
Annualized Performance
Periods Ending June 30, 2000
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Quarter Year to Date 1 Year 3 Year 5 Years Since
Ending June Inception
30, 2000 (Dec. 1994)
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
Composite
Returns with
Fees
----------------------------------------------------------------------------------------------------------
Index Returns
----------------------------------------------------------------------------------------------------------
</TABLE>
The performance data represents the prior performance of the Composite, not the
prior performance of the Fund, and should not be considered an indication of
future performance of the Fund.
RISKS
11
<PAGE>
Below we have set forth some of the prominent risks associated with investing in
fixed income securities, as well as investing in general. Although we attempt
both to assess the likelihood that these risks may actually occur and to limit
them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated below the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than investment grade securities and
are more sensitive to changes in the issuer's capacity to pay.
Security Selection Risk. A risk that pervades all investing is the risk that the
securities in the Fund's portfolio will decline in value.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. It may also create a capital gains tax liability because bond issuers
usually pay a premium for the right to pay off bonds early. There is a greater
risk that the Fund will lose money due to prepayment risk because the Fund
invests in mortgage-related securities.
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security. There is a greater risk that the
Fund will lose money due to extension risk because the Fund invests in mortgage-
related securities.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment.
Foreign Market Risk. From time to time, foreign capital markets have exhibited
more volatility than those in the United States. Trading fixed income securities
on some foreign exchanges is inherently more difficult than trading in the
United States for several reasons including:
12
<PAGE>
. Political Risk. Some foreign governments have limited the outflow of
profits to investors abroad, extended diplomatic disputes to include trade
and financial relations, and imposed high taxes on corporate profits.
. Information Risk. Financial reporting standards for companies based in
foreign markets differ from those in the United States and may present an
incomplete or misleading picture of a foreign company compared to U.S.
standards.
. Liquidity Risk. Fixed income securities that trade infrequently or in low
volumes can be more difficult or more costly to buy, or to sell, than more
liquid or active securities. This liquidity risk is a factor of the trading
volume of a particular security, as well as the size and liquidity of the
entire local market. On the whole, foreign exchanges are smaller and less
liquid than the U.S. market. Relatively small transactions in some
instances can have a disproportionately large effect on the price and
supply of certain securities. In certain situations, it may become
virtually impossible to sell a security in an orderly fashion at a price
that approaches our estimate of its value.
. Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the U.S.
. Currency Risk. The Fund invests in foreign currencies and in securities
denominated in foreign currencies. This creates the possibility that
changes in foreign exchange rates will affect the U.S. dollar value of
foreign securities or the U.S. dollar amount of income or gain received on
these investments. Additionally, a change in economic policy may cause a
greater fluctuation in the value of a country's currency than in bonds
denominated in that currency. We may, but need not, seek to minimize this
risk by actively managing the currency exposure of the Fund, which entails
hedging from time to time.
FOOTNOTE: Currency management may be used in an attempt to offset investment
risks (``hedging'') and, where possible, to add to investment returns. Currency
management activities include the use of forward contracts and may include the
use of other instruments. There is no guarantee that these currency management
activities will be employed or that they will work, and their use could cause
lower returns or even losses to the Fund.
Emerging Market Risk. Because the Fund may invest in emerging markets, it may
face higher political, information, and market risks. In addition, profound
social changes and business practices that depart from norms in developed
countries' economies have hindered the orderly growth of emerging economies and
their securities markets in the past. High levels of debt tend to make emerging
economies heavily reliant on foreign capital and vulnerable to capital flight.
Risk Related to Investing in Below Investment Grade Securities. Below investment
grade securities are speculative and have only an adequate capacity to pay
principal and interest. These securities have a higher risk of default, tend to
be less liquid and may be more difficult to value. The issuers of lower quality
securities may be highly leveraged and have difficulty servicing their debt,
especially during prolonged economic recessions or periods of rising interest
rates. The prices of lower quality securities are volatile and may go down due
to market perceptions of deteriorating issuer creditworthiness or economic
conditions. The general risks of investing in fixed income securities as
described below are greater when investing in below investment grade securities.
13
<PAGE>
Non-diversification Risk. The Fund is non-diversified. Compared with other
funds, the Fund may invest a greater percentage of its assets in a particular
issuer. The Fund may be more susceptible to developments affecting any single
issuer or portfolio security.
Secondary Risks
Derivative Risks. Risks associated with derivatives include:
. that the derivative is not well correlated with the security for which it
is acting as a substitute;
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market.
The use of derivatives for leveraging purposes tends to magnify the effect of an
instrument's price changes as market conditions change. For futures contracts
and options on futures contracts used for leveraging, the margin and premiums
required to make those investments will not exceed 5% of the Fund's net asset
value after taking into account unrealized profits and losses on the contracts.
Futures contracts and options on futures contracts used for leveraging involve
greater risks than bond investments.
Short Sales. The Fund may engage in short sales in order to profit from an
anticipated decline in the value of a security. The Fund may also engage in
short sales to attempt to limit its exposure to a possible market decline in the
value of its portfolio securities, which the investment adviser believes possess
volatility characteristics similar to those being hedged. Short selling may
produce a higher than normal portfolio turnover that may result in increased
transaction costs to the Fund and gains from the sale of securities deemed to
have been held for less than three months. Such gains must be less than 30% of
the Fund's gross income in order for the Fund to qualify as a regulated
investment company under the Internal Revenue Code.
Pricing Risk. When price quotations for particular securities are not readily
available, we determine their value by the method that most accurately reflects
their current worth in the judgment of the Board of Trustees. This procedure
implies an unavoidable risk that our prices are higher or lower than the prices
that the securities might actually command if we were to sell them. If we value
these securities too highly when you buy shares of the Fund, you may end up
paying too much for your Fund shares. If we underestimate their price when you
sell, you may not receive the full market value for your Fund shares.
The market for below investment grade debt securities may be thinner and less
active than that for higher rated debt securities, which can adversely affect
the prices at which the below investment grade securities are sold. If market
quotations are not available, below investment grade debt securities will be
valued in accordance with procedures established by the Board of Trustees.
Judgment plays a greater role in valuing below investment grade corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the availability of outside pricing
services to value lower-rated debt securities and the Fund's ability to dispose
of these securities. Since the risk of default is higher for lower-rated
securities, the
14
<PAGE>
investment adviser's research and credit analysis are an especially important
part of managing securities of this type.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank AG, Deutsche Fund Management, Bankers Trust Company,
DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche Asset
Management Investment Services Limited.
Board of Trustees. A Board of Trustees supervises all of the Fund's activities
on behalf of the Fund's shareholders.
Investment Adviser and Sub-Adviser. Under the supervision of the Board of
Trustees, DAMI ("DAMI") with headquarters at 885 Third Avenue, New York, New
York, acts as the investment adviser for the Fund. As investment adviser, DAMI
makes the Fund's investment decisions. It buys and sells securities for the Fund
and conducts the research that leads to these purchase and sale decisions. The
Fund's investment adviser is also responsible for selecting brokers and dealers
and for negotiating brokerage commissions and dealer charges. The investment
adviser will receive 0.45% of the Fund's average daily net assets for its
services in a fiscal year. The investment adviser may reimburse a portion of its
fee during the period.
Deutsche Asset Management Investment Services Limited ("DAMIS"), with
headquarters at One Appold Street, London, England, acts as sub-adviser to that
portion of the Fund's assets invested in non-U.S. fixed income securities. The
investment adviser pays the sub-adviser out of the investment advisory fees it
receives from the Fund.
DAMI and DAMIS provide a full range of international investment advisory
services to institutional clients. As of __________, 2000, DAMI and DAMIS
managed approximately $xx billion and $xx billion in assets, respectively. DAMI
and DAMIS are indirect wholly owned subsidiaries of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
financial services, including investment management, mutual fund services,
retail and commercial banking, investment banking and insurance.
Portfolio Managers
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of DAMI and Lead Manager of the Fund
. Portfolio Manager of the Fund's U.S. investment grade fixed income
investments.
. Joined the investment adviser in 1989.
. Chief Investment Officer of the fixed income group (U.S.) of DAMI
. Member of the Fund's asset allocation team.
J. Christopher Gagnier, Director of DAMI and Co-Manager of the Fund
. Portfolio Manager of the Fund's corporate securities and asset backed
securities investments.
15
<PAGE>
. Joined the investment adviser in 1997.
. Fixed income specialist, Paine Webber, from 1984 to 1997.
. Member of the Fund's asset allocation team.
Steve Ilott, Director of DAMI
. Portfolio Manager and product manager of enhanced core fixed income
investments.
. Joined the investment adviser in 1998.
. Manager of global fixed income and currency portfolios at Robert Fleming &
Co. 1988 to 1998.
. 12 years of investment industry experience.
. Member of the Fund's asset allocation team.
Andrew Cestone, Director of DAMI
. Portfolio Manager of the Fund's U.S. high yield investments.
. Joined the investment adviser in 1998.
. Investment Analyst, Phoenix Investment Partners, from 1997 to 1998 and
Credit Officer, asset based lending group, Fleet Bank, from 1995 to 1997.
. Member of the Fund's asset allocation team.
Ian Clarke, Director of DAMIS
. Portfolio Manager of the Fund's foreign investment grade fixed income
investments.
. Joined the investment adviser in 1999.
. Executive Director, Morgan Stanley Dean Witter from 1992 to 1999 and prior
to that Director, United Bank of Kuwait plc from 1983 to 1992.
. Chief Investment Officer of the fixed income group (U.K.) of DAMIS.
. 14 years of investment industry experience.
. Member of the Fund's asset allocation team.
David Dowsett, Portfolio Manager of DAMIS
. Portfolio Manager of the Fund's emerging markets debt investments.
. Joined the investment adviser in 1994.
. 6 years of experience as an investment professional.
. Member of the Fund's asset allocation team.
Other Services. DAMI provides administrative services for the Fund. In addition,
DAMI--or your service agent--performs the functions necessary to establish and
maintain your account. In addition to setting up the account and processing your
purchase and sale orders, these functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the
Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
16
<PAGE>
. collecting your executed proxies.
Service agents include brokers, financial advisors or any other bank, dealer or
other institution that has a sub-shareholder servicing agreement with DAMI.
Service agents may charge additional fees to investors for those services not
otherwise included in the service agent's servicing agreement, such as cash
management or special trust or retirement-investment reporting.
Organizational Structure. The Fund is a series of an open-end investment company
organized as a Delaware business trust. The Fund has applied for an exemptive
order with the Securities and Exchange Commission which would permit it to
invest in the Deutsche High Yield Bond Portfolio and the Deutsche Emerging
Markets Debt fund for the purpose of gaining exposure to domestic and foreign
below investment grade fixed income securities, including high yield securities
of issuers in emerging markets. There is no assurance that such an order will be
granted. If the order is granted, the Fund will operate in a structure commonly
known as a "fund of funds." This means that the Fund pursues its objective by
investing in other mutual funds as well as in individual securities. As a fund
of funds, the Fund will incur its own direct expenses, in addition to bearing
indirectly a proportionate share of the expenses incurred by the underlying
funds in which it invests.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business.
The formula calls for deducting all of the liabilities of a Fund's class of
shares from the total value of its assets--the market value of the securities it
holds, plus its cash reserves--and dividing the result by the number of shares
of that class outstanding. Prices for securities that trade on foreign exchanges
can change significantly on days when the New York Stock Exchange is closed and
you cannot buy or sell Fund shares. Such price changes in the securities a Fund
owns may ultimately affect the price of Fund shares when the New York Stock
Exchange re-opens.
The Fund uses a forward pricing procedure. Therefore, the price at which you buy
or sell shares is based on the next calculation of the NAV after the order is
received by the Fund or your service agent, provided that your service agent
forwards your order to the Fund in a timely manner.
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their fair value in the judgment of the Board of Trustees.
The New York Stock Exchange is open every week, Monday through Friday, except
when the following holidays are celebrated: New Year's Day, Martin Luther King,
Jr. Day (the third Monday in January), Presidents' Day (the third Monday in
February), Good Friday, Memorial
17
<PAGE>
Day (the last Monday in May), Independence Day, Labor Day (the first Monday in
September), Thanksgiving Day (the fourth Thursday in November) and Christmas
Day.
PERFORMANCE INFORMATION
The Fund's performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indices and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
DIVIDENDS AND DISTRIBUTIONS
Income dividends, if any, for the Fund are declared daily and paid monthly.
Capital gains distributions, if any, are distributed at least annually. We
automatically reinvest all dividends and any capital gains, unless you tell us
otherwise.
TAX CONSIDERATIONS
The Fund does not ordinarily pay any U.S. federal income tax. If you are a
taxable shareholder, you and other shareholders pay taxes on the income or
capital gains earned and distributed by the Fund. Your taxes will vary from year
to year, based on the amount of capital gains distributions and dividends paid
out by your Fund. You owe the taxes whether you receive cash or choose to have
distributions and dividends reinvested. Distributions and dividends usually have
the following tax character:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Transaction Tax Status
---------------------------------------------------------------------------------------------------
<S> <C>
Income dividends (except exempt-interest Ordinary Income
dividends)
---------------------------------------------------------------------------------------------------
Short-term capital gains distributions Ordinary Income
---------------------------------------------------------------------------------------------------
Long-term capital gains distributions Long-term capital gains
---------------------------------------------------------------------------------------------------
</TABLE>
Every year your Fund will send you information on the distributions for the
previous year. In addition, the sale (including a redemption or exchange) of
Fund shares is a taxable transaction for you.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Transaction Tax Status
---------------------------------------------------------------------------------------------------
<S> <C>
Your sale of shares owned more than one year Generally, long-term capital gains or losses
---------------------------------------------------------------------------------------------------
Your sale of shares owned for one year or less Generally, short-term capital gains or losses;
losses subject to special rules
---------------------------------------------------------------------------------------------------
</TABLE>
The tax considerations for tax deferred accounts or non-taxable entities are
different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about your
investment.
18
<PAGE>
BUYING AND SELLING FUND SHARES
Contacting the Mutual Fund Service Center of Deutsche Asset Management
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
<S> <C>
By phone 1-800-730-1313
---------------------------------------------------------------------------------------------------
By mail Deutsche Asset Management Service Center
P.O. Box 219210
Kansas City, MO 64121
---------------------------------------------------------------------------------------------------
By overnight mail Deutsche Asset Management Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
---------------------------------------------------------------------------------------------------
</TABLE>
Our representatives are available to assist you personally Monday through
Friday, 9:00 a.m. to 7:00 p.m. Eastern time each day the New York Stock Exchange
is open for business.
Minimum Account Investments
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
<S> <C>
To open an account $5 million
---------------------------------------------------------------------------------------------------
To add to an account $1 million
---------------------------------------------------------------------------------------------------
Minimum account balance $1 million
---------------------------------------------------------------------------------------------------
</TABLE>
Shares of the Fund may be purchased without regard to the investment minimums by
employees of Deutsche Bank AG, any of its affiliates or subsidiaries, their
spouses and minor children, and Directors or Trustees of any investment company
advised or administered by Deutsche Bank AG or any of its affiliates or
subsidiaries, their spouses and minor children. The Fund and its service
providers reserve the right to, from time to time, at their discretion, waive or
reduce the investment minimums.
How to Open Your Fund Account
--------------------------------------------------------------------------------
By mail Complete and sign the account application that accompanies this
prospectus. (You may obtain additional applications by calling the
Service Center.) Mail the completed application along with a check
payable to the Fund you have selected to the Service Center. The
addresses are shown under "Contacting the Mutual Fund Service Center
of Deutsche Asset Management Funds".
--------------------------------------------------------------------------------
By wire Call the Service Center to set up a wire account.
--------------------------------------------------------------------------------
Please note that your account cannot become activated until we receive a
completed application via mail or fax.
Two Ways to Buy and Sell Shares in Your Account
MAIL:
Buying: Send your check, payable to the Deutsche Asset Management fund you have
selected, to the Service Center. The addresses are shown in this section under
"Contacting the Mutual Fund
19
<PAGE>
Service Center of Deutsche Asset Management." Be sure to include the fund number
and your account number (see your account statement) on your check. Please note
that we cannot accept starter checks or third-party checks. If you are investing
in more than one fund, make your check payable to "Deutsche Asset Management/
Mutual Funds" and include your account number, the names and numbers of the
funds you have selected, and the dollar amount or percentage you would like
invested in the fund.
Selling: To sell by mail send a signed letter to the Service Center with your
name, your fund number and account number, the fund's name, and either the
number of shares you wish to sell or the dollar amount you wish to receive. You
must leave at least $1 million worth of shares in your account to keep it open.
Unless exchanging into another Deutsche Asset Management fund, you must submit a
written authorization to sell shares in a retirement account.
WIRE:
Buying: You may buy shares by wire only if your account is authorized to do so.
Please note that you or your service agent must call the Service Center at
1-800-730-1313 to notify us in advance of a wire transfer purchase. Inform the
Service Center representative of the amount of your purchase and receive a trade
confirmation number. Instruct your bank to send payment by wire using the wire
instructions noted below. All wires must be received by 4:00 p.m. Eastern time
the next business day.
--------------------------------------------------------------------------------
Routing No. 1010 00695
--------------------------------------------------------------------------------
Attn: Deutsche Asset Management/ Mutual Funds
--------------------------------------------------------------------------------
DDA No. 98-7052-395-7
--------------------------------------------------------------------------------
FBO: (Account name)
(Account number)
--------------------------------------------------------------------------------
Credit: Total Return Bond - Premier Class ([fund number])
--------------------------------------------------------------------------------
Refer to your account statement for the account name, number and fund number.
Selling: You may sell shares by wire only if your account is authorized to do
so. For your protection, you may not change the destination bank account over
the phone. To sell by wire, contact your service agent or the Service Center at
1-800-730-1313. Inform the Service Center representative of the amount of your
redemption and receive a trade confirmation number. The minimum redemption by
wire is $1,000. We must receive your order by 4:00 p.m. Eastern time to wire
your account the next business day.
Important Information about Buying and Selling Shares
. You may buy and sell shares of the fund through authorized service agents
as well as directly from us. The same terms and conditions apply.
Specifically, once you place your order with a service agent, it is
considered received by the Service Center. It is then your service agent's
responsibility to transmit the order to the Service Center. You should
contact your service agent if you have a dispute as to when your order was
placed with the fund. Your service
20
<PAGE>
agent may charge a fee for buying and selling shares for you.
. You may place orders to buy and sell over the phone by calling your service
agent or the Service Center at 1-800-730-1313. If you pay for shares by
check and the check fails to clear, or if you order shares by phone and
fail to pay for them by 4:00 p.m. Eastern time the next business day, we
have the right to cancel your order, hold you liable or charge you or your
account for any losses or fees the fund or its agents have incurred. To
sell shares, you must state whether you would like to receive the proceeds
by wire or check.
. After we or your service agent receives your order, we buy or sell your
shares at the next price calculated on a day the New York Stock Exchange is
open for business.
. We accept payment for shares only in U.S. dollars by check, bank or Federal
Funds wire transfer, or by electronic bank transfer. We do not accept
starter checks or third-party checks.
. The payment of redemption proceeds (including exchanges) for shares of the
fund recently purchased by check may be delayed for up to 15 calendar days
while we wait for your check to clear.
. We process all sales orders free of charge.
. Unless otherwise instructed, we normally mail a check for the proceeds from
the sale of your shares to your account address the next business day but
no later than seven days.
. We reserve the right to close your account on 30 days' notice if it fails
to meet minimum balance requirements for any reason other than a change in
market value.
. If you sell shares by mail or wire, you may be required to obtain a
signature guarantee. Please contact your service agent or the Service
Center for more information.
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "in-kind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent or the
Service Center for more information.
. During periods of heavy market activity, you may have trouble reaching the
Service Center by telephone. If this occurs, you should make your request
by mail.
. We reserve the right to reject purchases of Fund shares (including
exchanges) for any reason. We will reject purchases if we conclude that the
purchaser may be investing only for the short term or to profit from day to
day fluctuations in the Fund's share price.
. We reserve the right to reject purchases of Fund shares (including
exchanges) or to suspend or postpone redemptions at times when both the New
York Stock Exchange and the Fund's custodian are closed.
. Account Statements and Fund Reports: We or your service agent will furnish
you with a written confirmation of every transaction that affects your
account balance. You will also receive monthly statements reflecting the
balances in your account. We will send you a report every six months on
your fund's overall performance, its current holdings and its investing
strategies.
. Exchange Privilege: You can exchange all or part of your shares for shares
in another Deutsche Asset Management mutual fund up to four times a year
(from the date of the first exchange). When you exchange shares, you are
selling shares in one fund to purchase shares in another. Before buying
shares through an exchange, you should obtain a copy of that fund's
prospectus and read it carefully. You may order exchanges over the phone
only if your account is authorized to do so. You will receive a written
confirmation of each transaction
21
<PAGE>
from the Service Center or your service agent.
Please note the following conditions:
. The accounts between which the exchange is taking place must have the
same name, address and taxpayer ID number.
. You may make the exchange by phone if your account has the exchange by
phone feature or by letter or wire.
. If you are maintaining a taxable account, you may have to pay taxes on
the exchange.
FINANCIAL HIGHLIGHTS
The Fund does not have a full calendar year of annual operating performance to
report.
22
<PAGE>
[BACK COVER]
Additional information about the Fund's investments will be made available in
the Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated September 29, 2000, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semi-annual report, or if you
have questions about investing in the Fund, write to us at:
Deutsche Asset Management Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
or call our toll-free number:
1-800-730-1313
You can find reports and other information about the Fund on the EDGAR Database
on the SEC website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by electronic request at
[email protected] or by writing to the Public Reference Section of the SEC,
------------------
Washington, D.C. 20549-0102. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 202-942-8090.
Cusip #
Total Return Bond--Premier Class
Morgan Grenfell Investment Trust
Distributed by:
ICC Distributors, Inc.
811-8006
23
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any statement where the
offer is not permitted.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
One South Street
Baltimore, MD 21202
STATEMENT OF ADDITIONAL INFORMATION
September 29, 2000
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of fifteen investment portfolios, each having
separate and distinct investment objectives and policies. This Statement of
Additional Information ("SAI") provides supplementary information pertaining to
the following investment portfolios of the Trust (each, a "Fund"):
- Fixed Income, previously Morgan Grenfell Fixed Income Fund
- Municipal Bond, previously Morgan Grenfell Municipal Bond Fund
- Short-Term Fixed Income, previously Morgan Grenfell Short-Term Fixed
Income Fund
- Short-Term Municipal Bond, previously Morgan Grenfell Short-Term
Municipal Bond Fund
- Smaller Companies, previously Morgan Grenfell Smaller Companies Fund
- Micro Cap, previously Morgan Grenfell Micro Cap Fund
- Total Return Bond, previously Morgan Grenfell Total Return Bond Fund
This SAI is not a prospectus, and should be read only in conjunction with the
Institutional and Investment Class Prospectuses for each Fund except Total
Return Bond, dated February 28, 2000, and with the Investment, Institutional and
Premier Class Prospectuses dated September 29, 2000 for Total Return Bond, as
amended or supplemented from time to time (each, a "Prospectus" and
collectively, the "Prospectuses"). The unaudited semi-annual financial
statements and the audited financial statements for each Fund are included in
the Funds' annual and semi-annual reports, which we have filed electronically
with the Securities and Exchange Commission and which are incorporated by
reference into the SAI. A copy of each Prospectus may be obtained without
charge from Deutsche Asset Management, Inc. ("DAMI"), the Trust's Administrator,
by calling 1-800-730-1313 or writing to Morgan Grenfell Investment Trust, P.O.
Box 219210, Kansas City, Missouri 64121.
Page -1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Introduction................................................................. 3
Additional Information on Fund Investments and Strategies and Related Risks.. 3
Investment Restrictions...................................................... 34
Trustees and Officers........................................................ 38
Investment Advisory and Other Services....................................... 41
Codes of Ethics.............................................................. 45
Service Plan................................................................. 46
Portfolio Transactions....................................................... 48
Purchase and Redemption of Shares............................................ 50
Performance Information...................................................... 52
Taxes........................................................................ 56
General Information About the Trust.......................................... 64
Additional Information....................................................... 68
Financial Statements......................................................... 68
Appendix A - Description of Ratings.......................................... 70
Appendix B - The Adviser's Micro Cap Investment Results...................... 74
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this SAI or in the Prospectuses in connection
with the offering made by each Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Trust or its Distributor. Each Prospectus does not constitute an
offering by the Trust or by the Distributor in any jurisdiction in which such
offering may not lawfully be made. Shares of the Funds are not available in
certain states. Please call 1-800-730-1313 to determine availability in your
state.
Page -2-
<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company that currently consists
of fifteen separate investment portfolios. This SAI relates to the following
seven separate investment portfolios of the Trust (the "Funds"):
Fixed Income
Short-Term Fixed Income
Total Return Bond
(collectively, the "Fixed Incomes")
Municipal Bond
Short-Term Municipal Bond
(collectively, the "Municipal Funds")
Smaller Companies
Micro Cap
(collectively, the "Equity Funds")
Each Fund, other than Total Return Bond, is classified as "diversified" within
the meaning of the Investment Company Act of 1940 (the "1940 Act").
Deutsche Asset Management, Inc. (the "Adviser" or "DAMI") serves as investment
adviser to the Funds. ICC Distributors, Inc. (the "Distributor" or "ICCD")
serves as the Funds' principal underwriter and distributor. DAMI also serves as
the Funds' administrator (the "Administrator").
The information contained in this SAI generally supplements the information
contained in the Prospectuses. No investor should invest in shares of a Fund
without first reading the Prospectuses. Capitalized terms used herein and not
otherwise defined have the same meaning ascribed to them in each Prospectus.
ADDITIONAL INFORMATION ON FUND INVESTMENTS
AND STRATEGIES AND RELATED RISKS
The following supplements the information contained in the Prospectus concerning
the investment objectives and policies of each Fund.
Fixed Income
------------
Under normal conditions, the Fund invests at least 80% of its assets in
intermediate-term U.S. Treasury, corporate, mortgage-backed, asset-backed,
taxable municipal and tax-exempt municipal bonds. The Fund invests primarily in
investment grade fixed income securities that, at the time of purchase, are
either rated in one of the three highest rating categories by a major
independent agency, or in unrated securities the Adviser considers of comparable
quality. The Fund may invest up to 15% of its assets in investment grade fixed
income securities rated within
Page -3-
<PAGE>
the fourth highest rating category. In the event that any security is
downgraded, the Adviser will determine whether to hold or sell such security,
provided that that Fund will not hold more than 5% of its net assets in
securities that are rated below investment grade (junk-bonds). The Fund may
invest up to 25% of its total assets in U.S. dollar-denominated securities of
foreign issuers. The Fund may hold up to 20% of its total assets in cash or
money market instruments in order to maintain liquidity, or in the event that
the Adviser determines that securities meeting the Fund's investment objective
are not otherwise readily available for purchase.
Short-Term Fixed Income
-----------------------
Under normal conditions, the Fund invests at least 80% of its assets in short-
term U.S. Treasury, corporate, mortgage-backed, asset-backed, taxable municipal
and tax-exempt municipal bonds. The Fund invests primarily in investment grade
fixed income securities that, at the time of purchase, are either rated in one
of the three highest rating categories by a major independent agency, or in
unrated securities the Adviser considers of comparable quality. The Fund may
invest up to 15% of its assets in investment grade fixed income securities rated
within the fourth highest rating category. In the event that any security is
downgraded, the Adviser will determine whether to hold or sell such security,
provided that that Fund will not hold more than 5% of its net assets in
securities that are rated below investment grade (junk-bonds). The Fund may
invest up to 25% of its total assets in U.S. dollar-denominated securities of
foreign issuers. The Fund may hold up to 20% of its total assets in cash or
money market instruments in order to maintain liquidity, or in the event that
the Adviser determines that securities meeting the Fund's investment objective
are not otherwise readily available for purchase.
Municipal Bond
--------------
Under normal conditions, the Fund invests at least 80% of net assets in
municipal securities which pay interest exempt from federal income tax and at
least 65% of total assets in municipal bonds. There is no restriction on the
percentage of assets that may be invested in obligations the interest on which
is a preference item for purposes of the federal alternative minimum tax. The
Fund may invest 25% or more of its total assets in private activity and
industrial development bonds if the interest paid on them is exempt from regular
federal income tax. The Fund invests primarily in investment grade bonds that
are either rated in one of the three highest rating categories by one of the
major independent rating agencies, or in unrated securities that the Adviser
considers of comparable quality. The Fund may invest up to 15% of its assets in
investment grade bonds that are rated in the fourth highest category. In the
event that any security is downgraded, the Adviser will determine whether to
hold or sell such security, provided that that Fund will not hold more than 5%
of its net assets in securities that are rated below investment grade (junk-
bonds). Up to 20% of the Fund's total assets may be invested in certain taxable
securities in order to maintain liquidity. Securities may be purchased on a
when-issued basis.
Short-Term Municipal Bond
-------------------------
Under normal conditions, the Fund invests at least 80% of net assets in
municipal securities which pay interest exempt from federal income tax and at
least 65% of total assets in municipal bonds. There is no restriction on the
percentage of assets that may be invested in obligations
Page -4-
<PAGE>
the interest on which is a preference item for purposes of the federal
alternative minimum tax. The Fund may invest 25% or more of its total assets in
private activity and industrial development bonds if the interest paid on them
is exempt from regular federal income tax. The Fund invests primarily in
investment grade bonds that are either rated in one of the three highest rating
categories by one of the major independent rating agencies, or in unrated
securities that the Adviser considers of comparable quality. The Fund may invest
up to 15% of its assets in investment grade bonds that are rated in the fourth
highest category. In the event that any security is downgraded, the Adviser will
determine whether to hold or sell such security, provided that that Fund will
not hold more than 5% of its net assets in securities that are rated below
investment grade (junk-bonds). Up to 20% of the Fund's total assets may be
invested in certain taxable securities in order to maintain liquidity.
Securities may be purchased on a when-issued basis.
Total Return Bond
-----------------
Under normal conditions, the Fund invests at least 65% of its total assets in
U.S.-dollar denominated investment grade fixed income securities. The remainder
of the Fund's assets may be invested in fixed income securities of foreign
issuers, below investment grade fixed income securities (high yield bonds) of
U.S. and foreign issuers, including high yield bonds of issuers in countries
with new or emerging securities markets, or, to maintain liquidity, in cash or
money market instruments. The Fund may invest up to 25% of its total assets in
foreign investment grade fixed income securities. The Fund may invest up to 17%
of its assets in below investment grade fixed income securities of U.S. and
foreign issuers. The Fund may also invest up to 7% of its assets in high yield
bonds of issuers in countries with new or emerging securities markets. The Fund
may invest up to 35% of its assets in securities denominated in a foreign
currency. We may also use various instruments commonly known as "derivatives" as
secondary investments. In particular, the Fund may use forward currency
transactions and currency options.
Smaller Companies
-----------------
Under normal conditions, the Fund invests at least 65% of its total assets in
the equity and equity related securities of U.S. small capitalization companies.
The Adviser defines the small capitalization equity securities universe as the
bottom 20% of the total domestic equity market capitalization (at the time of
investment) using a minimum market capitalization of $10 million. Up to 35% of
the Fund's total assets may be invested in investment grade fixed income
securities, securities of medium and large capitalization companies and in cash.
Up to 5% of the Fund's net assets may be invested in the securities of foreign
issuers.
Micro Cap
---------
Under normal conditions, the Fund invests at least 65% of its total assets in
the common stocks of U.S. micro capitalization companies and securities
convertible into such stocks. The Adviser defines Micro Capitalization equity
universe as the bottom 5% of the total domestic equity market capitalization (at
the time of investment) using a minimum market capitalization of $10 million.
Up to 25% of the Fund's total assets may be invested in the securities of
foreign companies that would be considered in the bottom 5% in terms of market
capitalization in the U.S. equity market. The Fund may invest up to 35% of its
assets in high quality debt instruments
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and money market instruments with remaining maturities of one year or less,
including repurchase agreements. In addition, the Fund may invest up to 5% of
its net assets in non-convertible bonds and preferred stocks that are considered
high quality.
FIXED INCOME SECURITIES
GENERAL. Each Fund may invest in fixed income securities. In periods of
declining interest rates, the yield (income from portfolio investments over a
stated period of time) of a Fund that invests in fixed income securities may
tend to be higher than prevailing market rates, and in periods of rising
interest rates, the yield of the Fund may tend to be lower. Also, when interest
rates are falling, the inflow of net new money to such a Fund will likely be
invested in portfolio instruments producing lower yields than the balance of the
Fund's portfolio, thereby reducing the yield of the Fund. In periods of rising
interest rates, the opposite can be true. The net asset value of a Fund
investing in fixed income securities can generally be expected to change as
general levels of interest rates fluctuate. The value of fixed income
securities in a Fund's portfolio generally varies inversely with changes in
interest rates. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
PRIVATE ACTIVITY AND INDUSTRIAL DEVELOPMENT BONDS. Each of the Funds other than
the Equity Funds may invest in private activity and industrial development
bonds, which are obligations issued by or on behalf of public authorities to
raise money to finance various privately owned or operated facilities for
business and manufacturing, housing, sports and pollution control. These bonds
are also used to finance public facilities such as airports, mass transit
systems, ports, parking or sewage or solid waste disposal facilities, as well as
certain other facilities or projects. The payment of the principal and interest
on such bonds is generally dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
PUT BONDS. Each of the Funds other than the Equity Funds may invest in "put"
bonds, which are tax exempt securities (including securities with variable
interest rates) that may be sold back to the issuer of the security at face
value at the option of the holder prior to their stated maturity. The Adviser
intends to purchase only those "put" bonds for which the put option is an
integral part of the security as originally issued. The option to "put" the
bond back to the issuer prior to the stated final maturity can cushion the price
decline of the bond in a rising interest rate environment. However, the premium
paid, if any, for an option to put will have the effect of reducing the yield
otherwise payable on the underlying security. For the purpose of determining
the "maturity" of securities purchased subject to an option to put, and for the
purpose of determining the dollar weighted average maturity of a Fund holding
such securities, the Fund will consider "maturity" to be the first date on which
it has the right to demand payment from the issuer of the put although the final
maturity of the security is later than such date.
U.S. GOVERNMENT SECURITIES. The Funds may invest in obligations issued or
guaranteed as to both principal and interest by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises ("U.S. Government
securities"). Some U.S. Government securities, such as U.S. Treasury bills,
notes and bonds, are supported by the full faith and credit of the United
States. Others, such as obligations issued or guaranteed by U.S. Government
agencies or
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instrumentalities are supported either by (i) the full faith and credit of the
U.S. Government (such as securities of the Small Business Administration), (ii)
the right of the issuer to borrow from the U.S. Treasury (such as securities of
the Federal Home Loan Banks), (iii) the discretionary authority of the U.S.
Government to purchase the agency's obligations (such as securities of the
Federal National Mortgage Association), or (iv) only the credit of the issuer.
No assurance can be given that the U.S. Government will provide financial
support to U.S. Government agencies or instrumentalities in the future.
Each of the Funds other than the Equity Funds may also invest in separately
traded principal and interest components of securities guaranteed or issued by
the U.S. Government or its agencies, instrumentalities or sponsored enterprises
if such components are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ("STRIPS") or any
similar program sponsored by the U.S. Government. STRIPS are sold as zero
coupon securities. See "Zero Coupon Securities."
CUSTODIAL RECEIPTS. Custodial receipts are interests in separately traded
interest and principal component parts of U.S. Government securities that are
issued by banks or brokerage firms and are created by depositing U.S. Government
securities into a special account at a custodian bank. The custodian holds the
interest and principal payments for the benefit of the registered owners of the
certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register.
Custodial receipts include Treasury Receipts ("TRs"), Treasury Investment Growth
Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities ("CATS").
TIGRs and CATS are interests in private proprietary accounts while TRs and
STRIPS (see "U.S. Government securities" above) are interests in accounts
sponsored by the U.S. Treasury. Receipts are sold as zero coupon securities; for
more information, see "Zero Coupon Securities."
Each of the Funds other than the Equity Funds and the Municipal Funds may
acquire U.S. Government securities and their unmatured interest coupons that
have been separated ("stripped") by their holder, typically a custodian bank or
investment brokerage firm. Having separated the interest coupons from the
underlying principal of the U.S. Government securities, the holder will resell
the stripped securities in custodial receipt programs with a number of different
names, including TIGRs, and CATS. The stripped coupons are sold separately from
the underlying principal, which is usually sold at a deep discount because the
buyer receives only the right to receive a future fixed payment on the security
and does not receive any rights to periodic interest (cash) payments. The
underlying U.S. Treasury bonds and notes themselves are generally held in book-
entry form at a Federal Reserve Bank. Counsel to the underwriters of these
certificates or other evidences of ownership of U.S. Treasury securities have
stated that, in their opinion, purchasers of the stripped securities most likely
will be deemed the beneficial holders of the underlying U.S. Government
securities for federal tax and securities purposes. In the case of CATS and
TIGRS, the Internal Revenue Service ( the "IRS") has reached this conclusion for
the purpose of applying the tax diversification requirements applicable to
regulated investment companies such as the Funds. CATS and TIGRS are not
considered U.S. Government securities by the staff of the Commission. Further,
the IRS conclusion noted above is contained only in a general counsel
memorandum, which is an internal document of no precedential value or binding
effect, and a private letter ruling, which also may not be relied
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upon by the Funds. The Trust is not aware of any binding legislative, judicial
or administrative authority on this issue.
ZERO COUPON SECURITIES. STRIPS and custodial receipts (TRs, TIGRs and CATS) are
sold as zero coupon securities, that is, fixed income securities that have been
stripped of their unmatured interest coupons. Zero coupon securities are sold at
a (usually substantial) discount and redeemed at face value at their maturity
date without interim cash payments of interest or principal. The amount of this
discount is accreted over the life of the security, and the accretion
constitutes the income earned on the security for both accounting and tax
purposes. Because a Fund must distribute the accreted amounts in order to
qualify for favorable tax treatment, it may have to sell portfolio securities to
generate cash to satisfy the applicable distribution requirements. Because of
these features, the market prices of zero coupon securities are generally more
volatile than the market prices of securities that have similar maturity but
that pay interest periodically. Zero coupon securities are likely to respond to
a greater degree to interest rate changes than are non-zero coupon securities
with similar maturity and credit qualities.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each of the Funds other than the Equity
Funds may invest in variable or floating rate instruments and variable rate
demand instruments, including variable amount master demand notes. These
instruments will normally involve industrial development or revenue bonds that
provide that the rate of interest is set as a specific percentage of a
designated base rate (such as the prime rate) at a major commercial bank. In
addition, the interest rate on these securities may be reset daily, weekly or on
some other reset period and may have a floor or ceiling on interest rate
changes. A Fund holding such an instrument can demand payment of the obligation
at all times or at stipulated dates on short notice (not to exceed 30 days) at
par plus accrued interest.
Debt instruments purchased by a Fund may be structured to have variable or
floating interest rates. These instruments may include variable amount master
demand notes that permit the indebtedness to vary in addition to providing for
periodic adjustments in the interest rates. The Adviser will consider the
earning power, cash flows and other liquidity ratios of the issuers and
guarantors of such instruments and, if the instrument is subject to a demand
feature, will continuously monitor their financial ability to meet payment on
demand. Where necessary to ensure that a variable or floating rate instrument is
equivalent to the quality standards applicable to a Fund's fixed income
investments, the issuer's obligation to pay the principal of the instrument will
be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. Any bank providing such a bank letter, line of credit,
guarantee or loan commitment will meet the Fund's investment quality standards
relating to investments in bank obligations. The Adviser will also continuously
monitor the creditworthiness of issuers of such instruments to determine whether
a Fund should continue to hold the investments.
The absence of an active secondary market for certain variable and floating rate
notes could make it difficult to dispose of the instruments, and a Fund could
suffer a loss if the issuer defaults or during periods in which a Fund is not
entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject to the
Fund's limitation on investments in illiquid securities when a reliable trading
market for the instruments does not exist
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and the Fund may not demand payment of the principal amount of such instruments
within seven days.
YIELDS AND RATINGS. The yields on certain obligations, including the money
market instruments in which each Fund may invest (such as commercial paper and
bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of Standard and Poor's
Ratings Group ("Standard & Poor's"), Moody's Investor Service, Inc. ("Moody's")
and other recognized rating organizations represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality or value. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. See Appendix A for a description of the ratings provided by
Standard & Poor's, Moody's and certain other recognized rating organizations.
Subsequent to its purchase by a Fund, a rated security may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by the
Fund. The Board of Trustees or the Adviser, pursuant to guidelines established
by the Board of Trustees, will consider such an event in determining whether the
Fund should continue to hold the security in accordance with the interests of
the Fund and applicable regulations of the Securities and Exchange Commission
(the "Commission"). In no event, however, will any Fund hold more than 5% of its
net assets in fixed income securities that are not investment grade.
LOWER QUALITY DEBT OBLIGATIONS "JUNK-BONDS". Total Return Bond may invest in
below investment grade bonds, including securities in default. These securities
are considered speculative and, while generally offering greater income than
investments in higher quality securities, involve greater risk of loss of
principal and income, including the possibility of default or bankruptcy of the
issuers of such securities, and have greater price volatility, especially during
periods of economic uncertainty or change. These lower quality bonds tend to be
affected by economic changes and short-term corporate and industry developments
to a greater extent than higher quality securities, which react primarily to
fluctuations in the general level of interest rates. Below investment grade
bonds (junk-bonds) will also be affected by the market's perception of their
credit quality, especially during times of adverse publicity, and the outlook
for economic growth. In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. The market for these lower quality bonds is
generally less liquid than the market for investment grade bonds. Therefore, the
Adviser's judgment may at times play a greater role in valuing these securities
than in the case of investment grade bonds, and it also may be more difficult
under certain adverse market conditions to sell these lower quality securities
to meet redemption requests, to respond to changes in the market, or to
determine accurately a Fund's net asset value.
As discussed above, Total Return Bond may invest in high yielding fixed income
securities that are rated lower than Baa by Moody's or BBB by Standard & Poor's
and unrated securities determined to be of comparable quality. The values of
these lower quality securities generally fluctuate more than those of higher
quality securities. In addition, these securities involve a greater possibility
of an adverse change in financial condition affecting the ability of the issuer
to
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make payments of interest and principal. The Adviser seeks to reduce these risks
through investment analysis and attention to current developments in interest
rates and economic conditions, but there can be no assurance that the Adviser
will be successful in reducing the risks associated with investments in such
securities. To the extent a Fund invests in such lower quality securities, the
achievement of its investment objective may be more dependent on the Adviser's
own credit analysis.
Total Return Bond may invest in pay-in-kind (PIK) securities, which pay interest
in either cash or additional securities, at the issuer's option, for a specified
period. In addition, each Fund may invest in zero coupon bonds. Both of these
types of bonds may be more speculative and subject to greater fluctuations in
value than securities which pay interest periodically and in cash, due to
changes in interest rates. A Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders and
which, because no cash is generally received at the time of accrual, may require
the liquidation of other portfolio securities to satisfy the Fund's distribution
obligations. See "Taxes" below.
The market value of fixed income securities which carry no equity participation
usually reflects yields generally available on securities of similar quality and
type. When such yields decline, the market value of a portfolio already invested
at higher yields can be expected to rise if such securities are protected
against early call. Similarly, when such yields increase, the market value of a
portfolio already invested at lower yields can be expected to decline.
CONVERTIBLE SECURITIES AND PREFERRED STOCKS
Subject to its investment objectives and policies, each Fund (other than
Municipal Bond and Short-Term Municipal Bond) may invest in convertible
securities, which are ordinarily preferred stock or long-term debt obligations
of an issuer convertible at a stated exchange rate into common stock of the
issuer. The market value of convertible securities tends to decline as interest
rates increase and, conversely, to increase as interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities generally rank senior to common stocks in an issuer's
capital structure and are consequently of higher quality and entail less risk
than the issuer's common stock. However, the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security. The convertible debt
securities in which each Fund may invest are subject to the same rating criteria
and downgrade policy as the Fund's investments in fixed income securities.
Total Return Bond and each of the Equity Funds, subject to its investment
objectives, may purchase preferred stock. Preferred stocks are equity
securities, but possess certain attributes of debt securities and are generally
considered fixed income securities. Holders of preferred stocks normally have
the right to receive dividends at a fixed rate when and as declared by the
issuer's board of directors, but do not participate in other amounts available
for distribution by the
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issuing corporation. Dividends on the preferred stock may be cumulative, and in
such cases all cumulative dividends usually must be paid prior to dividend
payments to common stockholders. Because of this preference, preferred stocks
generally entail less risk than common stocks. Upon liquidation, preferred
stocks are entitled to a specified liquidation preference, which is generally
the same as the par or stated value, and are senior in right of payment to
common stocks. However, preferred stocks are equity securities in that they do
not represent a liability of the issuer and therefore do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible preferred stocks may be subordinated to other preferred stock of the
same issuer.
WARRANTS
Each Equity Fund and Total Return Bond may invest in warrants. Warrants
generally entitle the holder to buy a specified number of shares of common stock
at a specified price, which is often higher than the market price at the time of
issuance, for a period of years or in perpetuity. Warrants may be issued in
units with other securities or separately, and may be freely transferable and
traded on exchanges. While the market value of a warrant tends to be more
volatile than that of the securities underlying the warrant, the market value of
a warrant may not necessarily change with that of the underlying security. A
warrant ceases to have value if it is not exercised prior to any expiration date
to which the warrant is subject. The purchase of warrants involves a risk that a
Fund could lose the purchase value of a warrant if the right to subscribe to
additional shares is not exercised prior to the warrant's expiration. Also, the
purchase of warrants involves the risk that the effective price paid for the
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security.
MUNICIPAL SECURITIES
The Municipal Funds and, to a more limited extent, Fixed Income, Short-Term
Fixed Income, and Total Return Bond may invest in municipal securities.
Municipal securities consist of bonds, notes and other instruments issued by or
on behalf of states, territories and possessions of the United States (including
the District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax (i.e., excluded from gross income for federal income tax purposes but not
necessarily exempt from the federal alternative minimum tax or from state and
local taxes). Municipal securities may also be issued on a taxable basis (i.e.,
the interest on such securities is not exempt from regular federal income tax).
Municipal securities are often issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which municipal securities
may be issued include refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal securities also include "private
activity" or industrial development bonds, which are issued by or on behalf of
public authorities to provide financing aid to acquire sites or construct or
equip facilities within a municipality for privately or publicly owned
corporations.
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The two principal classifications of municipal securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest although the characteristics and enforcement of general obligations may
vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer may also be
backed by a letter of credit, guarantee or insurance. General obligations and
revenue obligations may be issued in a variety of forms, including commercial
paper, fixed, variable and floating rate securities, tender option bonds,
auction rate bonds and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a variety
of hybrid and special types of municipal securities. There are also numerous
differences in the credit backing of municipal securities both within and
between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the identification
of the issuer of a municipal security which is not a general obligation is made
by the Adviser based on the characteristics of the municipal security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
An entire issue of municipal securities may be purchased by one or a small
number of institutional investors such as a Fund. Thus, the issue may not be
said to be publicly offered. Unlike some securities that are not publicly
offered, a secondary market exists for many municipal securities that were not
publicly offered initially and such securities can be readily marketable.
The obligations of an issuer to pay the principal of and interest on a municipal
security are subject to the provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of creditors, such as the Federal Bankruptcy
Act, and laws, if any, that may be enacted by Congress or state legislatures
extending the time for payment of principal or interest or imposing other
constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a municipal
security may be materially affected.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
INTERESTS. A municipal lease is an obligation in the form of a lease or
installment purchase contract which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance (as well as regular
Federal income tax). Municipal leases frequently involve special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses
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that relieve the governmental issuer of any obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Thus, a Fund's
investment in municipal leases will be subject to the special risk that the
governmental issuer may not appropriate funds for lease payments.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of nonappropriation or foreclosure might prove difficult,
time consuming and costly, and result in an unsatisfactory or delayed recoupment
of a Fund's original investment.
Certificates of participation represent undivided interests in municipal leases,
installment purchase contracts or other instruments. The certificates are
typically issued by a trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or installment purchase contracts.
Certain municipal lease obligations and certificates of participation may be
deemed illiquid for the purpose of the Funds' respective limitations on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such Fund's limitation on investments in
illiquid securities. In determining the liquidity of municipal lease obligations
and certificates of participation, the Adviser will consider a variety of
factors including: (1) the willingness of dealers to bid for the security; (2)
the number of dealers willing to purchase or sell the obligation and the number
of other potential buyers; (3) the frequency of trades or quotes for the
obligation; and (4) the nature of the marketplace trades. In addition, the
Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund. No Fund may invest more than 5% of its net assets in municipal leases.
Each of the Funds other than the Equity Funds may purchase participations in
municipal securities held by a commercial bank or other financial institution.
Such participations provide a Fund with the right to a pro rata undivided
interest in the underlying municipal securities. In addition, such
participations generally provide a Fund with the right to demand payment, on not
more than seven days notice, of all or any part of the Fund's participation
interest in the underlying municipal security, plus accrued interest.
MUNICIPAL NOTES. Municipal securities in the form of notes generally are used
to provide for short-term capital needs, in anticipation of an issuer's receipt
of other revenues or financing, and typically have maturities of up to three
years. Such instruments may include Tax Anticipation Notes, Revenue Anticipation
Notes, Bond Anticipation Notes, Tax and Revenue Anticipation Notes and
Construction Loan Notes. Tax Anticipation Notes are issued to finance the
working capital needs of governments. Generally, they are issued in anticipation
of various tax revenues, such as income, sales, property, use and business
taxes, and are payable from these
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specific future taxes. Revenue Anticipation Notes are issued in expectation of
receipt of other kinds of revenue, such as federal revenues available under
federal revenue sharing programs. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. In most cases,
the long-term bonds then provide the funds needed for repayment of the notes.
Tax and Revenue Anticipation Notes combine the funding sources of both Tax
Anticipation Notes and Revenue Anticipation Notes. Construction Loan Notes are
sold to provide construction financing. These notes are secured by mortgage
notes insured by the Federal Housing Authority; however, the proceeds from the
insurance may be less than the economic equivalent of the payment of principal
and interest on the mortgage note if there has been a default. The obligations
of an issuer of municipal notes are generally secured by the anticipated
revenues from taxes, grants or bond financing. An investment in such
instruments, however, presents a risk that the anticipated revenues will not be
received or that such revenues will be insufficient to satisfy the issuer's
payment obligations under the notes or that refinancing will be otherwise
unavailable.
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper typically
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
PRE-REFUNDED MUNICIPAL SECURITIES. The principal of and interest on municipal
securities that have been pre-refunded are no longer paid from the original
revenue source for the securities. Instead, after pre-refunding the source of
such payments of the principal of and interest on these securities are typically
paid from an escrow fund consisting of obligations issued or guaranteed by the
U.S. Government. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded municipal
securities. Issuers of municipal securities use this advance refunding technique
to obtain more favorable terms with respect to securities that are not yet
subject to call or redemption by the issuer. For example, advance refunding
enables an issuer to refinance debt at lower market interest rates, restructure
debt to improve cash flow or eliminate restrictive covenants in the indenture or
other governing instrument for the pre-refunded municipal securities. However,
except for a change in the revenue source from which principal and interest
payments are made, the pre-refunded municipal securities remain outstanding on
their original terms until they mature or are redeemed by the issuer. Pre-
refunded municipal securities are usually purchased at a price which represents
a premium over their face value.
TENDER OPTION BONDS. A tender option bond is a municipal security (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the agreement
of a third party, such as a bank, broker-dealer or other financial institution,
pursuant to which such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution and receive
the face value thereof.
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As consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term tax-exempt rate.
However, an institution will not be obligated to accept tendered bonds in the
event of certain defaults or a significant downgrade in the credit rating
assigned to the issuer of the bond. The liquidity of a tender option bond is a
function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate. Each Municipal Fund intends to invest only in
tender option bonds the interest on which will, in the opinion of bond counsel,
counsel for the issuer of interests therein or counsel selected by the Adviser,
be exempt from regular federal income tax. However, because there can be no
assurance that the IRS will agree with such counsel's opinion in any particular
case, there is a risk that a Municipal Fund will not be considered the owner of
such tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the proper tax treatment of tender
option bonds and the associated fees, in relation to various regulated
investment company tax provisions is unclear. Each Municipal Fund intends to
manage its portfolio in a manner designed to eliminate or minimize any adverse
impact from the tax rules applicable to these investments.
AUCTION RATE SECURITIES. Auction rate securities consist of auction rate
municipal securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in municipal securities. Provided
that the auction mechanism is successful, auction rate securities usually permit
the holder to sell the securities in an auction at par value at specified
intervals. The dividend is reset by "Dutch" auction in which bids are made by
broker-dealers and other institutions for a certain amount of securities at a
specified minimum yield. The dividend rate set by the auction is the lowest
interest or dividend rate that covers all securities offered for sale. While
this process is designed to permit auction rate securities to be traded at par
value, there is the risk that an auction will fail due to insufficient demand
for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund may
be designated as exempt from federal income tax to the extent they are
attributable to tax-exempt interest income earned by the fund on the securities
in its portfolio and distributed to holders of the preferred securities,
provided that the preferred securities are treated as equity securities for
federal income tax purposes and the closed-end fund complies with certain
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
For purposes of complying with the 20% limitation on each Municipal Fund's
investments in taxable investments, auction rate preferred securities will be
treated as taxable investments unless substantially all of the dividends on such
securities are expected to be exempt from regular federal income taxes.
A Fund's investments in auction rate preferred securities of closed-end funds
are subject to limitations on investments in other U.S. registered investment
companies, which limitations are prescribed by the 1940 Act. These limitations
include prohibitions against acquiring more than
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3% of the voting securities of any other such investment company, and investing
more than 5% of the Fund's assets in securities of any one such investment
company or more than 10% of its assets in securities of all such investment
companies. A Fund will indirectly bear its proportionate share of any management
fees paid by such closed-end funds in addition to the advisory fee payable
directly by the Fund.
PRIVATE ACTIVITY BONDS. Certain types of municipal securities, generally
referred to as industrial development bonds (and referred to under current tax
law as private activity bonds), are issued by or on behalf of public authorities
to obtain funds for privately-operated housing facilities, airport, mass transit
or port facilities, sewage disposal, solid waste disposal or hazardous waste
treatment or disposal facilities and certain local facilities for water supply,
gas or electricity. Other types of industrial development bonds, the proceeds of
which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute municipal
securities, although the current federal tax laws place substantial limitations
on the size of such issues. The interest from certain private activity bonds
owned by a Fund (including a Municipal Fund's distributions attributable to such
interest) may be a preference item for purposes of the alternative minimum tax.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
GENERAL. Fixed Income, Short-Term Fixed Income, Total Return Bond and, to a more
limited extent, the Municipal Funds may invest in mortgage-backed securities,
which represent direct or indirect participations in, or are collateralized by
and payable from, mortgage loans secured by real property. Fixed Income, Short-
Term Fixed Income, and Total Return Bond may also invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such securities are generally issued by trusts and special purpose
corporations.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Accordingly,
the market values of such securities will vary with changes in market interest
rates generally and in yield differentials among various kinds of U.S.
Government securities and other mortgage-backed and asset-backed securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities because asset-backed securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. In addition, there is the possibility that, in some cases,
recoveries on repossessed collateral may not be available to support payments
on these securities. Many mortgage and asset-backed securities may be considered
derivative instruments. Fixed Income and Short-Term Fixed Income will each
invest no more than 40% of its total assets in collateralized mortgaged
obligations or in asset-backed securities (in each case, excluding U.S.
Government securities). No other Fund will invest 25% or more of its total
assets in collateralized mortgage obligations or in asset-backed securities (in
each case, excluding U.S. Government securities).
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MORTGAGE-BACKED. Each of the Funds other than the Equity Funds may invest in
mortgage-backed securities, including derivative instruments. Mortgage-backed
securities represent direct or indirect participations in or obligations
collateralized by and payable from mortgage loans secured by real property. A
Fund may invest in mortgage-backed securities issued or guaranteed by U.S.
Government agencies or instrumentalities such as the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Obligations
of GNMA are backed by the full faith and credit of the U.S. Government.
Obligations of FNMA and FHLMC are not backed by the full faith and credit of the
U.S. Government but are considered to be of high quality since they are
considered to be instrumentalities of the United States. The market value and
yield of these mortgage-backed securities can vary due to market interest rate
fluctuations and early prepayments of underlying mortgages. These securities
represent ownership in a pool of Federally insured mortgage loans with a maximum
maturity of 30 years. The scheduled monthly interest and principal payments
relating to mortgages in the pool will be "passed through" to investors.
Government mortgage-backed securities differ from conventional bonds in that
principal is paid back to the certificate holders over the life of the loan
rather than at maturity. As a result, there will be monthly scheduled payments
of principal and interest.
Only Fixed Income, Short-Term Fixed Income and Total Return Bond may invest in
mortgage-backed securities issued by non-governmental entities including
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"). CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence. Investors purchasing such CMOs
in the shortest maturities receive or are credited with their pro rata portion
of the unscheduled prepayments of principal up to a predetermined portion of the
total CMO obligation. Until that portion of such CMO obligation is repaid,
investors in the longer maturities receive interest only. Accordingly, the CMOs
in the longer maturity series are less likely than other mortgage pass-throughs
to be prepaid prior to their stated maturity. Although some of the mortgages
underlying CMOs may be supported by various types of insurance, and some CMOs
may be backed by GNMA certificates or other mortgage pass-throughs issued or
guaranteed by U.S. Government agencies or instrumentalities, the CMOs themselves
are not generally guaranteed.
REMICs are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities, including "regular" interests
and "residual" interests. The Funds do not intend to acquire residual interests
in REMICs under current tax law, due to certain disadvantages for regulated
investment companies that acquire such interests. Mortgage-backed securities are
subject to unscheduled principal payments representing prepayments on the
underlying mortgages. Although these securities may offer yields higher than
those available from other types of securities, mortgage-backed securities may
be less effective than other types of securities as a means of "locking in"
attractive long-term rates because of the prepayment
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feature. For instance, when interest rates decline, the value of these
securities likely will not rise as much as comparable debt securities due to the
prepayment feature. In addition, these prepayments can cause the price of a
mortgage-backed security originally purchased at a premium to decline in price
to its par value, which may result in a loss.
Due to prepayments of the underlying mortgage instruments, mortgage-backed
securities do not have a known actual maturity. In the absence of a known
maturity, market participants generally refer to an estimated average life. The
Adviser believes that the estimated average life is the most appropriate measure
of the maturity of a mortgage-backed security. Accordingly, in order to
determine whether such security is a permissible investment, it will be deemed
to have a remaining maturity of three years or less if the average life, as
estimated by the Adviser, is three years or less at the time of purchase of the
security by a Fund. An average life estimate is a function of an assumption
regarding anticipated prepayment patterns. The assumption is based upon current
interest rates, current conditions in the relevant housing markets and other
factors. The assumption is necessarily objective, and thus different market
participants could produce somewhat different average life estimates with regard
to the same security. Although the Adviser will monitor the average life of the
portfolio securities of each Fund with a portfolio maturity policy and make
needed adjustments to comply with such Funds' policy as to average dollar
weighted portfolio maturity, there can be no assurance that the average life of
portfolio securities as estimated by the Adviser will be the actual average life
of such securities.
No Fund will invest 25% or more of its total assets in CMOs (other than U.S.
Government securities).
ASSET-BACKED SECURITIES. Fixed Income, Short-Term Fixed Income, and Total Return
Bond may invest in asset-backed securities, which represent participations in,
or are secured by and payable from, pools of assets including company
receivables, truck and auto loans, leases and credit card receivables. The asset
pools that back asset-backed securities are securitized through the use of
privately-formed trusts or special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation, or
other credit enhancements may be present. Certain asset backed securities may be
considered derivative instruments. No Fund will invest 25% or more of its total
assets in asset-backed securities.
SECURITIES OF FOREIGN ISSUERS
FOREIGN SECURITIES. Subject to their respective investment objectives and
policies, each of the Funds other than the Municipal Funds may invest in
securities of foreign issuers and supranational entities. While the non-U.S.
investments of the Equity Funds and Total Return Bond may be denominated in any
currency, the investments of Fixed Income, Short-Term Fixed Income in foreign
securities may be denominated only in the U.S. dollar. Foreign securities may
offer investment opportunities not available in the United States, but such
investments also involve significant risks not typically associated with
investing in domestic securities. In many foreign countries, there is less
publicly available information about foreign issuers, and there is less
government regulation and supervision of foreign stock exchanges, brokers and
listed companies. Also, in many foreign countries, companies are not subject to
uniform accounting,
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auditing, and financial reporting standards comparable to those applicable to
domestic issuers. Security trading practices differ and there may be difficulty
in enforcing legal rights outside the United States. Settlement of transactions
in some foreign markets may be delayed or may be less frequent than in the
United States, which could affect the liquidity of the Funds' portfolios.
Additionally, in some foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of
securities, property, or other Fund assets, political or social instability or
diplomatic developments which could affect investments in foreign securities.
To the extent the investments of the Equity Funds and Total Return Bond are
denominated in foreign currencies, the net asset values of such Funds may be
affected favorably or unfavorably by fluctuations in currency exchange rates and
by changes in exchange control regulations. For example, if the Adviser
increases a Fund's exposure to a foreign currency, and that currency's value
subsequently falls, the Adviser's currency management may result in increased
losses to the Fund. Similarly, if the Adviser hedges a Fund's exposure to a
foreign currency, and that currency's value rises, the Fund will lose the
opportunity to participate in the currency's appreciation. The Equity Funds and
Total Return Bond will incur transaction costs in connection with conversions
between currencies.
FOREIGN GOVERNMENT SECURITIES. The foreign government securities in which each
of the Funds other than the Municipal Funds may invest generally consist of debt
obligations issued or guaranteed by national, state or provincial governments or
similar political subdivisions. Each of the Funds other than the Municipal Funds
may invest in foreign government securities in the form of American Depositary
Receipts. Foreign government securities also include debt securities of
supranational entities. Quasi-governmental and supranational entities include
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the International
Bank for Reconstruction and Development (the "World Bank"), the Japanese
Development Bank, the Asian Development Bank and the InterAmerican Development
Bank. Currently, Fixed Income and Short-Term Fixed Income intend to invest only
in obligations issued or guaranteed by the Asian Development Bank, the Inter-
American Development Bank, the International Bank for Reconstruction and
Development (the "World Bank"), the African Development Bank, the European Coal
and Steel Community, the European Economic Community, the European Investment
Bank and the Nordic Investment Bank. Foreign government securities also include
mortgage-related securities issued or guaranteed by national, state or
provincial governmental instrumentalities, including quasi-governmental
agencies.
EQUITY AND EQUITY RELATED SECURITIES
The Funds may invest in common stock, preferred stock, warrants, purchased call
options and other rights to acquire stock. The market value of an equity
security will increase or decrease depending on market conditions. This affects
the value of the shares of a Fund, and the value of your investment. Smaller
Companies will invest at least 60% of its assets directly in stocks.
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SMALL AND MICRO CAPITALIZATION COMPANIES
Smaller Companies and Micro Cap invest a significant portion of their assets in
smaller, lesser-known companies which the Adviser believes offer greater growth
potential than larger, more mature, better-known companies. Investing in the
securities of these companies, however, also involves greater risk and the
possibility of greater portfolio price volatility. Among the reasons for the
greater price volatility of these small companies and unseasoned stocks are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks and the greater sensitivity of small companies to
changing economic conditions in their geographic region. For example, securities
of these companies involve higher investment risk than that normally associated
with larger firms due to the greater business risks of small size and limited
product lines, markets, distribution channels and financial and managerial
resources. Many smaller capitalization companies in which Smaller Companies and
Micro Cap may invest are not well-known to the investing public, do not have
significant institutional ownership and are followed by relatively few
securities analysts. As a result, there may be less publicly available
information concerning these companies than exists for larger capitalization
companies. Also, the securities of smaller capitalization companies traded on
the over-the-counter market may have fewer market makers, wider spreads between
their quoted bid and asked prices and lower trading volumes, resulting in
comparatively greater price volatility and less liquidity than exists for
securities of larger capitalization companies.
CURRENCY MANAGEMENT TECHNIQUES
To the extent that they invest in securities denominated or quoted in foreign
currencies, the Equity Funds and Total Return Bond may enter into forward
currency exchange contracts ("forward contracts") and buy and sell currency
options to hedge against currency exchange rate fluctuations. For the same
purpose, Total Return Bond may also enter into currency swap agreements,
purchase securities indexed to foreign currencies and buy and sell futures
contracts relating to foreign currencies and options on such futures contracts.
The instruments involved in Currency-Related Transactions may be considered
derivative instruments. A Fund may enter into Currency-Related Transactions to
attempt to protect against an anticipated rise in the U.S. dollar price of
securities that it intends to purchase. In addition, a Fund may enter into
Currency-Related Transactions to attempt to protect against the decline in value
of its foreign currency denominated or quoted portfolio securities, or a decline
in the value of anticipated dividends or interest from such securities, due to a
decline in the value of the foreign currency against the U.S. dollar. The
forecasting of currency market movements is extremely difficult and there can be
no assurance that currency hedging strategies will be successful. If the Adviser
is incorrect in its forecast, currency hedging strategies may result in
investment performance worse than if the strategies were not attempted. In
addition, forward contracts and over-the-counter currency options may be
illiquid and are subject to the risk that the counterparty will default on its
obligations.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of the Equity Funds and Total
Return Bond may exchange currencies in the normal course of managing its
investments in foreign securities and may incur costs in doing so because a
foreign exchange dealer will charge a fee for conversion. A Fund may conduct
foreign currency exchange transactions on a "spot" basis (i.e., for prompt
delivery and settlement) at the prevailing spot rate
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for purchasing or selling currency in the foreign currency exchange market. A
Fund also may enter into forward foreign currency exchange contracts ("forward
currency contracts") or other contracts to purchase and sell currencies for
settlement at a future date. A foreign exchange dealer, in that situation, will
expect to realize a profit based on the difference between the price at which a
foreign currency is sold to a Fund and the price at which the dealer will cover
the purchase in the foreign currency market. Foreign exchange transactions are
entered into at prices quoted by dealers, which may include a mark-up over the
price that the dealer must pay for the currency.
A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades, but currency dealers
seek to obtain a "spread" or profit on each transaction.
At the maturity of a forward contract, a Fund may either accept or make delivery
of the currency specified in the contract or, at or prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
Total Return Bond may use forward currency transactions in an attempt to hedge
against losses, or where possible, to add to investment returns. The Equity
Funds may enter into forward currency contracts only for the following hedging
purposes. First, when a Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when a Fund anticipates the
receipt in a foreign currency of dividend or interest payments on such a
security which it holds, the Fund may desire to "lock in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund will attempt to
protect itself against an adverse change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.
Additionally, when management of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may cause the Fund to enter into a forward contract to sell, for a
fixed amount of U.S. dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures.
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Using forward currency contracts in an attempt to protect the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which a Fund can achieve at some future point in
time. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the dollar value of
only a portion of a Fund's foreign assets.
A Fund's custodian will place cash or liquid securities into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward currency contracts requiring the Fund
to purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or liquid securities will be placed
in the account on a daily basis so that the value of the account will equal the
amount of a Fund's commitments with respect to such contracts. The segregated
account will be marked-to-market on a daily basis. Although forward currency
contracts are not presently regulated by the Commodity Futures Trading
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
these contracts. In such event, the Funds' ability to utilize forward currency
contracts may be restricted. In addition, a particular forward currency contract
and assets used to cover such contract may be illiquid.
A Fund generally will not enter into a forward currency contract with a term of
greater than one year. The forecasting of short-term currency market movements
is extremely difficult and there can be no assurance that short-term hedging
strategies will be successful.
While a Fund will enter into forward currency contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while a Fund may benefit from currency transactions, unanticipated changes
in currency prices may result in a poorer overall performance for a Fund than if
it had not engaged in any such transactions. Moreover, there may be an imperfect
correlation between a Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may cause a Fund to sustain losses which will prevent the
Fund from achieving a complete hedge or expose the Fund to risk of foreign
currency exchange loss. Forward currency contracts may be considered derivative
instruments.
The Equity Funds and Total Return Bond's activities in forward currency exchange
contracts, currency futures contracts and related options and currency options
(see below) may be limited by the requirements of subchapter M of the Code, for
qualification as a regulated investment company.
OPTIONS ON SECURITIES, SECURITIES INDICES AND FOREIGN CURRENCIES
GENERAL. Each Equity Fund and Total Return Bond may write covered put and call
options and purchase put and call options. Such options may relate to particular
securities, to various stock indices, or to currencies. The Funds may write call
and put options which are issued by the Options Clearing Corporation (the "OCC")
or which are traded on U.S. and non-U.S. exchanges and over-the-counter. These
instruments may be considered derivative instruments.
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WRITTEN OPTIONS. Each Equity Fund and Total Return Bond may write (sell) covered
put and call options on securities and enter into related closing transactions.
A Fund may receive fees (referred to as "premiums") for granting the rights
evidenced by the options. However, in return for the premium for a written call
option, the Fund assumes certain risks. For example, in the case of a written
call option, the Fund forfeits the right to any appreciation in the underlying
security while the option is outstanding. A put option gives to its purchaser
the right to compel the Fund to purchase an underlying security from the option
holder at the specified price at any time during the option period. In contrast,
a call option written by the Fund gives to its purchaser the right to compel the
Fund to sell an underlying security to the option holder at a specified price at
any time during the option period. Upon the exercise of a put option written by
the Fund, the Fund may suffer a loss equal to the difference between the price
at which the Fund is required to purchase the underlying security and its market
value at the time of the option exercise, less the premium received for writing
the option. All options written by a Fund are covered. In the case of a call
option, this means that the Fund will own the securities subject to the option
or an offsetting call option as long as the written option is outstanding, or
will have the absolute and immediate right to acquire other securities that are
the same as those subject to the written option. In the case of a put option,
this means that the Fund will deposit cash or liquid securities in a segregated
account with the custodian with a value at least equal to the exercise price of
the put option.
PURCHASED OPTIONS. Each Equity Fund and Total Return Bond may also purchase put
and call options on securities. A put option entitles a Fund to sell, and a call
option entitles a Fund to buy, a specified security at a specified price during
the term of the option. The advantage to the purchaser of a call option is that
it may hedge against an increase in the price of securities it ultimately wishes
to buy. The advantage to the purchaser of a put option is that it may hedge
against a decrease in the price of portfolio securities it ultimately wishes to
sell.
A Fund may enter into closing transactions in order to offset an open option
position prior to exercise or expiration by selling an option it has purchased
or by entering into an offsetting option. If a Fund cannot effect closing
transactions, it may have to retain a security in its portfolio it would
otherwise sell, or deliver a security it would otherwise retain.
A Fund may purchase and sell options traded on U.S. exchanges and, to the extent
permitted by law, options traded over-the-counter. A Fund may also purchase and
sell options traded on recognized foreign exchanges. There can be no assurance
that a liquid secondary market will exist for any particular option. Over-the-
counter options also involve the risk that a counterparty will fail to meet its
obligation under the option.
OPTIONS ON STOCK INDICES OR CURRENCIES. The Equity Funds may purchase and write
exchange-listed put and call options on stock indices to hedge against risks of
market-wide price movements. A stock index measures the movement of a certain
group of stocks by assigning relative values to the common stocks included in
the index. Examples of well-known stock indices are the Standard & Poor's Index
of 500 Common Stocks and the Wilshire 5000 Index. Options on stock indices are
similar to options on securities. However, because options on stock indices do
not involve the delivery of an underlying security, the option represents the
holder's right to obtain from the writer in cash a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value
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of the underlying index on the exercise date. The Equity Funds may also purchase
and write put and call options on currencies.
A call option on a securities index provides the holder with the right to
receive a cash payment upon exercise of the option if the market value of the
underlying index exceeds the option's exercise price. Conversely, a put option
on a securities index provides the holder with the right to receive a cash
payment upon exercise of the option if the market value of the underlying index
is less than the option's exercise price. The amount of any payment to the
option holder will be equal to the difference between the closing price of the
index at the time of exercise and the exercise price of the option expressed in
U.S. dollars or a foreign currency, times a specified multiple. A put option on
a currency gives its holder the right to sell an amount (specified in units of
the underlying currency) of the underlying currency at the stated exercise price
at any time prior to the option's expiration. Conversely, a call option on a
currency gives its holder the right to purchase an amount (specified in units of
the underlying currency) of the underlying currency at the stated exercise price
at any time prior to the option's expiration.
When an Equity Fund writes an option on a stock index, it will cover the option
by depositing cash or liquid securities or a combination of both in an amount
equal to the market value of the option, in a segregated account, which will be
marked to market daily, with the Fund's custodian, and will maintain the account
while the option is open. Alternatively, and only in the case of a written call
option on a stock index, the Fund may cover the written option by owning an
offsetting call option. A call option on currency written by a Fund is covered
if the Fund owns an equal amount of the underlying currency.
OTHER CONSIDERATIONS. The Funds will engage in over-the-counter ("OTC") options
only with broker-dealers deemed creditworthy by the Adviser. Closing
transactions in certain options are usually effected directly with the same
broker-dealer that effected the original option transaction. A Fund bears the
risk that the broker- dealer may fail to meet its obligations. There is no
assurance that a Fund will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the OCC, which performs the obligations of its
members who fail to do so in connection with the purchase or sale of options.
When a Fund purchases a put option, the premium paid by it is recorded as an
asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission paid by the Fund) received by the Fund
is included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be marked-to-market on an ongoing basis to reflect the current value of the
option purchased or written. The current value of a traded option is the last
sale price or, in the absence of a sale, the average of the closing bid and
asked prices. If an option purchased by the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by the Fund on the closing transaction is more than the
premium paid to purchase the option, or a loss if it is less. If an option
written by the Fund expires on the stipulated expiration date or if the Fund
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit related to such option will be
eliminated. If an
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option written by the Fund is exercised, the proceeds to the
Fund from the exercise will be increased by the net premium originally received,
and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on securities,
securities indices and currencies. For example, there are significant
differences between the securities markets, currency markets and the
corresponding options markets that could result in imperfect correlations,
causing a given option transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded OTC or on a U.S.
or non-U.S. securities exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an exchange; the facilities of an exchange or the OCC may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The hours of trading for options may not conform to the hours during which the
underlying securities and currencies are traded. To the extent that the options
markets close before the markets for the underlying securities and currencies,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
The risks described above also apply to options on futures, which are discussed
below.
FUTURES CONTRACTS AND RELATED OPTIONS
GENERAL. When deemed advisable by the Adviser, each Equity Fund and Total Return
Bond may enter into futures contracts and purchase and write options on futures
contracts to hedge against changes in interest rates, securities prices or
currency exchange rates or for certain non-hedging purposes. The Funds may
purchase and sell financial futures contracts, including stock index futures,
and purchase and write related options. A Fund may engage in futures and related
options transactions for hedging and non-hedging purposes as defined in
regulations of the Commodity Futures Trading Commission. A Fund will not enter
into futures contracts or options thereon for non-hedging purposes, if
immediately thereafter, the aggregate initial margin and premiums required to
establish non-hedging positions in futures contracts and options on futures will
exceed 5% of the net asset value of the Fund's portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the
amount by which such options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Funds to purchase securities, require the Funds to segregate cash
or liquid securities with a value equal to the amount of the Fund's obligations.
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FUTURES CONTRACTS. A futures contract may generally be described as an agreement
between two parties to buy and sell a particular financial instrument for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract). Futures contracts
obligate the long or short holder to take or make delivery of a specified
quantity of a commodity or financial instrument, such as a security or the cash
value of a securities index, during a specified future period at a specified
price.
When interest rates are rising or securities prices are falling, a Fund can seek
to offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, a Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Funds may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures on securities are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to establish
with more certainty the effective price and rate of return on portfolio
securities and securities that a Fund proposes to acquire. A Fund may, for
example, take a "short" position in the futures market by selling futures
contracts in order to hedge against an anticipated rise in interest rates or a
decline in market prices that would adversely affect the value of a Fund's
portfolio securities. Such futures contracts may include contracts for the
future delivery of securities held by a Fund or securities with characteristics
similar to those of the Fund's portfolio securities. If, in the opinion of the
Adviser, there is a sufficient degree of correlation between price trends for a
Fund's portfolio securities and futures contracts based on other financial
instruments, securities indices or other indices, the Fund may also enter into
such futures contracts as part of its hedging strategy. Although under some
circumstances prices of securities in a Fund's portfolio may be more or less
volatile than prices of such futures contracts, the Adviser will attempt to
estimate the extent of this volatility difference based on historical patterns
and compensate for any such differential by having the Fund enter into a greater
or lesser number of futures contracts or by attempting to achieve only a partial
hedge against price changes affecting a Fund's securities portfolio. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
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OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium, to sell a futures
contract (if the option is exercised), which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium which may partially offset an increase in the price of
securities that a Fund intends to purchase. However, a Fund becomes obligated to
purchase a futures contract (if the option is exercised) which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
A Fund may use options on futures contracts solely for bona fide hedging or
other non-hedging purposes as described below.
OTHER CONSIDERATIONS. Each Equity Fund and Total Return Bond will engage in
futures and related options transactions only for bona fide hedging or non-
hedging purposes as permitted by CFTC regulations which permit principals of an
investment company registered under the 1940 Act to engage in such transactions
without registering as commodity pool operators. A Fund will determine that the
price fluctuations in the futures contracts and options on futures used by it
for hedging purposes are substantially related to price fluctuations in
securities or instruments held by the Fund or securities or instruments which it
expects to purchase. Except as stated below, a Fund's futures transactions will
be entered into for traditional hedging purposes--i.e., futures contracts will
be sold to protect against a decline in the price of securities (or the currency
in which they are denominated) that a Fund owns or futures contracts will be
purchased to protect a Fund against an increase in the price of securities (or
the currency in which they are denominated) that a Fund intends to purchase. As
evidence of this hedging intent, each Fund expects that, on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities (or assets
denominated in the related currency) in the cash market at the time when the
futures or option position is closed out. However, in particular cases, when it
is economically advantageous for a Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
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As an alternative to compliance with the bona fide hedging definition, a CFTC
regulation now permits a Fund to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish non-
hedging positions in futures contracts and options on futures will not exceed 5%
of the net asset value of a Fund's portfolio, after taking into account
unrealized profits and losses on any such positions and excluding the amount by
which such options were in-the-money at the time of purchase. A Fund will engage
in transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Code for maintaining
its qualification as a regulated investment company. See "Taxes."
A Fund will be required, in connection with transactions in futures contracts
and the writing of options on futures contracts, to make margin deposits, which
will be held by its custodian for the benefit of the futures commission merchant
through whom the Fund engages in such futures and option transactions. These
transactions involve brokerage costs, require margin deposits and, in the case
of futures contracts and options obligating a Fund to purchase securities,
require a Fund to segregate cash or liquid securities in an account maintained
with its custodian to cover such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions. The other risks associated with the
use of futures contracts and options thereon are (i) imperfect correlation
between the change in market value of the securities held by a Fund and the
prices of the futures and options and (ii) the possible absence of a liquid
secondary market for a futures contract or option and the resulting inability to
close a futures position prior to its maturity date.
In the event of an imperfect correlation between a futures position and
portfolio position which is intended to be protected, the desired protection may
not be obtained and a Fund may be exposed to risk of loss. The risk of imperfect
correlation may be minimized by investing in contracts whose price behavior is
expected to resemble that of the Fund's underlying securities. The Funds will
attempt to minimize the risk that they will be unable to close out futures
positions by entering into such transactions on a national exchange with an
active and liquid secondary market.
LIMITATIONS AND RISKS ASSOCIATED WITH TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS
AND OPTIONS ON FUTURES CONTRACTS
Options and futures transactions involve (1) liquidity risk that contractual
positions cannot be easily closed out in the event of market changes or
generally in the absence of a liquid secondary market, (2) correlation risk that
changes in the value of hedging positions may not match the securities market
fluctuations intended to be hedged, and (3) market risk that an incorrect
prediction of securities prices by the Adviser may cause the Fund to perform
worse than if such positions had not been taken. The ability to terminate over-
the-counter options is more limited than with exchange traded options and may
involve the risk that the counterparty to the option will not fulfill its
obligations. In accordance with a position taken by the Commission, each Fund
will limit its investments in illiquid securities to 15% of the Fund's net
assets.
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Options and futures transactions are highly specialized activities which involve
investment techniques and risks that are different from those associated with
ordinary portfolio transactions. Gains and losses on investments in options and
futures depend on the Adviser's ability to predict the direction of stock prices
and other economic factors. The loss that may be incurred by a Fund in entering
into futures contracts and written options thereon is potentially unlimited.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain facilities of an options
clearing entity or other entity performing the regulatory and liquidity
functions of an options clearing entity inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders. Most futures exchanges limit the amount
of fluctuation permitted in a futures contract's prices during a single trading
day. Once the limit has been reached no further trades may be made that day at a
price beyond the limit. The price limit will not limit potential losses, and may
in fact prevent the prompt liquidation of futures positions, ultimately
resulting in further losses.
Except as set forth above under "Futures Contracts and Options on Futures
Contracts", there is no limit on the percentage of the assets of any Equity Fund
that may be at risk with respect to futures contracts and related options. A
Fund may not invest more than 25% of its total assets in purchased protective
put options. A Fund's transactions in options, futures contracts and options on
futures contracts may be limited by the requirements for qualification of the
Fund as a regulated investment company for tax purposes. See "Taxes" below.
Options, futures contracts and options on futures contracts are derivative
instruments.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. In a repurchase agreement, a
Fund buys a security subject to the right and obligation to sell it back to the
other party at the same price plus accrued interest. The Fund's custodian will
hold the security as collateral for the repurchase agreement. Collateral must be
maintained at a value at least equal to 102% of the repurchase price, but
repurchase agreements involve some credit risk to a Fund if the other party
defaults on its obligation and the Fund is delayed in or prevented from
liquidating the collateral. A Fund will enter into repurchase agreements only
with financial institutions deemed to present minimal risk of bankruptcy during
the term of the agreement based on guidelines established and periodically
reviewed by the Trust's Board of Trustees.
For purposes of the 1940 Act and, generally, for tax purposes, a repurchase
agreement is considered to be a loan from the Fund to the seller of the
obligation. For other purposes, it is not clear whether a court would consider
such an obligation as being owned by the Fund or as being collateral for a loan
by the Fund to the seller. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the obligation before its
repurchase, under the repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the security. Such delays may result in a
loss of interest or decline in price of the obligation.
If the court characterizes the transaction as a loan and the Fund has not
perfected a security interest in the obligation, the Fund may be treated as an
unsecured creditor of the seller and required to return the obligation to the
seller's estate. As an unsecured creditor, the Fund would be at risk of losing
some or all of the principal and income involved in the transaction. As with
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any unsecured debt instrument purchased for the Funds, the Adviser seeks to
minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case, the seller of the obligation. In
addition to the risk of bankruptcy or insolvency proceedings, there is the risk
that the seller may fail to repurchase the security. However, if the market
value of the obligation falls below an amount equal to 102% of the repurchase
price (including accrued interest), the seller of the obligation will be
required to deliver additional securities so that the market value of all
securities subject to the repurchase agreement equals or exceeds the repurchase
price.
"WHEN-ISSUED" PURCHASES AND FORWARD COMMITMENTS (DELAYED DELIVERY)
Each Fund may purchase securities on a when-issued, delayed delivery or forward
commitment basis. When these transactions are negotiated, the price of the
securities is fixed at the time of the commitment, but delivery and payment may
take place up to 90 days after the date of the commitment to purchase for equity
securities, and up to 45 days after such date for fixed income securities. When-
issued securities or forward commitments involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date.
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 the Fund to lock in a price or yield
on a security, regardless of future changes in interest rates. A Fund will
purchase securities on a "when-issued" or forward commitment basis only with the
intention of completing the transaction and actually purchasing the securities.
If deemed appropriate by the Adviser, however, a Fund may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the Fund on
the settlement date. In these cases the Fund may realize a gain or loss, and
distributions attributable to any such gain, including a distribution by a
Municipal Fund, would be taxable to shareholders.
When a Fund agrees to purchase securities on a "when-issued" or forward
commitment basis, the Fund's custodian will set aside cash or liquid securities
equal to the amount of the commitment in a separate account. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required subsequently to place additional
assets in the separate account in order to ensure that the value of the account
remains equal to the amount of the Fund's commitments. The market value of a
Fund's net assets will generally fluctuate to a greater degree when it sets
aside portfolio securities to cover such purchase commitments than when it sets
aside cash. Because a Fund's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Fund expects that its commitments to purchase when-
issued securities and forward commitments will not exceed 33% of the value of
its total assets. When a Fund engages in "when-issued" and forward commitment
transactions, it relies on the other party to the transaction to consummate the
trade. Failure of such party to do so may result in the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value ,are
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taken into account when determining the market value of a Fund starting on the
day the Fund agrees to purchase the securities. The Fund does not earn interest
or dividends on the securities it has committed to purchase until the settlement
date.
BORROWING
Each Fund may borrow for temporary or emergency purposes, although borrowings by
Fixed Income and Municipal Bond may not exceed 10% of the value of their
respective total assets. This borrowing may be unsecured. The 1940 Act requires
a Fund to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the asset coverage should decline below 300% as a result of market
fluctuations or for other reasons, a Fund will be required to sell some of its
portfolio securities within three days to reduce its borrowings and restore the
300% asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. To limit the potential leveraging
effects of a Fund's borrowings, each Fund other than Fixed Income and Municipal
Bond will not make investments while borrowings are in excess of 5% of total
assets. Fixed Income and Municipal Bond may not make additional investments
while they have any borrowings outstanding. Borrowing generally will exaggerate
the effect on net asset value of any increase or decrease in the market value of
the portfolio. Money borrowed will be subject to interest costs which may or may
not be recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate. See "Investment Restrictions."
LENDING PORTFOLIO SECURITIES
Each Fund, other than Fixed Income and Municipal Bond, may lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made by a Fund, may not exceed 33 1/3% of the value of the Fund's
total assets. A Fund's loans of securities will be collateralized by cash, cash
equivalents or U.S. Government securities. The cash or instruments
collateralizing the Fund's loans of securities will be maintained at all times
in a segregated account with the Fund's custodian, in an amount at least equal
to the current market value of the loaned securities. From time to time, a Fund
may pay a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party that is unaffiliated
with the Fund and is acting as a "placing broker". No fee will be paid to
affiliated persons of the Fund. The Board of Trustees will make a determination
that the fee paid to the placing broker is reasonable.
By lending portfolio securities, a Fund can increase its income by continuing to
receive amounts equal to the interest or dividends on the loaned securities as
well as by either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U.S.
Government securities are used as collateral. A Fund will comply with the
following conditions whenever it loans securities: (i) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must
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receive reasonable interest on the loan, as well as amounts equal to the
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower except that, if a material event will occur affecting the
investment in the loaned securities, the Fund must terminate the loan in time to
vote the securities on such event.
DIVERSIFICATION
Each Fund other than Total Return Bond is "diversified" under the 1940 Act and
is also subject to issuer diversification requirements imposed on regulated
investment companies by Subchapter M of the Code. See "Investment Restrictions"
and "Taxes" below. Total Return Bond is "non-diversified" under the 1940 Act.
Accordingly, although it is subject to the issuer diversification requirements
imposed on regulated investment companies by Subchapter M of the Code, Total
Return Bond is not subject to the more stringent issuer diversification
requirements imposed on diversified funds by the 1940 Act. To the extent that
Total Return Bond does not meet the standards for being diversified under the
1940 Act, it will be more susceptible to developments affecting any single
issuer of portfolio securities.
CONCENTRATION OF INVESTMENTS
As a matter of fundamental policy, no Fund may invest 25% or more of its total
assets in the securities of one or more issuers conducting their principal
business activities in the same industry (except U.S. Government securities).
Currently, it is not anticipated that either Municipal Fund will invest 25% or
more of its total assets (at market value at the time of purchase) in: (a)
securities of one or more issuers conducting their principal activities in the
same state; or (b) securities the principal and interest of which is paid from
revenues of projects with similar characteristics, except that 25% or more of
either Municipal Fund's total assets may be invested in single family and multi-
family housing obligations. To the extent a Municipal Fund concentrates its
investments in single family and multi-family housing obligations, the Fund will
be subject to the peculiar risks associated with investments in such
obligations, including prepayment risks and the risks of default on housing
loans, which may be affected by economic conditions and other factors relating
to such obligations.
MORTGAGE DOLLAR ROLLS
Each of the Funds other than the Equity Funds and the Municipal Funds may enter
into mortgage "dollar rolls" in which a Fund sells securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar (same type, coupon and maturity) securities on a specified future date.
During the roll period, a Fund forgoes principal and interest paid on the
securities. A Fund is compensated by the difference between the current sales
price and the lower forward price for the future purchase (often referred to as
the "drop") or fee income and by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction.
The Funds may enter into both covered and uncovered rolls.
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RESTRICTED SECURITIES
Each of the Funds other than the Municipal Funds may invest to a limited extent
in restricted securities. Restricted securities are securities that may not be
sold freely to the public without prior registration under federal securities
laws or an exemption from registration. Restricted securities will be considered
illiquid unless they are restricted securities offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act of 1933 and the
Board of Trustees determines that these securities are liquid based upon a
review of the trading markets for the specific securities.
OTHER INVESTMENT COMPANIES
Each Fund may invest in the aggregate no more than 10% of its total assets,
calculated at the time of purchase, in the securities of other U.S.-registered
investment companies. In addition, a Fund may not invest more than 5% of its
total assets in the securities of any one such investment company or acquire
more than 3% of the voting securities of any other such investment company,
except that, in accordance with an exemptive order expected to be issued by the
Commission, Total Return Bond may invest up to 17% of its shares in
institutional shares of High Yield Bond and up to 7% of its shares in
institutional shares of Emerging Markets Debt (but only after such order is
issued). A Fund will indirectly bear its proportionate share of any management
or other fees paid by investment companies in which it invests, in addition to
its own fees. Total Return Bond will not acquire securities of another
investment company if, at the time of acquisition, the other investment company
owns securities of any other investment company in excess of the limits
contained in section 12(d)(1)(A) of the 1940 Act.
TEMPORARY DEFENSIVE INVESTMENTS
For temporary defensive purposes during periods then the Adviser determines that
conditions warrant, each of the Funds other than the Municipal Funds may invest
up to 100% of its assets in cash and money market instruments, including
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; certificates of deposit, time deposits, and bankers'
acceptances issued by banks or savings and loans associations having net assets
of at least $500 million as of the end of their most recent fiscal year;
commercial paper rated at the time of purchase at least A-1 by Standard & Poor's
or P-1 by Moody's, or unrated commercial paper determined by the Adviser to be
of comparable quality; repurchase agreements involving any of the foregoing;
and, to the extent permitted by applicable law, shares of other investment
companies investing solely in money market instruments.
COMMERCIAL PAPER
Commercial paper is a short-term, unsecured negotiable promissory note of a U.S
or non-U.S issuer. Each of the Funds may purchase commercial paper. Each Fund
may also invest in variable rate master demand notes which typically are issued
by large corporate borrowers and which provide for variable amounts of principal
indebtedness and periodic adjustments in the interest rate. Demand notes are
direct lending arrangements between a Fund and an issuer, and are not normally
traded in a secondary market. A Fund, however, may demand payment of principal
and accrued interest at any time. In addition, while demand notes generally are
not
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rated, their issuers must satisfy the same criteria as those that apply to
issuers of commercial paper. The Adviser will consider the earning power, cash
flow and other liquidity ratios of issuers of demand notes and continually will
monitor their financial ability to meet payment on demand. See also "Fixed
Income Securities--Variable and Floating Rate Instruments."
BANK OBLIGATIONS
Each Fund's investments in money market instruments may include certificates of
deposit, time deposits and bankers' acceptances. Certificates of Deposit ("CDs")
are short-term negotiable obligations of commercial banks. Time Deposits ("TDs")
are non-negotiable deposits maintained in banking institutions for specified
periods of time at stated interest rates. Bankers' acceptances are time drafts
drawn on commercial banks by borrowers usually in connection with international
transactions.
U.S. commercial banks organized under federal law are supervised and examined by
the Comptroller of the Currency and are required to be members of the Federal
Reserve System and to be insured by the Federal Deposit Insurance Corporation
(the "FDIC"). U.S. banks organized under state law are supervised and examined
by state banking authorities but are members of the Federal Reserve System only
if they elect to join. Most state banks are insured by the FDIC (although such
insurance may not be of material benefit to a Fund, depending upon the principal
amount of CDs of each bank held by the Fund) and are subject to federal
examination and to a substantial body of federal law and regulation. As a result
of governmental regulations, U.S. branches of U.S. banks, among other things,
generally are required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by the
Funds, are supervised and subject to examination by the Office of Thrift
Supervision. U.S. savings and loan associations are insured by the Savings
Association Insurance Fund which is administered by the FDIC and backed by the
full faith and credit of the U.S. Government.
INVESTMENT RESTRICTIONS
The fundamental investment restrictions set forth below may not be changed with
respect to a Fund without the approval of a "majority" (as defined in the 1940
Act) of the outstanding shares of that Fund. For the purposes of the 1940 Act,
"majority" means the lesser of (a) 67% or more of the shares of the Fund present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the shares of
the Fund.
Investment restrictions that involve a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by or on behalf of, a Fund
with the exception of borrowings permitted by fundamental investment restriction
(2) listed below for each Fund other than Fixed Income and Municipal Bond and
fundamental investment restriction (3) listed below for Fixed Income and
Municipal Bond.
In addition, the policy of each Municipal Bond and Short-Term Municipal Bond to
invest at least 80% of its net assets in tax-exempt securities has been
designated as fundamental.
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The nonfundamental investment restrictions set forth below may be changed or
amended by the Trust's Board of Trustees without shareholder approval.
INVESTMENT RESTRICTIONS THAT APPLY TO SHORT-TERM FIXED INCOME, SHORT-TERM
MUNICIPAL BOND, TOTAL RETURN BOND AND THE EQUITY FUNDS
FUNDAMENTAL INVESTMENT RESTRICTIONS The Trust may not, on behalf of a Fund:
(1) Issue senior securities, except as permitted by paragraphs (2), (6) and (7)
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts, repurchase agreements and
reverse repurchase agreements entered into in accordance with the Fund's
investment policy, and the pledge, mortgage or hypothecation of the Fund's
assets within the meaning of paragraph (3) below are not deemed to be
senior securities, if appropriately covered.
(2) Borrow money (i) except from banks as a temporary measure for extraordinary
emergency purposes and (ii) except that the Fund may enter into reverse
repurchase agreements and dollar rolls, if appropriately covered, with
banks, broker-dealers and other parties; provided that, in each case, the
Fund is required to maintain asset coverage of at least 300% for all
borrowings. For the purposes of this investment restriction, short sales,
transactions in currency, forward contracts, swaps, options, futures
contracts and options on futures contracts, and forward commitment
transactions shall not constitute borrowing.
(3) Pledge, mortgage, or hypothecate its assets, except to secure indebtedness
permitted by paragraph (2) above and to the extent related to the
segregation of assets in connection with the writing of covered put and
call options and the purchase of securities or currencies on a forward
commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to forward contracts, options,
futures contracts and options on futures contracts.
(4) Act as an underwriter, except to the extent that, in connection with the
disposition of Fund securities, the Fund may be deemed to be an underwriter
for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real estate
mortgage loans, except that the Fund may invest in securities of corporate
or governmental entities secured by real estate or marketable interests
therein or securities issued by companies (other than real estate limited
partnerships) that invest in real estate or interests therein.
(6) Make loans, except that the Fund may lend Fund securities in accordance
with the Fund's investment policies and may purchase or invest in
repurchase agreements, bank certificates of deposit, all or a portion of an
issue of bonds, bank loan participation agreements, bankers' acceptances,
debentures or other securities, whether or not the purchase is made upon
the original Issuance of the securities.
-35-
<PAGE>
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward
foreign currency exchange contracts, forward commitments, securities index
put or call warrants and repurchase agreements entered into in accordance
with the Fund's investment policies.
(8) Invest 25% or more of the value of the Fund's total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry or group of industries. This restriction
does not apply to investments in obligations of the U.S. Government or any
of its agencies or instrumentalities.
In addition, each Fund, other than Total Return Bond, will adhere to the
following fundamental investment restriction:
With respect to 75% of its total assets, a Fund may not purchase securities
of an issuer (other than the U.S. Government, or any of its agencies or
instrumentalities, or other investment companies), if (a) such purchase
would cause more than 5% of the Fund's total assets taken at market value
to be invested in the securities of such issuer, or (b) such purchase would
at the time result in more than 10% of the outstanding voting securities of
such issuer being held by the Fund.
NONFUNDAMENTAL INVESTMENT RESTRICTIONS The Trust may not, on behalf of a Fund:
(a) Participate on a joint-and-several basis in any securities trading account.
The "bunching" of orders for the sale or purchase of marketable Fund
securities with other accounts under the management of the Adviser to save
commissions or to average prices among them is not deemed to result in a
securities trading account.
(b) Purchase securities of other U.S.-registered investment companies, except
as permitted by the Investment Company Act of 1940 and the rules,
regulations and any applicable exemptive order issued thereunder.
(c) Invest for the purpose of exercising control over or management of any
company.
(d) Purchase any security, including any repurchase agreement maturing in more
than seven days, which is illiquid, if more than 15% of the net assets of
the Fund, taken at market value, would be invested in such securities.
The staff of the Commission has taken the position that fixed time deposits
maturing in more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid. Until such time (if any) as this
position changes, the Trust, on behalf of each Fund, will include such
investments in determining compliance with the 15% limitation on investments in
illiquid securities (10% limitation for Municipal Bond and Short-Term Municipal
Bond). Restricted securities (including commercial paper issued pursuant to
Section 4(2) of the
-36-
<PAGE>
Securities Act of 1933, which the Board of Trustees has determined are readily
marketable will not be deemed to be illiquid for purposes of such restriction.
"Value" for the purposes of the foregoing investment restrictions shall mean the
market value used in determining each Fund's net asset value.
INVESTMENT RESTRICTIONS THAT APPLY TO FIXED INCOME AND MUNICIPAL BOND
Fundamental Investment Restrictions. The Trust may not, on behalf of Fixed
Income or Municipal Bond:
(1) Acquire more than 10% of the voting securities of any one issuer.
(2) Invest in companies for the purpose of exercising control.
(3) Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of its total assets. Any borrowing
will be done from a bank and to the extent that such borrowing exceeds 5%
of the value of a Fund's assets, asset coverage of at least 300% is
required. In the event that such asset coverage shall at any time fall
below 300%, a Fund shall, within three days thereafter or such longer
period as the Securities and Exchange Commission may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. This borrowing
provision is included for temporary liquidity or emergency purposes. All
borrowings will be repaid before making investments and any interest paid
on such borrowings will reduce income.
(4) Make loans, except that a Fund may purchase or hold debt instruments in
accordance with its investment objective and policies, and a Fund may enter
into repurchase agreements.
(5) Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed 10% of
total assets taken at current value at the time of the incurrence of such
loan.
(6) Purchase or sell real estate, real estate limited partnership interests,
futures contracts, commodities or commodities contracts and interests in a
pool of securities that are secured by interests in real estate. However,
subject to the permitted investments of the Fund, a Fund may invest in
municipal securities or other obligations secured by real estate or
interests therein.
(7) Make short sales of securities, maintain a short position or purchase
securities on margin, except that a Fund may obtain short-term credits as
necessary for the clearance of security transactions.
(8) Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
-37-
<PAGE>
(9) Purchase securities of other investment companies except as permitted by
the Investment Company Act of 1940 and the rules and regulations
thereunder.
(10) Issue senior securities (as defined in the Investment Company Act of 1940)
except in connection with permitted borrowings as described above or as
permitted by rule, regulation or order of the Securities and Exchange
Commission.
(11) Purchase or retain securities of an issuer if an officer, trustee, partner
or director of the Fund or any investment adviser of the Fund owns
beneficially more than 1/2 of 1% of the shares or securities of such issuer
and all such officers, trustees, partners and directors owning more than
1/2 of 1% of such shares or securities together own more than 5% of such
shares or securities.
(12) Invest in interests in oil, gas or other mineral exploration or development
programs and oil, gas or mineral leases.
(13) Write or purchase puts, calls, options or combinations thereof or invest in
warrants, except that a Fund may purchase "put" bonds.
NONFUNDAMENTAL INVESTMENT RESTRICTIONS
(1) A Fund may not invest in illiquid securities in an amount exceeding, in the
aggregate, 10% of Municipal Bond's total assets and 15% of Fixed Income's
net assets. An illiquid security is a security that cannot be disposed of
promptly (within seven days) and in the usual course of business without a
loss, and includes repurchase agreements maturing in excess of seven days,
time deposits with a withdrawal penalty, non-negotiable instruments and
instruments for which no market exists.
(2) A Fund may not purchase securities of other U.S.-registered investment
companies except as permitted by the Investment Company Act of 1940 and the
rules, regulations and any applicable exemptive order issued thereunder.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set forth
below. An asterisk (*) indicates those Trustees deemed to be "interested
persons" of the Trust for purposes of the 1940 Act.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Name and Address Positions with Trust Principal Occupation During Past Five
Years
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Paul K. Freeman (2) Trustee Project Leader,
7257 South Tucson Way International Institute for Applied
Englewood, CO 80112 (age 48) Systems Analysis (since 1998); Chief
Executive Officer, The Eric Group
Inc. (environmental insurance)
(1986-1998).
-------------------------------------------------------------------------------------------------
Graham E. Jones (2) Trustee Senior Vice President, BGK Realty
330 Garfield Street Inc. (since 1995); Financial Manager,
-------------------------------------------------------------------------------------------------
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Name and Address Positions with Trust Principal Occupation During Past
Five Years
------------------------------------------------------------------------------------------------
<S> <C> <C>
Santa Fe, NM 87501 Positions with Practice Management Systems (medical
(age 65) information services) (1988-95);
Director, 11 closed-end funds managed
by Morgan Stanley Asset Management;
Trustee, 9 open-end mutual funds
managed by Weiss, Peck & Greer;
Trustee of 10 open-end mutual funds
managed by Sun Capital Advisers, Inc.
-------------------------------------------------------------------------------------------------
William N. Searcy (2) Trustee Pension & Savings Trust Officer,
2330 Shawnee Mission Pkwy Sprint Corporation
Westwood, KS 66205 (telecommunications) (since 1989);
(age 53) Trustee of six open-end mutual funds
managed by Sun Capital Advisers, Inc.
-------------------------------------------------------------------------------------------------
Hugh G. Lynch Trustee Retired, former Managing Director,
767 Fifth Avenue International Investments, General
New York, NY 10153 Motors Investment Management
(age 62) Corporation
Director, Emerging Markets Growth
Fund managed by Capital
International, Inc. (since December
1994); Director, The Greater China
Fund (since February 2000).
--------------------------------------------------------------------------------------------------
Edward T. Tokar Trustee Vice President-Investments, Honeywell
101 Columbia Road International, Inc. (advanced
Morristown, NJ 07962 technology and manufacturer) (since
(age 52) 1985).
--------------------------------------------------------------------------------------------------
Richard T . Hale President Trustee of each of the investment
One South Street companies within the Deutsche Asset
Baltimore, MD 21202 Management mutual fund complex;
Managing Director, Deutsche Asset
Management; Managing Director,
Deutsche Banc Alex. Brown
Incorporated;
Director and President, Investment
Company Capital Corp.; Executive Vice
President, ICCD (the Trust's
Distributor) (since 2000).
-------------------------------------------------------------------------------------------------
Neil P. Jenkins Vice President Director, Deutsche Asset Management
20 Finsbury Circus Investment Services (since 1996);
London, England Chief Executive Deutsche Asset
(age 39) Management Investment Services
--------------------------------------------------------------------------------------------------
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Name and Address Positions with Trust Principal Occupation During Past Five
--------------------------------------------------------------------------------------------------
<S> <C>
(since 1999); Director, Deutsche Asset
Management, Inc (1991-1996) Morgan
Grenfell International Funds Mgmt
(1995-1999), and Morgan Grenfell & Co.
(since 1985).
--------------------------------------------------------------------------------------------------
David W. Baldt Vice President Managing Director of Active Fixed
150 S. Independence Sq. Income, DAMI (since 1989).
W. Philadelphia, PA 19106
(age 50)
--------------------------------------------------------------------------------------------------
James H. Grifo Vice President Vice Chairman, ICCD (the Trust's
150 S. Independence Sq. Distributor) (since 2000); Managing
W. Philadelphia, PA 19106 Director and Executive Vice
(age 48) President, DAMI (since 1996); Senior
Vice President, GT Global Financial
(1990 - 1996).
--------------------------------------------------------------------------------------------------
Amy M. Olmert (1)(3) Treasurer, Chief Vice President, Deutsche Asset
One South Street Financial Officer Management Americas (since 1999);
Baltimore, MD 21202 Vice President, BT Alex. Brown Inc.
(age 36) (1997-1999); Senior Manager,
PricewaterhouseCoopers LLP
(1988-1997).
---------------------------------------------------------------------------------------------------
Daniel O. Hirsch Secretary Secretary, ICCD (the Trust's
One South Street Distributor) (since 2000); Principal,
Baltimore, MD 21202 Deutsche Asset Management Americas
(age 45) (since 1999); Director, Deutsche Bank
Alex. Brown Incorporated and
Investment Company Capital Corp.
(since 1998); Assistant General
Counsel, Office of the General
Counsel, United States Securities and
Exchange Commission (1993-1998).
--------------------------------------------------------------------------------------------------
</TABLE>
1 Member of the Trust's Pricing Committee.
2 Member of the Trust's Audit Committee.
3 Member of the Trust's Dividend Committee.
Certain of the Trustees and officers of the Trust reside outside the United
States, and substantially all the assets of these persons are located outside
the United States courts predicated upon the civil liability provisions of the
federal securities laws of the United States or the laws of the State of
Delaware. In addition, it is not certain that a foreign court would enforce, in
original actions or in actions to enforce judgments obtained in the
-40-
<PAGE>
United States, liabilities against these Trustees and officers predicated
solely upon the federal securities laws.
Messrs. Jones, Freeman and Searcy are members of the Audit Committee of the
Board of Trustees. The Audit Committee's functions include making
recommendations to the Trustees regarding the selection of independent
accountants, and reviewing with such accountants and the Treasurer of the Trust
matters relating to accounting and auditing practices and procedures, accounting
records, internal accounting controls and the functions performed by the Trust's
custodian, administrator and transfer agent.
As of [DATE], the Trustees and officers of the Trust owned, as a group, less
than one percent of the outstanding shares of each Fund other than Smaller
Companies and Micro Cap. On such date, the Trustees and officers of the Trust
owned, as a group, approximately _% of the outstanding shares of Smaller
Companies and _% of the outstanding shares of Micro Cap, respectively.
COMPENSATION OF TRUSTEES
The Trust pays each Trustee who is not affiliated with the Adviser an annual fee
of $15,000 provided that they attend each regular Board meeting during the year.
Members of the Audit Committee also receive $1,000 for each Audit Committee
meeting attended. The Chairman of the Audit Committee, currently Mr. Searcy,
receives an additional $1,000 per Audit Committee meeting attended. The Trustees
are also reimbursed for out-of-pocket expenses incurred by them in connection
with their duties as Trustees. The following table sets forth the compensation
paid by the Trust to the Trustees for the fiscal year of the Trust ended October
31, 1999:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Pension or Retirement Benefits
Name of Trustee Accrued as Part of Fund Aggregate Compensation from
Expenses the Trust/Complex*
------------------------------------------------------------------------------------------------
<S> <C> <C>
Paul K. Freeman $0 $22,750
------------------------------------------------------------------------------------------------
Graham E. Jones $0 $24,750
------------------------------------------------------------------------------------------------
William N. Searcy $0 $25,750
------------------------------------------------------------------------------------------------
Hugh G. Lynch $0 $21,750
------------------------------------------------------------------------------------------------
Edward T. Tokar $0 $21,750
------------------------------------------------------------------------------------------------
</TABLE>
* The Trustees listed above do not serve on the Board of any other investment
company that may be considered to belong to the same complex as the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
THE ADVISER
Effective October 6, 1999, the investment adviser to each Fund, Morgan Grenfell
Inc. changed its name to Deutsche Asset Management, Inc. ("DAMI"). DAMI, 885
Third Avenue, New
-41-
<PAGE>
York, New York, acts as the investment adviser to each Fund pursuant to the
terms of Management Contracts, dated December 28, 1994, August 7, 1996, January
30, 1997 and January 30, 1998 (referred to collectively herein as the
"Management Contracts"). Pursuant to the Management Contracts, the Adviser
supervises and assists in the management of the assets of each Fund and
furnishes each Fund with research, statistical, advisory and managerial
services. The Adviser pays the ordinary office expenses of the Trust and the
compensation, if any, of all officers and employees of the Trust and all
Trustees who are "interested persons" (as defined in the 1940 Act) of the
Adviser. Under the Management Contracts, the Trust, on behalf of each Fund, is
obligated to pay the Adviser a monthly fee at an annual rate of each Fund's
average daily net assets as follows:
--------------------------------------------------------------
Fund Annual
Rate
--------------------------------------------------------------
Municipal Bond 0.40%
--------------------------------------------------------------
Short-Term Municipal Bond 0.40%
--------------------------------------------------------------
Fixed Income 0.40%
--------------------------------------------------------------
Short-Term Fixed Income 0.40%
--------------------------------------------------------------
Smaller Companies 1.00%
--------------------------------------------------------------
Micro Cap 1.50%
--------------------------------------------------------------
Total Return Bond 0.45%
--------------------------------------------------------------
[If Total Return Bond receives exemptive relief from the commission to invest up
to 17% of its total assets in High Yield Bond Portfolio and up to 7% of its
total assets in the Emerging Markets Debt fund, its advisory fee will be reduced
to _______%].
Each Fund's advisory fees are paid monthly and will be prorated if the Adviser
shall not have acted as the Fund's investment adviser during the entire monthly
period.
The Adviser and the Administrator have contractually agreed for the 16-month
period from each Fund's most recently completed fiscal year to waive their fees
and reimburse expenses so that total expenses will not exceed those set forth in
the Fund's Prospectus. These contractual fee waivers may only be changed by the
Fund's Board of Trustees. For the fiscal year ended October 31, 1999, Fixed
Income, Municipal Bond, Short-Term Fixed Income, Short-Term Municipal Bond, and
Smaller Companies each paid the Adviser net advisory fees of $5,004,754,
$2,598,550, $96,835, $343,523, and $63,602, respectively. For the fiscal year
ended October 31, 1998, Fixed Income, Municipal Bond, Short-Term Fixed Income,
Short-Term Municipal Bond, and Micro Cap each paid the Adviser net advisory fees
of $4,688,049, $1,734,753, $2,407, $45,706, and $138,127, respectively. During
the fiscal period ended October 31, 1998, Smaller Companies paid no advisory
fees. For the fiscal period ended September 30, 1999, Micro Cap
-42-
<PAGE>
paid the Adviser net advisory fees of $225,700. During the fiscal period ended
October 31, 1997, Fixed Income and Municipal Bond each paid the Adviser net
advisory fees of $3,171,809 and $977,638, respectively. During the fiscal period
ended October 31, 1997, Short-Term Fixed Income, Short-Term Municipal Bond,
Smaller Companies and Micro Cap paid no advisory fees. Total Return Bond was not
in operation during any of the indicated periods, and, accordingly, paid no
advisory fees during such periods.
Each Management Contract between DAMI and the Trust except the management
contract for Total Return Bond, was most recently approved on November 18, 1999
by a vote of the Trust's Board of Trustees, including a majority of those
Trustees who were not parties to such Management Contract or "interested
persons" of any such parties. The Management Contract for Total Return Bond was
approved by a vote of the Trust's Board of Trustees, including a majority of
those Trustees who were not parties to such Management Contract or "interested
persons" of any such parties. After its initial term, each Management Contract
will continue in effect, with respect to each Fund, only if such continuance is
specifically approved annually by the Trustees, including a majority of the
Trustees who are not parties to the Management Contracts or "interested persons"
of any such parties, or by a vote of a majority of the outstanding shares of
each Fund. The Management Contracts are terminable by vote of the Board of
Trustees, or, with respect to a Fund, by the holders of a majority of the
outstanding shares of the Fund, at any time without penalty on 60 days' written
notice to the Adviser. Termination of a Management Contract (that covers more
than one Fund) with respect to a Fund will not terminate or otherwise invalidate
any provision of such Management Contract with respect to any other Fund. The
Adviser may terminate any Management Contract at any time without penalty on 60
days' written notice to the Trust. Each Management Contract terminates
automatically in the event of its "assignment" (as such term is defined in the
1940 Act).
Each Management Contract provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or any
Fund in connection with the performance of the Adviser's obligations under the
Management Contract with the Trust, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder.
In the management of the Funds and its other accounts, the Adviser allocates
investment opportunities to all accounts for which they are appropriate subject
to the availability of cash in any particular account and the final decision of
the individual or individuals in charge of such accounts. Where market supply is
inadequate for a distribution to all such accounts, securities are allocated
based on a Fund's pro rata portion of the amount ordered. In some cases this
procedure may have an adverse effect on the price or volume of the security as
far as a Fund is concerned. However, it is the judgment of the Board that the
desirability of continuing the Trust's advisory arrangements with the Adviser
outweighs any disadvantages that may result from contemporaneous transactions.
See "Portfolio Transactions."
DAMI is registered with the Commission as an investment adviser and provides a
full range of investment advisory services to institutional clients. DAMI is an
indirect wholly-owned subsidiary of Deutsche Bank AG, an international
commercial and investment banking group. As of [date], DAMI managed
approximately $xxx billion in assets for various individual and
Page -43-
<PAGE>
institutional accounts, including the SMALLCap Fund, Inc., a registered, closed-
end investment company for which it acts as investment adviser.
SUBADVISER FOR TOTAL RETURN BOND
Deutsche Asset Management Investment Services Limited ("DAMIS"), located at 20
Finsbury Circus, London, England, acts as Subadviser for the foreign component
of Total Return Bond pursuant to the terms of a subadvisory contract. DAMI is
registered with the Commission as an investment adviser and provides a full
range of investment advisory services to institutional clients. DAMIS is also an
indirect wholly-owned subsidiary of Deutsche Bank AG. As of _________________,
DAMIS managed approximately $_______ billion in assets for various individual
and institutional accounts, including the following registered investment
company to which it acts as a subadviser: RSI International Equity Fund.
Under the subadvisory contract, the Adviser, and not the Fund, will pay the
Subadviser______% of the average daily net assets of Total Return Bond.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics pursuant to Rule
17j-1 under the 1940 Act. The Trust's Code of Ethics permits access persons of
the Funds to invest in securities for their own accounts, but requires
compliance with the Code's preclearance requirements, subject to certain
exceptions. In addition, the Trust's Code provides for trading blackout periods
that prohibit trading by personnel within periods of trading by the Funds in the
same security. The Trust's Code prohibits short term trading profits, prohibits
personal investment in initial public offerings and requires prior approval with
respect to purchases of securities in private placements.
Each Fund's adviser and the Trust's distributor have also adopted a Code of
Ethics. The Codes of Ethics allow personnel to invest in securities for their
own accounts, but require compliance with the Codes' pre-clearance requirements
and other restrictions, including "blackout periods" and minimum holding
periods, subject to limited exceptions. Deutsche Asset Management, Inc. and the
distributor's Codes prohibit participation in all initial public offerings, and
the Deutsche Asset Management Investment Services Limited Code prohibits
participation in initial public offerings distributed in the United States. All
Codes require prior approval for purchases of securities in private placements.
PORTFOLIO MANAGEMENT
The person or persons who are primarily responsible for the day-to-day
management of each Fund's portfolio and his or her relevant experience is
described in the Fund's prospectus.
PORTFOLIO TURNOVER
It is estimated that, under normal circumstances, the portfolio turnover rate of
each of the Equity Funds will not exceed 150%. It is estimated that, under
normal circumstances, the portfolio
Page -44-
<PAGE>
turnover rate of each other Fund will not exceed 175%. The higher portfolio
turnover rates of these Funds may result from their respective portfolio
management strategies. These Funds may sell securities held for a short time in
order to take advantage of what the Adviser believes to be temporary disparities
in normal yield relationships between securities. A high rate of portfolio
turnover (i.e., 100% or higher) will result in correspondingly higher
transaction costs to a Fund, particularly if the Fund's primary investments are
equity securities. A high rate of portfolio turnover will also increase the
likelihood of net short-term capital gains (distributions of which are taxable
to shareholders as ordinary income).
Each Fund's portfolio turnover rate is calculated by dividing the lesser of the
dollar amount of sales or purchases of portfolio securities by the average
monthly value of a Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. For the fiscal period
ended October 31, 1999, the portfolio turnover rates for Fixed Income, Municipal
Bond, Short-Term Fixed Income, Short-Term Municipal Bond, and Smaller Companies
were 157%, 27%, 142%, 64%, and 105% respectively. For the fiscal period ended
September 30, 1999, the portfolio turnover rate for Micro Cap was 115%. For the
fiscal period ended October 31, 1998, the portfolio turnover rates for Fixed
Income, Municipal Bond, Short-Term Fixed Income, Short-Term Municipal Bond,
Smaller Companies and Micro Cap were 122%, 42%, 98%, 26%, 108% and 85%,
respectively. Total Return Bond was not in operation during the indicated
period.
THE ADMINISTRATOR
DAMI (the "Administrator"), 150 South Independence Square West, Philadelphia, PA
19106, serves as the Trust's administrator pursuant to an Administration
Agreement dated August 27, 1998. Pursuant to the Administration Agreement, the
Administrator has agreed to furnish statistical and research data, clerical
services, and stationery and office supplies; prepare and file various reports
with the appropriate regulatory agencies including the Commission and state
securities commissions; and provide accounting and bookkeeping services for the
Funds, including the computation of each Fund's net asset value, net investment
income and net realized capital gains, if any.
For its services under the Administration Agreement, the Administrator receives
a monthly fee at the following annual rates of the aggregate average daily net
assets of such Fund: 0.12% for Fixed Incomes; 0.22% for the Equity Funds. The
Administrator will pay Accounting Agency and Transfer Agency fees out of the
Administration fee. Previously, these fees were charged directly to the Funds.
Net Fund Operating Expenses will remain unchanged since the Adviser has agreed
to reduce its advisory fee and to make arrangements to limit certain other
expenses to the extent necessary to limit Fund Operating Expenses of each Fund
to the specified percentage of each Fund's net assets as demonstrated in the
Expense Information tables in the prospectus. For the fiscal year ended October
31, 1999, Fixed Income, Short-Term Fixed Income, Municipal Bond, Short-Term
Municipal Bond, and Smaller Companies paid the Administrator administration fees
of $1,501,426, $29,051, $779,565, $103,057, and $13,993, respectively. For the
fiscal period ended September 30, 1999, Micro Cap paid the Administrator
administration fees of $33,104.
Page -45-
<PAGE>
Prior to November 1, 1998, SEI Financial Management Corporation was the
Administrator for the Funds. For the fiscal period ended October 31, 1998, Fixed
Income, Short-Term Fixed Income, Municipal Bond, Short-Term Municipal Bond,
Smaller Companies and Micro Cap paid the Administrator administration fees of
$941,106, $60,177, $331,733, $60,177, $60,177 and $57,677, respectively. For the
fiscal period ended October 31, 1997, Fixed Income, Short-Term Fixed Income,
Municipal Bond, Short-Term Municipal Bond, Smaller Companies and Micro Cap paid
the Administrator administration fees of $901,672, $60,000, $295,813, $60,000,
$60,000 and $23,000, respectively. The administration fees described in this
paragraph were paid pursuant to a fee schedule that is different from the one
currently in effect (described above).
Total Return Bond was not in operation during any of the indicated periods, and,
accordingly, paid no administration fees during such period.
The Administration Agreement provides that the Administrator shall not be liable
under the Administration Agreement except for bad faith or gross negligence in
the performance of its duties or from the reckless disregard by it of its duties
and obligations thereunder.
EXPENSES OF THE TRUST
The expenses borne by the Fund include: (i) fees and expenses of any investment
adviser and any administrator of the Funds; (ii) fees and expenses incurred by
the Funds in connection with membership in investment company organizations;
(iii) brokers' commissions; (iv) payment for portfolio pricing services to a
pricing agent, if any; (v) legal expenses; (vi) interest, insurance premiums,
taxes or governmental fees; (vii) clerical expenses of issue, redemption or
repurchase of shares of the Funds; (viii) the expenses of and fees for
registering or qualifying shares of the Funds for sale and of maintaining the
registration of the Funds and registering the Funds as a broker or a dealer;
(ix) the fees and expenses of Trustees who are not affiliated with the Adviser;
(x) the fees or disbursements of custodians of the Funds' assets, including
expenses incurred in the performance of any obligations enumerated by the
Declaration of Trust or By-Laws of the Trust insofar as they govern agreements
with any such custodian; (xi) costs in connection with annual or special
meetings of shareholders, including proxy material preparation, printing and
mailing; (xii) charges and expenses of the Trust's auditor; (xiii) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the Trust's business; and (xiv) expenses of an
extraordinary and nonrecurring nature.
TRANSFER AGENT
Investment Company Capital Corp., One South Street, Baltimore, Maryland 21202
("ICCC"), has been retained to act as transfer and dividend disbursing agent
pursuant to a transfer agency agreement (the "Transfer Agency Agreement"), under
which the Transfer Agent (i) maintains record shareholder accounts, and (ii)
makes periodic reports to the Trust's Board of Trustees concerning the
operations of each Fund.
THE DISTRIBUTOR
The Trust, on behalf of the Funds, has entered into a distribution agreement
(the "Distribution Agreement") pursuant to which ICC Distributors, Inc, One
South Street, Baltimore, Maryland
Page -46-
<PAGE>
21202 (the "Distributor" or ICCD), as agent, serves as principal underwriter for
the continuous offering of shares of each Fund. The Distributor has agreed to
use its best efforts to solicit orders for the purchase of shares of each Fund,
although it is not obligated to sell any particular amount of shares. Shares of
the Funds are not subject to sales loads or distribution fees. The Adviser, and
not the Trust, is responsible for payment of any expenses or fees incurred in
the marketing and distribution of shares of the Funds.
The Distribution Agreement will remain in effect for one year from its effective
date and will continue in effect thereafter only if such continuance is
specifically approved annually by the Trustees, including a majority of the
Trustees who are not parties to the Distribution Agreement or "interested
persons" of such parties. The Distribution Agreement was most recently approved
on August 19, 1999 by a vote of the Trust's Board of Trustees, including a
majority of those Trustees who were not parties to the Distribution Agreement or
"interested persons" of any such parties. The Distribution Agreement is
terminable, as to a Fund, by vote of the Board of Trustees, or by the holders of
a majority of the outstanding shares of the Fund, at any time without penalty on
60 days' written notice to the Distributor. The Distributor may terminate the
Distribution Agreement at any time without penalty on 60 days' written notice to
the Trust.
ICCD is an indirect wholly-owned subsidiary of Deutsche Bank AG and, therefore,
is an affiliate of DAMI and DAMIS. James H. Grifo is Vice President of the Trust
and Vice Chairman of ICCD. Richard T. Hale is President of the Trust and
Executive Vice President of ICCD. Daniel O. Hirsch is Secretary of the Trust and
ICCD.
CUSTODIAN
Brown Brothers Harriman and Co. (the "Custodian"), 40 Water Street, Boston,
Massachusetts 02109, serves as the Trust's custodian pursuant to a Custodian
Agreement. Under its custody agreement with the Trust, the Custodian (i)
maintains separate accounts in the name of each Fund, (ii) holds and transfers
portfolio securities on account of each Fund, (iii) accepts receipts and makes
disbursements of money on behalf of each Fund, (iv) collects and receives all
income and other payments and distributions on account of each Fund's portfolio
securities and (v) makes periodic reports to the Trust's Board of Trustees
concerning each Fund's operations. The Custodian is authorized to select one or
more foreign or domestic banks or companies to serve as sub-custodian on behalf
of the Funds.
SERVICE PLAN
(INVESTMENT SHARES ONLY)
Each Fund has adopted a service plan (the "Plan") with respect to its Investment
shares which authorizes it to compensate Service Organizations whose customers
invest in Investment shares of the Funds for providing certain personal, account
administration and/or shareholder liaison services. Pursuant to the Plans, the
Funds may enter into agreements with Service Organizations ("Service
Agreements"). Under such Service Agreements or otherwise, the Service
Organizations may perform some or all of the following services: (i) acting as
record holder and nominee of all Investment shares beneficially owned by their
customers; (ii) establishing and maintaining individual accounts and records
with respect to the service shares owned by each customer; (iii) providing
facilities to answer inquiries and respond to correspondence from
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customers about the status of their accounts or about other aspects of the Trust
or applicable Fund; (iv) processing and issuing confirmations concerning
customer orders to purchase, redeem and exchange Investment shares; (v)
receiving and transmitting funds representing the purchase price or redemption
proceeds of such Investment shares; (vi) participant level recordkeeping, sub-
accounting, and other administrative services in connection with the entry of
purchase and redemption orders for the Plan; (vii) withholding sums required by
applicable authorities; (viii) providing daily violation services to the Plans;
(ix) paying and filing of all withholding and documentation required by
appropriate government agencies; (x) provision of reports, refunds and other
documents required by tax laws and the Employee Retirement Income Security Act
of 1974 ("ERISA"); and (xi) providing prospectuses, proxy materials and other
documents of the Funds to participants as may be required by law. In the event
that your service plan is terminated, your shares will be converted to
Institutional Class shares of the same Fund.
As compensation for such services, each Service Organization of the funds is
entitled to receive a service fee in an amount up to 0.25% (on an annualized
basis) of the average daily net assets of the Fund's Investment shares
attributable to customers of such Service Organization. Service Organizations
may from time to time be required to meet certain other criteria in order to
receive service fees.
In accordance with the terms of the Service Plans, the officers of the Trust
provide to the Trust's Board of Trustees for their review periodically a written
report of services performed by and fees paid to each Service Organization under
the Service Agreements and Service Plans.
Pursuant to the Plans, Investment shares of a Fund that are beneficially owned
by customers of a Service Organization will convert automatically to
Institutional shares of the same Fund in the event that such Service
Organization's Service Agreement expires or is terminated. Customers of a
Service Organization will receive advance notice of any such conversion, and any
such conversion will be effected on the basis of the relative net asset values
of the two classes of shares involved.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974 ("ERISA") may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Investment shares of the Fund. Service Organizations that are subject
to the jurisdiction of the Commission, the Department of Labor or state
securities commissions are urged to consult their own legal advisers before
investing fiduciary assets in Investment shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive fees
under a Service Plan if the plan fiduciary otherwise properly discharges its
fiduciary duties, including (if applicable) those under ERISA. Under ERISA, a
plan fiduciary, such as a trustee or investment manager, must meet the fiduciary
responsibility standards set forth in part 4 of Title I of ERISA. Those
standards are designed to help ensure that the fiduciary's decisions are made in
the best interests of the plan and are not colored by self-interest.
Section 403 (c)(1) of ERISA provides, in part, that the assets of a plan shall
be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a)(1) sets forth a similar
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requirement on how a plan fiduciary must discharge his or her duties with
respect to the plan, and provides further that such fiduciary must act prudently
and solely in the interests of the participants and beneficiaries. These basic
provisions are supplemented by the per se prohibitions of certain classes of
transactions set forth in Section 406 of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from
causing that plan to engage in a transaction if he knows or should know that the
transaction would constitute a direct or indirect transfer to, or use by or for
the benefit of, a party in interest, of any assets of that plan. Section 3(14)
includes within the definition of "party in interest" with respect to a plan any
fiduciary with respect to that plan. Thus, Section 406(a)(1)(D) would not only
prohibit a fiduciary from causing the plan to engage in a transaction which
would benefit a third person who is a party in interest, but it would also
prohibit the fiduciary from similarly benefiting himself. In addition, Section
406(b)(1) specifically prohibits a fiduciary with respect to a plan from dealing
with the assets of that plan in his own interest or for his own account. Section
406(b)(3) supplements these provisions by prohibiting a plan fiduciary from
receiving any consideration for his own personal account from any party dealing
with the plan in connection with a transaction involving the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan may
properly receive service fees under a Service Plan if the fees are used for the
exclusive purpose of providing benefits to the plan's participants and their
beneficiaries or for defraying reasonable expenses of administering the plan for
which the plan would otherwise be liable. See, e.g., Department of Labor ERISA
Technical Release No. 86-1 (stating a violation of ERISA would not occur where a
broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which plan is otherwise responsible for paying). Thus, the
fiduciary duty issues involved in a plan fiduciary's receipt of the service fee
must be assessed on a case-by-case basis by the relevant plan fiduciary.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the Adviser makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds. In executing portfolio transactions, the
Adviser seeks to obtain the best net results for the Funds, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. Commission rates, being a component of price, are
considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through dealers acting for
their own account and not as brokers or otherwise through transactions directly
with the issuer of the instrument. Some fixed income securities are purchased
and sold on an exchange or in over-the-counter transactions conducted on an
agency basis involving a commission.
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<PAGE>
Pursuant to the Management Contracts, the Adviser agrees to select broker-
dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In addition, the Management Contracts authorize the
Adviser, subject to the periodic review of the Trust's Board of Trustees, to
cause a Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another broker-
dealer for effecting the same transaction, provided that the Adviser determines
in good faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either the particular transaction or the overall responsibilities of the
Adviser to the Fund. Such brokerage and research services may consist of pricing
information, reports and statistics on specific companies or industries, general
summaries of groups of bonds and their comparative earnings and yields, or broad
overviews of the securities markets and the economy.
Supplemental research information utilized by the Adviser is in addition to, and
not in lieu of, services required to be performed by the Adviser and does not
reduce the advisory fees payable to the Adviser. The Trustees will periodically
review the commissions paid by the Funds to consider whether the commissions
paid over representative periods of time appear to be reasonable in relation to
the benefits inuring to the Funds. It is possible that certain of the
supplemental research or other services received will primarily benefit one or
more other investment companies or other accounts of the Adviser for which
investment discretion is exercised. Conversely, a Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other account or investment company. During the
fiscal year ended October 31, 1999, the Adviser paid the following brokerage
commissions for research services: for Smaller Companies approximately $10,562
and for Micro Cap approximately $26,796.
Investment decisions for each Fund and for other investment accounts managed by
the Adviser are made independently of each other in the light of differing
conditions. However, the same investment decision may be made for two or more of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated as to amount in a
manner deemed equitable to each such account. While in some cases this practice
could have a detrimental effect on the price or value of the security as far as
a Fund is concerned, in other cases it is believed to be beneficial to a Fund.
To the extent permitted by law, the Adviser may aggregate the securities to be
sold or purchased for a Fund with those to be sold or purchased for other
investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the general
policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may place
securities transactions with brokers with whom it is affiliated ("Affiliated
Brokers").
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection
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with transactions effected on a securities exchange. The Board, including a
majority of the Trustees who are not "interested persons" of the Trust or the
Adviser, has adopted procedures designed to comply with the requirements of
Section 17(e) of the 1940 Act and Rule 17e-1 promulgated thereunder to ensure
that the broker's commission is "reasonable and fair compared to the commission,
fee or other remuneration received by other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time...."
A transaction would not be placed with an Affiliated Broker if a Fund would have
to pay a commission rate less favorable than their contemporaneous charges for
comparable transactions for their other most favored, but unaffiliated,
customers except for accounts for which they act as a clearing broker, and any
of their customers determined, by a majority of the Trustees who are not
"interested persons" of the Fund or the Adviser, not to be comparable to the
Fund. With regard to comparable customers, in isolated situations, subject to
the approval of a majority of the Trustees who are not "interested persons" of
the Trust or the Adviser, exceptions may be made. Since the Adviser, as
investment adviser to the Funds, has the obligation to provide management, which
includes elements of research and related skills, such research and related
skills will not be used by them as a basis for negotiating commissions at a rate
higher than that determined in accordance with the above criteria. The Funds
will not engage in principal transactions with Affiliated Brokers. When
appropriate, however, orders for the account of the Funds placed by Affiliated
Brokers are combined with orders of their respective clients, in order to obtain
a more favorable commission rate. When the same security is purchased for two or
more funds or customers on the same day, each fund or customer pays the average
price and commissions paid are allocated in direct proportion to the number of
shares purchased.
Affiliated Brokers furnish to the Trust at least annually a statement setting
forth the total amount of all compensation retained by them or any associated
person of them in connection with effecting transactions for the account of the
Funds, and the Board reviews and approves all such portfolio transactions on a
quarterly basis and the compensation received by Affiliated Brokers in
connection therewith. During the fiscal years ended October 31,1997 and 1998, no
Fund paid any brokerage commissions to any Affiliated Broker. For the fiscal
period ended October 31, 1999, Micro Cap paid brokerage commissions in the
amount of $894 to Bankers Trust Company, an Affiliated Broker. This represents
3% of the aggregate brokerage commissions paid by the Fund in the fiscal year
and 3% of the aggregate dollar amount of transactions effected by the Fund in
the fiscal year.
For the fiscal period ended October 31, 1999, Smaller Companies paid brokerage
commissions in the amount of $258 to Bankers Trust Company, an Affiliated
Broker. This represents 2% of the aggregate brokerage commissions paid by the
Fund in the fiscal year and 2% of the aggregate dollar amount of transactions
effected by the Fund in the fiscal year.
Affiliated Brokers do not knowingly participate in commissions paid by the Funds
to other brokers or dealers and do not seek or knowingly receive any reciprocal
business as the result of the payment of such commissions. In the event that an
Affiliated Broker learns at any time that it has knowingly received reciprocal
business, it will so inform the Board.
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For the fiscal years ended October 31, 1997, 1998 and 1999 Fixed Income,
Municipal Bond, Short-Term Fixed Income and Short-Term Municipal Bond paid no
brokerage commissions. For the fiscal years ended October 31, 1997, 1998 and
1999, Smaller Companies paid aggregate brokerage commissions of $7,708, $11,892
and $10,707, respectively. For the fiscal periods ended October 31, 1997, 1998
and 1999, Micro Cap paid aggregate brokerage commissions of $7,337, $28,211 and
$32,822, respectively.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are distributed by ICC Distributors, Inc., the Distributor.
The Funds offer three classes of shares Institutional, Investment and Premier
shares. General information on how to buy shares of the Funds is set forth in
"Managing Your Investment" in each Fund's Prospectus. The following supplements
that information.
Investors may invest in Institutional shares and Premier shares by establishing
a shareholder account with the Trust. In order to make an initial investment in
Investment shares of a Fund, an investor must establish an account with a
service organization. Additionally, each Fund has authorized brokers to accept
purchase and redemption orders for shares for each Fund. Brokers, including
authorized brokers of service organizations, are, in turn, authorized to
designate other intermediaries to accept purchase and redemption orders on a
Fund's behalf. Investors who invest through brokers, service organizations or
their designated intermediaries may be subject to minimums established by their
broker, service organization or designated intermediary.
Investors who establish shareholder accounts with the Trust should submit
purchase and redemption orders to the Transfer Agent as described in the
Prospectus. Investors who invest through authorized brokers, service
organizations or their designated intermediaries should submit purchase and
redemption orders directly to their broker, service organization or designated
intermediary. The broker or intermediary may charge you a transaction fee. A
Fund will be deemed to have received a purchase or redemption order when an
authorized broker, service organization or, if applicable, an authorized
designee, accepts the order. Shares of any Fund may be purchased or redeemed on
any Business Day at the net asset value next determined after receipt of the
order, in good order, by the Transfer Agent, the service organization, broker or
designated intermediary. A "Business Day" means any day on which the New York
Stock Exchange (the "NYSE") is open. For an investor who has a shareholder
account with the Trust, the Transfer Agent must receive the investor's purchase
or redemption order before the close of regular trading on the NYSE for the
investor to receive that day's net asset value. For an investor who invests
through a mutual fund marketplace, the investor's authorized broker or
designated intermediary must receive the investor's purchase or redemption order
before the close of regular trading on the NYSE and promptly forward such order
to the Transfer Agent for the investor to receive that day's net asset value.
Service organizations, brokers and designated intermediaries are responsible for
promptly forwarding such investors' purchase or redemption orders to the
Transfer Agent.
NET ASSET VALUE
Under the 1940 Act, the Board of Trustees of the Trust is responsible for
determining in good faith the fair value of the securities of each Fund. In
accordance with procedures adopted by the Board of Trustees, the net asset value
per share of each class of each Fund is calculated by
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determining the net worth of the Fund attributable to the class (assets,
including securities at value, minus liabilities) divided by the number of
shares of such class outstanding. Each Fund computes net asset value for each
class of its shares at the close of such regular trading, on each day on which
the New York Stock Exchange ("NYSE") is open (a "Business Day"). If the NYSE
closes early, the fund will accelerate the calculation of the NAV and
transaction deadlines to the actual closing time. The NYSE is closed on
Saturdays and Sundays as well as the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
For purposes of calculating net asset value for each class of its shares, equity
securities traded on a recognized U.S. or foreign securities exchange or the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
are valued at their last sale price on the principal exchange on which they are
traded or NASDAQ (if NASDAQ is the principal market for such securities) on the
valuation day or, if no sale occurs, at the bid price. Unlisted equity
securities for which market quotations are readily available are valued at the
most recent bid price prior to the time of valuation.
Debt securities and other fixed income investments of the Funds are valued at
prices supplied by independent pricing agents, which prices reflect broker-
dealer supplied valuations and electronic data processing techniques. Short-term
obligations maturing in sixty days or less may be valued at amortized cost,
which method does not take into account unrealized gains or losses on such
portfolio securities. Amortized cost valuation involves initially valuing a
security at its cost, and thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods in which the value of the
security, as determined by amortized cost, may be higher or lower than the price
the Fund would receive if the Fund sold the security.
Other assets and assets for which market quotations are not readily available
are valued at fair value using methods determined in good faith by the Board of
Trustees.
Trading in securities on European and Far Eastern securities exchanges and over-
the-counter markets is normally completed well before the close of regular
trading or the NYSE each Business Day. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all Business Days. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not Business Days and on which the Funds' net asset values are not calculated.
Such calculation may not take place contemporaneously with the determination of
the prices of certain portfolio securities used in such calculation. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of the regular trading on the NYSE will not
be reflected in the Funds' calculation of net asset values unless the Adviser
deems that the particular event would materially affect net asset value, in
which case an adjustment will be made.
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PERFORMANCE INFORMATION
From time to time, performance information, such as total return and yield for
shares of a Fund may be quoted in advertisements or in communications to
shareholders. A Fund's total return may be calculated on an annualized and
aggregate basis for various periods (which periods will be stated in the
advertisement). Average annual return reflects the average percentage change per
year in value of an investment in shares of a Fund. Aggregate total return
reflects the total percentage change over the stated period. In calculating
total return, dividends and capital gain distributions made by the Fund during
the period are assumed to be reinvested in the Fund's shares. A Fund's yield
reflects a Fund's overall rate of income on portfolio investments as a
percentage of the share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30-day period by the net
asset value per share on the last day of that period.
For the Municipal Funds, tax-equivalent yield may also be quoted. Tax-equivalent
yield is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after tax equivalent of a
Municipal Fund's yield, assuming certain tax brackets for a shareholder.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding the Fund may discuss
performance as reported by various financial publications. The performance of a
Fund may be compared in publications to the performance of various indices and
investments for which reliable performance data is available. In addition, the
performance of a Fund may be compared in publications to averages, performance
rankings or other information prepared by recognized mutual fund statistical
services.
Performance quotations of a Fund represent the Fund's past performance and,
consequently, should not be considered representative of the future performance
of the Fund. The value of shares, when redeemed, may be more or less than the
original cost. Any fees charged by banks or other institutional investors
directly to their customer accounts in connection with investments in shares of
a Fund are not at the direction or within the control of the Funds and will not
be included in the Funds' calculations of total return.
YIELD
From time to time, Fixed Income, Short-Term Fixed Income, each Municipal Fund
and Total Return Bond may advertise its yield and (in the case of the Municipal
Funds) its tax-equivalent yield. Yield and tax-equivalent yield are calculated
separately for each class of shares of a Fund. Each type of share is subject to
differing yields for the same period. The yield of a class of shares of a Fund
refers to the annualized income generated by an investment in the Fund over a
specified 30-day period. The yield is calculated by assuming that the income
generated by the investment during that period is generated for each like period
over one year and is shown as a percentage of the investment. In particular,
yield will be calculated according to the following formula:
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YIELD = 2 [ ( ---- + 1 ) 6 - 1 ]
cd
Where: a = dividends and interest earned by the Fund during the
period;
b = net expenses accrued for the period;
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
d = maximum offering price per share on the last day of the period.
Tax-equivalent yield is computed by dividing the portion of the yield that is
tax exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield that is not tax exempt. Actual yields will depend
on such variables as asset quality, average asset maturity, the type of
instruments a Fund invests in, changes in interest rates on money market
instruments, changes in the expenses of the Fund and other factors. Yields are
one basis upon which investors may compare the Funds with other mutual funds;
however, yields of other mutual funds and other investment vehicles may not be
comparable because of the factors set forth above and differences in the methods
used in valuing portfolio instruments.
For the 30-day period ended October 31, 1999, the yields for Institutional
shares of Fixed Income, Municipal Bond, Short-Term Fixed Income, Short-Term
Municipal Bond were 6.79%, 5.71%, 6.50%, 4.84%, respectively. If the expense
limitations for these Funds had not been in effect during this period, the
yields for Institutional shares of these Funds would have been 6.79%, 5.17%,
6.44%, 4.82% and 13.00%, respectively. For the same period, the tax-equivalent
yields for Institutional shares of Municipal Bond and Short-Term Municipal Bond
were 8.56% and 8.01%, respectively, assuming the highest Federal Income Tax
bracket for individuals (39.6%). If the expense limitations for these Funds had
not been in effect during this period, the tax-equivalent yields for
Institutional shares of these Funds would have been 8.56% and 7.98%,
respectively, assuming the same Federal Income Tax bracket.
For the 30-day period ended October 31, 1999, the yields for the Investment
shares of Fixed Income, Municipal Bond, Short-Term Municipal Bond were 6.54%,
4.93%, 4.59%, respectively. If the expense limitations described in the
Prospectus for this Fund had not been in effect during this period, the yield
for Investment shares of Fixed Income, Municipal Bond, Short-Term Municipal Bond
would be 6.54%, 4.93%, 4.57%, respectively. For the same period, the tax-
equivalent yields for Investment shares of Municipal Bond and Short-Term
Municipal Bond were 8.16% and 7.60%, respectively, assuming the highest Federal
Income Tax bracket for individuals (39.6%). If the expense limitations
described in the Prospectus for this Fund had not been in effect during this
period, the tax-equivalent yields for Investment shares of this Fund would have
been 8.16% and 7.57%, respectively, assuming the same Federal Income Tax
bracket.
TOTAL RETURN
Average annual total return is calculated separately each class of shares of a
Fund. Each type of share is subject to different fees and expenses and,
consequently, may have differing average
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annual total returns for the same period. Each Fund that advertises "average
annual total return" for a class of its shares computes such return by
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
ERV
T = [ ( --- ) 1/n - 1 ]
P
Where: T = average annual total return,
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year (or other)
periods at the end of the applicable period (or a fractional
portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
Each Fund that advertises "aggregate total return" for a class of its shares
computes such returns by determining the aggregate compounded rates of return
during specified periods that likewise equate the initial amount invested to the
ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
Aggregate Total Return = [( ERV ) - 1]
---
P
The above calculations are made assuming that (1) all dividends and capital gain
distributions are reinvested on the reinvestment dates at the price per share
existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
For the fiscal year ended October 31, 1999, the average annual total return of
Institutional shares of Fixed Income, Municipal Bond, Short-Term Fixed Income,
Short-Term Municipal Bond, and Smaller Companies were 0.86%, -0.78%, 4.49%,
1.33%, and 25.03%, respectively. For the fiscal period ended September 30,
1999, the average annual total return of Institutional shares of Micro Cap were
65.67%. For the five-year period ended October 31, 1999, the average annual
total returns of Institutional shares of Fixed Income and Municipal Bond were
7.75% and 6.15%, respectively. For their respective periods from commencement
of operations to October 31, 1999, the average annual total returns of
Institutional shares of Fixed Income, Municipal Bond, Short-Term Fixed Income,
Short-Term Municipal Bond, and Smaller Companies were 7.35%, 7.16%, 6.05%,
5.16%, and 13.81%, respectively. For the period ended September 30, 1999, the
average annual total return of Institutional shares of Micro Cap were 20.64%.
If expense limitations for the above Funds had not been in effect during the
indicated periods, the total returns for Institutional shares of these Funds for
such periods would have been lower than the
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total return figures shown in this paragraph. Total Return Bond does not have
annual returns for at least one year.
For the fiscal year ended October 31, 1999, the average annual returns for
Investment shares of Fixed Income, Municipal Bond, Short-Term Municipal Bond,
Smaller Companies and Micro Cap were 0.65%, -1.01%, 1.08%, 24.75% and 65.74%,
respectively. For their respective periods from commencement of operations for
Investment shares to October 31, 1999, the average annual total returns for
Investment shares of Fixed Income, Municipal Bond, Short-Term Municipal Bond,
and Smaller Companies were 3.43%, 2.89%, 3.06%, and 6.50%, respectively. For
the fiscal period ended September 30, 1999, the average annual returns for
Investment shares of Micro Cap were 65.74%. For the period from commencement of
operations for Investment shares to September 30, 1999, the average annual total
returns for Micro Cap were 16.66%. If the expense limitations described in each
Prospectus for the above Funds had not been in effect during the indicated
periods, the total returns of these Funds for such periods would have been lower
than the total return figures shown in this paragraph.
The Funds may from time to time advertise comparative performance as measured by
various publications, including, but not limited to, Barron's, The Wall Street
Journal, Weisenberger Investment Companies Service, Dow Jones Investment
Adviser, Dow Jones Asset Management, Business Week, Changing Times, Financial
World, Forbes, Fortune and Money. In addition, the Funds may from time to time
advertise their performance relative to certain indices and benchmark
investments, including: (a) the Lipper Analytical Services, Inc. Mutual Fund
Performance Analysis, Fixed Income Analysis and Mutual Fund Indices (which
measure total return and average current yield for the mutual fund industry and
rank mutual fund performance); (b) the CDA Mutual Fund Report published by CDA
Investment Technologies, Inc. (which analyzes price, risk and various measures
of return for the mutual fund industry); (c) the Consumer Price Index published
by the U.S. Bureau of Labor Statistics (which measures changes in the price of
goods and services); (d) Stocks, Bonds, Bills and Inflation published by
Ibbotson Associates (which provides historical performance figures for stocks,
government securities and inflation); (e) the Lehman Brothers Aggregate Bond
Index or its component indices (the Aggregate Bond Index measures the
performance of Treasury, U.S. Government agency, corporate, mortgage and Yankee
bonds); (f) the Standard & Poor's Bond Indices (which measure yield and price of
corporate, municipal and U.S. Government bonds); and (g) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers,
Inc., Credit Suisse First Boston Corporation, Morgan Stanley Dean Witter,
Salomon Smith Barney, Merrill Lynch, Donaldson Lufkin and Jenrette or other
providers of such data. The composition of the investments in such indices and
the characteristics of such benchmark investments are not identical to, and in
some cases are very different from, those of the Funds' portfolios. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the Funds to calculate their performance figures.
TAXES
The following is a summary of the principal U.S. federal income, and certain
state and local tax considerations regarding the purchase, ownership and
disposition of shares in the Funds. This summary does not address special tax
rules applicable to certain classes of investors, such as tax-
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<PAGE>
exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his own tax adviser with respect to
the specific federal, state, local and foreign tax consequences of investing in
the Funds. The summary is based on the laws in effect on the date of this
Statement of Additional Information, which are subject to change.
GENERAL
Each Fund is a separate taxable entity. Each Fund has elected or intends to
elect to be treated, and intends to qualify for each taxable year, as a
regulated investment company under Subchapter M of the Code. Qualification of a
Fund as a regulated investment company under the Code requires, among other
things, that (a) the Fund derive at least 90% of its gross income (including
tax-exempt interest) for its taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
stocks or securities or foreign currencies, or other income (including but not
limited to gains from options, futures, and forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
(the "90% gross income test"); and (b) the Fund diversify its holdings so that,
at the close of each quarter of its taxable year, (i) at least 50% of the market
value of its total (gross) assets is comprised of cash, cash items, United
States Government securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the Fund's total assets and to not more
than 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities of any
one issuer (other than United States Government securities and securities of
other regulated investment companies) or two or more issuers controlled by the
Fund and engaged in the same, similar or related trades or businesses. Future
Treasury regulations could provide that qualifying income under the 90% gross
income test will not include gains from foreign currency transactions or
derivatives that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures or forward contracts for purposes other than hedging currency
risk with respect to securities in a Fund's portfolio or anticipated to be
acquired may not qualify as "directly-related" under such regulations.
If a Fund complies with such provisions, then in any taxable year in which the
Fund distributes at least 90% of the sum of (i) its "investment company taxable
income" (which includes dividends, taxable interest, taxable accrued original
issue discount, recognized market discount income, income from securities
lending, any net short-term capital gain in excess of net long-term capital loss
and certain net realized foreign exchange gains and is reduced by deductible
expenses) and (ii) the excess of its gross tax-exempt interest, if any, over
certain disallowed deductions ("net tax-exempt interest"), the Fund (but not its
shareholders) will be relieved of federal income tax on any income of the Fund,
including long-term capital gains, distributed to shareholders. However, if a
Fund retains any investment company taxable income or net capital gain (the
excess of net long-term capital gain over net short-term capital loss), it will
be subject to federal income tax at regular corporate rates on the amount
retained.
If a Fund retains any net capital gain, the Fund may designate the retained
amount as undistributed capital gains in a notice to its shareholders who, if
subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income for federal income tax
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<PAGE>
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities.
For U.S. federal income tax purposes, the tax basis of shares owned by a
shareholder of a Fund will be increased by an amount equal under current law to
65% of the amount of undistributed net capital gain included in the
shareholder's gross income. Each Fund intends to distribute at least annually
to its shareholders all or substantially all of its investment company taxable
income, net tax-exempt interest, and net capital gain. If for any taxable year
a Fund does not qualify as a regulated investment company, it will be taxed on
all of its investment company taxable income and net capital gain at corporate
rates, any net tax-exempt interest may be subject to alternative minimum tax,
and its distributions to shareholders will be taxable as ordinary dividends to
the extent of its current and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, each Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed in such year and on which no federal income tax was
paid by the Fund. For federal income tax purposes, dividends declared by a Fund
in October, November or December to shareholders of record on a specified date
in such a month and paid during January of the following year are taxable to
such shareholders as if received on December 31 of the year declared.
Gains and losses on the sale, lapse, or other termination of options and futures
contracts, options thereon and certain forward contracts (except certain foreign
currency options, forward contracts and futures contracts) entered into by a
Fund will generally be treated as capital gains and losses. Certain of the
futures contracts, forward contracts and options held by the Funds will be
required to be "marked-to-market" for federal income tax purposes, that is,
treated as having been sold at their fair market value on the last day of the
Funds' taxable year. As a result, a Fund may be required to recognize income or
gain without a concurrent receipt of cash. Additionally, a Fund may be required
to recognize gain if an option, future, forward contract, short sale, or other
transaction that is not subject to these mark to market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any gain or loss recognized on actual or deemed
sales of futures contracts, forward contracts, or options that are subject to
the mark to market rules, but not the constructive sales rules, (except for
certain foreign currency options, forward contracts, and futures contracts) will
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. As a result of certain hedging transactions entered into by a Fund,
such Fund may be required to defer the recognition of losses on futures or
forward contracts and options or underlying securities or foreign currencies to
the extent of any unrecognized gains on related positions and the
characterization of gains or losses as long-term or short-term may be changed.
The tax provisions described above applicable to options, futures, forward
contracts and constructive sales may affect the amount, timing and character of
a Fund's distributions to shareholders. Certain tax elections may be available
to the Funds to mitigate some of the unfavorable consequences described in this
paragraph.
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<PAGE>
Section 988 of the Code contains special tax rules applicable to certain foreign
currency transactions and instruments that may affect the amount, timing and
character of income, gain or loss recognized by Funds other than the Municipal,
Fixed Income and Short-Term Fixed Incomes. Under these rules, foreign exchange
gain or loss realized with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment.
If a Fund acquires stock (including, under proposed regulations, an option to
acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) or hold at least 50% of their assets in investments producing such
passive income ("passive foreign investment companies"), the Fund could be
subject to federal income tax and additional interest charges on "excess
distributions" received from such companies or gain from the sale of stock in
such companies, even if all income or gain actually received by the Fund is
timely distributed to its shareholders. The Fund would not be able to pass
through to its shareholders any credit or deduction for such a tax. Certain
elections may, if available, ameliorate these adverse tax consequences, but any
such election could require the Fund to recognize taxable income or gain without
the concurrent receipt of cash. Investments in passive foreign investment
companies may also produce ordinary income rather than capital gains, and the
deductibility of losses is subject to certain limitations. The applicable Funds
may limit and/or manage their holdings in passive foreign investment companies
or make an available election to minimize their tax liability or maximize their
return from these investments.
The federal income tax rules applicable to currency and interest rate swaps,
mortgage dollar rolls, and certain structured securities are unclear in certain
respects, and the Funds may be required to account for these transactions or
instruments under tax rules in a manner that may affect the amount, timing and
character of income, gain or loss therefrom and that may, under certain
circumstances, limit the extent to which the Funds engage in these transactions
or acquire these instruments.
Total Return Bond may invest in debt obligations that are in the lowest rating
categories or are unrated, including debt obligations of issuers not currently
paying interest as well as issuers who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for
these Funds. Tax rules are not entirely clear about issues such as when a Fund
may cease to accrue interest, original issue discount, or market discount, when
and to what extent deductions may be taken for bad debts or worthless
securities, how payments received on obligations in default should be allocated
between principal and income, and whether exchanges of debt obligations in a
workout context are taxable. These and other issues will be addressed by these
Funds, to the extent they invest in such securities, in order to reduce the risk
of their distributing insufficient income to preserve their status as regulated
investment companies and seek to avoid having to pay federal income or excise
tax.
A Fund that invests in foreign securities may be subject to foreign withholding
or other foreign taxes on certain income (possibly including, in some cases,
capital gains) from such securities. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in
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<PAGE>
some cases. The Funds anticipate that they generally will not be entitled to
elect to pass through such foreign taxes to their shareholders. If such an
election is made, shareholders would have to include their shares of such taxes
as additional income, but could be entitled to U.S. tax credits or deductions
for such taxes, subject to certain requirements and limitations under the Code.
Each Fund's investments in zero coupon securities, deferred interest securities,
increasing rate securities, pay-in-kind ("P.I.K.") securities, or other
securities bearing original issue discount or, if the Fund elects to include
market discount in income currently, market discount will generally cause it to
realize income prior to the receipt of cash payments with respect to these
securities. Transactions or instruments subject to the mark to market or
constructive sale rules described above may have the same result in some
circumstances. In order to obtain cash to distribute this income or gain,
maintain its qualification as a regulated investment company, and avoid federal
income or excise taxes, a Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold.
Each Municipal Fund purchases tax-exempt municipal securities which are
generally accompanied by an opinion of bond counsel to the effect that interest
on such securities is not included in gross income for federal income tax
purposes. It is not economically feasible to, and the Municipal Funds therefore
do not, make any additional independent inquiry into whether such securities are
in fact tax-exempt. Bond counsels' opinions will generally be based in part
upon covenants by the issuers and related parties regarding continuing
compliance with federal tax requirements. Tax laws not only limit the purposes
for which tax-exempt bonds can be issued and the supply of such bonds, but also
contain numerous and complex requirements that must be satisfied on a continuing
basis in order for bonds to be and remain tax-exempt. If the issuer of a bond
or a user of a bond-financed facility fails to comply with such requirements at
any time, interest on the bond could become taxable, retroactive to the date the
bond was issued. In that event, a portion of a Municipal Fund's distributions
attributable to interest such Fund received on such bond for the current year
and for prior years could be characterized or recharacterized as taxable income.
Each Fixed Income and each Municipal Fund may purchase municipal securities
together with the right to resell the securities to the seller at an agreed upon
price or yield within a specified period prior to the maturity date of the
securities. Such a right to resell is commonly known as a "put" and is also
referred to as a "standby commitment." A Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, a Fund
may purchase beneficial interests in municipal securities held by trusts,
custodial arrangements or partnerships and/or combined with third-party puts or
other types of features such as interest rate swaps; those investments may
require the Fund to pay "tender fees" or other fees for the various features
provided. The IRS has issued a revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The IRS has
also issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers) to the effect that tax-exempt interest received
by a regulated investment company with respect to such obligations will be tax-
exempt in the hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of
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<PAGE>
the true owner of property in cases involving the sale of securities or
participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. Each Fund intends to take the position that it is the
owner of any municipal obligations acquired subject to a standby commitment or
other third party put and that tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt in its hands. There is no assurance
that the IRS will agree with such position in any particular case. Additionally,
the federal income tax treatment of certain other aspects of these investments,
including the treatment of tender fees paid by the Fund, in relation to various
regulated investment company tax provisions is unclear. However, the Adviser
intends to manage each Fund's portfolio in a manner designed to minimize any
adverse impact from the tax rules applicable to these investments.
For federal income tax purposes, each Fund is permitted to carry forward a net
capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent years'
capital gains are offset by such losses, they would not result in federal income
tax liability to the applicable Fund and, accordingly, would generally not be
distributed to shareholders. At October 31, 1999 the following Funds had
available realized capital losses to offset future net capital gains: (and, in
the case of Micro Cap, September 30,1999)
Expiration
Date
---------------
Municipal Bond $ 150,144 10/31/2007
Fixed Income 7,769,404 10/31/2007
Short-Term Municipal Bond 144,583 10/31/2005-2007
Short-Term Fixed Income 15,249 10/31/2007
Smaller Companies 127,538 10/31/2006-2007
Micro Cap 1,267,724 10/31/2007
U.S. SHAREHOLDERS--DISTRIBUTIONS
A Municipal Fund's distributions from the tax-exempt interest it receives will
generally be exempt from federal income tax, provided that such Fund qualifies
as a regulated investment company, at least 50% of the value of the Fund's total
assets at the close of each quarter of its taxable year consists of debt
obligations that pay interest excluded from gross income under Section 103(a) of
the Code, and the Fund properly designates such distributions as "exempt-
interest dividends." The portions of such exempt-interest dividends, if any,
derived from interest on certain private activity bonds will constitute tax
preference items and may give rise to, or increase liability under, the federal
alternative minimum tax for particular shareholders. In addition, all exempt-
interest dividends may increase certain corporate shareholders' liability, if
any, for the corporate alternative minimum tax and will be taken into account in
determining the portion, if any, of a shareholder's social security benefits or
certain railroad retirement benefits that is subject to tax.
For U.S. federal income tax purposes, distributions by the Funds other than the
Municipal Funds, as well as any distributions of the Municipal Funds that are
not designated as exempt-interest
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<PAGE>
dividends as described above, whether reinvested in additional shares or paid in
cash, generally will be taxable to shareholders who are subject to tax.
Shareholders receiving a distribution in the form of newly issued shares will be
treated for U.S. federal income tax purposes as receiving a distribution in an
amount equal to the amount of cash they would have received had they elected to
receive cash and will have a cost basis in each share received equal to such
amount divided by the number of shares received. Distributions from investment
company taxable income of any Fund, including the Municipal Funds, for the year
will be taxable as ordinary income. Investment company taxable income includes,
among other things, dividends, taxable interest, income from repurchase
agreements, certain interest from interest rate swaps and income from securities
loans; accrued, recognized market discount; a portion of the discount on certain
stripped tax-exempt obligations and their coupons; and net short-term capital
gain (in excess of net long-term capital loss) from the sale of investments or
options or futures transactions or the disposition of rights to when-issued
securities prior to issuance. Distributions to corporate shareholders
designated as derived from dividend income received by a Fund, if any, that
would be eligible for the dividends received deduction if the Fund were not a
regulated investment company will be eligible, subject to certain holding period
and debt-financing restrictions, for the 70% dividends received deduction for
corporations. Because eligible dividends are limited to those received by a
Fund from U.S. domestic corporations, dividends paid by Funds other than the
Equity Funds will generally not qualify for the dividends received deduction,
and some of the dividends paid by the Equity Funds also may not qualify for the
deduction. The dividends-received deduction, if available, is reduced to the
extent the shares with respect to which the dividends received are treated as
debt financed under the Code and is eliminated if the shares are deemed to have
been held for less than a minimum period, generally 46 days, extending before
and after each such dividend. The entire dividend, including the deducted
amount, is considered in determining the excess, if any, of a corporate
shareholder's adjusted current earnings over its alternative minimum taxable
income, which may increase its liability for the federal alternative minimum
tax. The dividend may, if it is treated as an "extraordinary dividend" under
the Code, reduce such shareholder's tax basis in its shares of a Fund and, to
the extent such basis would be reduced below zero, require the current
recognition of income. Capital gain dividends (i.e., dividends from net capital
gain) paid by any Fund, including the Municipal Funds, if designated as such in
a written notice to shareholders mailed not later than 60 days after a Fund's
taxable year closes, will be taxed to shareholders as long-term capital gain
regardless of how long shares have been held by shareholders, but are not
eligible for the dividends received deduction for corporations.
Interest on indebtedness incurred directly or indirectly to purchase or carry
shares of a Municipal Fund will not be deductible to the extent it is deemed
related to exempt-interest dividends paid by such Fund.
A Municipal Fund may not be an appropriate investment for persons who are, or
are related to, substantial users of facilities financed by industrial
development or private activity bonds.
Shareholders that are required to file tax returns are required to report tax-
exempt interest income, including exempt-interest dividends, on their federal
income tax returns. Each Municipal Fund will inform shareholders of the federal
income tax status of its distributions after the end of each calendar year,
including the amounts that qualify as exempt-interest dividends and any
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portions of such amounts that constitute tax preference items under the federal
alternative minimum tax. Shareholders who have not held shares of a Municipal
Fund for a full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of their distributions which is not exactly equal
to a proportionate share of the amount of tax-exempt interest or tax preference
income earned during the period of their investment in the Fund. Different tax
treatment, including penalties on certain excess contributions and deferrals,
certain pre-retirement and post-retirement distributions, and certain prohibited
transactions, is accorded to accounts maintained as qualified retirement plans.
Shareholders should consult their tax advisers for more information.
U.S. SHAREHOLDERS--SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in a
transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale or other disposition, such gain or loss
should be capital in character. However, any loss realized on the sale,
redemption or other disposition of shares of a Municipal Fund with a tax holding
period of six months or less will be disallowed to the extent of any exempt-
interest dividends with respect to such shares. Moreover, any loss realized on
the sale, redemption, or other disposition of the shares of any Fund with a tax
holding period of six months or less, to the extent such loss is not disallowed
under any other tax rule, will be treated as a long-term capital loss to the
extent of any capital gain dividend with respect to such shares. Additionally,
any loss realized on a sale, redemption or other disposition of shares of a Fund
may be disallowed under "wash sale" rules to the extent the shares disposed of
are replaced with shares of the same Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to a dividend reinvestment in shares of the Fund. If disallowed, the
loss will be reflected in an adjustment to the basis of the shares acquired.
Shareholders should consult their own tax advisers regarding their particular
circumstances to determine whether a disposition of Fund shares is properly
treated as a sale for tax purposes, as is assumed in the foregoing discussion.
The Funds may be required to withhold, as "backup withholding," federal income
tax at a rate of 31% from dividends (including distributions from a Fund's net
long-term capital gains, but not including exempt-interest dividends) and share
redemption and exchange proceeds to individuals and other non-exempt
shareholders who fail to furnish the Funds with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Funds that the payee has
failed to properly report interest or dividend income to the IRS or that the TIN
furnished by the payee to the Funds is incorrect, or if (when required to do so)
the payee fails to certify under penalties of perjury that it is not subject to
backup withholding. Any amounts withheld may be credited against a
shareholder's United States federal income tax liability. Distributions by a
Municipal Fund will not be subject to backup withholding, however, for any year
such Fund reasonably estimates that at least 95% of its dividends will be
exempt-interest dividends.
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NON-U.S. SHAREHOLDERS
Shareholders who, as to the United States, are nonresident aliens, foreign
corporations, fiduciaries of foreign trusts or estates, foreign partnerships or
other non-U.S. investors generally will be subject to U.S. withholding tax at
the rate of 30% on distributions treated as ordinary income unless the tax is
reduced or eliminated pursuant to a tax treaty or the dividends are effectively
connected with a U.S. trade or business of the shareholder. In the latter case
the dividends will be subject to tax on a net income basis at the graduated
rates applicable to U.S. individuals or domestic corporations. Distributions of
net capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a non-U.S. shareholder will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
is present in the United States for 183 days or more during the taxable year and
certain other conditions are met. Any gain realized by a non-U.S. shareholder
upon a sale or redemption of shares of a Fund will not be subject to U.S.
federal income or withholding tax unless the gain is effectively connected with
the shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met. Non-U.S. investors should consult their tax advisers about
the applicability of U.S. federal income or withholding taxes to certain
distributions received by them.
STATE AND LOCAL
The Funds may be subject to state or local taxes in jurisdictions in which the
Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Fund may have tax consequences for
shareholders different from those of a direct investment in the Fund's portfolio
securities. Shareholders should consult their own tax advisers concerning these
matters.
GENERAL INFORMATION ABOUT THE TRUST
GENERAL
The Trust was formed as a business trust under the laws of the State of Delaware
on September 13, 1993, and commenced investment operations on January 3, 1994.
The Board of Trustees of the Trust is responsible for the overall management and
supervision of the affairs of the Trust. The Declaration of Trust authorizes
the Board of Trustees to create separate investment series or portfolios of
shares. As of the date hereof, the Trustees have established the Funds
described in this Prospectus and thirteen additional series. Until December 28,
1994, Fixed Income and Municipal Bond were series of The Advisors' Inner Circle
Fund, a business trust organized under the laws of The Commonwealth of
Massachusetts on July 18, 1991. The Declaration of Trust further authorizes the
Trust to classify or reclassify any series or portfolio of shares into one or
more classes. As of the date hereof, the Trustees have established three
classes of shares: Investment shares, Institutional shares and Premier shares.
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<PAGE>
The shares of each class represent an interest in the same portfolio of
investments of a Fund. Each class has equal rights as to voting, redemption,
dividends and liquidations, except that only Investment shares bear service fees
and each class may bear other expenses properly attributable to the particular
class. Also, holders of Investment shares of each Fund have exclusive voting
rights with respect to the service plan adopted by their Fund.
When issued, shares of the Funds are fully paid and nonassessable. In the event
of liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to shareholders. Shares of the
Funds entitle their holders to one vote per share, are freely transferable and
have no preemptive, subscription or conversion rights.
Shares of a Fund will be voted separately with respect to matters pertaining to
that Fund except for the election of Trustees and the ratification of
independent accountants. For example, shareholders of each Fund are required to
approve the adoption of any investment advisory agreement relating to such Fund
and any change in the fundamental investment restrictions of such Fund.
Approval by the shareholders of one Fund is effective only as to that Fund. The
Trust does not intend to hold shareholder meetings, except as may be required by
the 1940 Act. The Trust's Declaration of Trust provides that special meetings
of shareholders shall be called for any purpose, including the removal of a
Trustee, upon written request of shareholders entitled to vote at least 10% of
the outstanding shares of the Trust, or Fund, as the case may be. In addition,
if ten or more shareholders of record who have held shares for at least six
months and who hold in the aggregate either shares having a net asset value of
$25,000 or 1% of the outstanding shares, whichever is less, seek to call a
meeting for the purpose of removing a Trustee, the Trust has agreed to provide
certain information to such shareholders and generally to assist their efforts.
In the event of a liquidation or dissolution of the Trust or an individual Fund,
shareholders of a particular Fund would be entitled to receive the assets
available for distribution belonging to such Fund. Shareholders of a Fund are
entitled to participate in the net distributable assets of the particular Fund
involved on liquidation, based on the number of shares of the Fund that are held
by each shareholder.
As of June 24, 2000, the following shareholders owned the following respective
percentages of the outstanding Institutional shares of Fixed Income, Municipal
Bond, Short-Term Municipal Bond, Short-Term Fixed Income, Smaller Companies and
Micro Cap:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding
Shares of the Fund
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Income - Institutional Charles Schwab & Co Inc., Special Custody Account, 7.38%
Class Mutual Funds Department, 101 Montgomery St., San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
Wendel & Co A/C 767923, c/o The Bank of New York, Attn: 6.11%
Mutual Fund/Reorg Dept/ P.O. Box 1066 Wall Street
Station, New York, NY 10268-1066
-------------------------------------------------------------------------------------------------------------------
Donaldson Lufkin & Jenrette SECS Corp, P.O. Box 5.63%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Page -66-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding
Shares of the Fund
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2052, Jersey City, NJ 07303-2052
-------------------------------------------------------------------------------------------------------------------
Northern Trust Company Tr, FBO Cosmair Inc Pension 5.04%
Trust, A/C 22-41685, P.O. 92956, Chicago, IL 60675-2956
-------------------------------------------------------------------------------------------------------------------
Municipal Bond - Institutional Charles Schwab & Co Inc., Special Custody Account, 61.44%
Class Mutual Funds Department, 101 Montgomery Street, San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
National Financial Services Corp., For the Exclusive 5.41%
Benefit of Our Customers, Attn: Mutual Funds - No Loads
- 5/th/ Floor, 200 Liberty Street, 1 World Fin Ctr, New
York, NY 10281-1003
-------------------------------------------------------------------------------------------------------------------
Short-Term Municipal Bond - Charles Schwab & Co Inc., Special Custody Account, 57.61%
Institutional Class Mutual Funds Department, 101 Montgomery Street, San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
Batrus & Co., c/o Bankers Trust Co., P.O. Box 9005, 13.64%
Church Street Station, New York, NY 10006
-------------------------------------------------------------------------------------------------------------------
Short-Term Fixed Income - Independence Trust Company, Cash Account, P.O. Box 34.87%
Institutional Class 662188, Franklin, TN 37058-2188
-------------------------------------------------------------------------------------------------------------------
First Union National Bank, Cash/Reinvest Acct, Acct 17.38%
#988688883, 1525 W Wt Harris Blvd #NC1151, Charlotte,
NC 28262-8522
-------------------------------------------------------------------------------------------------------------------
Batrus & Co, c/o Bankers Trust Co, P.O. Box 9005, 9.22%
Church Street Station, New York, NY 10006
-------------------------------------------------------------------------------------------------------------------
Smaller Companies - Morgan Grenfell Capital Management Inc., 885 Third Ave 69.39%
Institutional Class 32nd Fl, New York, NY 10022-4834
-------------------------------------------------------------------------------------------------------------------
Deutsche Bank Securities, Inc., C/F 360-01618-83, 1251 14.54%
6/th/ Ave, New York, NY 10020-1104
-------------------------------------------------------------------------------------------------------------------
Fidelity Investments Institutional Operations Co Inc., 6.32%
As Agent for Certain Employee Benefit Plans, 100
Magellan Way KWIC, Covington, KY 41015-1999
-------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co Inc., Special Custody Account, 5.44%
Mutual Funds Department, 101 Montgomery Street, San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
Micro Cap - Institutional Class Charles Schwab & Co, Inc., Special Custody Account, 55.40%
Mutual Funds Department, 101 Montgomery Street, San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Page -67-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding
Shares of the Fund
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Currie & Co, c/o Fiduciary Trust Company Intl, P.O. Box 10.53%
3199, Church Street Station, New York, NY 10008-3199
-------------------------------------------------------------------------------------------------------------------
National Financial Services Corp for the Exclusive 5.91%
Benefit of Our Customers, ATTN Mutual FDS-No Loads, 5/th/
Fl, 20 Liberty St, 1 World Fin Ctr, New York, NY
10281-1003
-------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 24, 2000, the following shareholders owned the following respective
percentages of the outstanding Investment shares of the following funds:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding
Shares of the Fund
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Income -- National Financial Services Corp for the Exclusive 83.83%
Investment Class Benefit of our Customers, ATTN Mutual FDS - No Loads,
5/th/ Fl, 200 Liberty St, 1 World Fin Ctr, New York, NY
10281-1003
-------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co, Inc., Special Custody Account, 14.98%
Mutual Funds Department, 101 Montgomery Street, San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
Municipal Bond -- National Financial Services Corp for the Exclusive 81.32%
Investment Class Benefit of our Customers, ATTN Mutual FDS, No Loads,
5/th/ Fl, 200 Liberty St, 1 World Fin Ctr, New York, NY
10281-1003
-------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co, Inc., Special Custody Account, 10.94%
Mutual Funds Department, 101 Montgomery Street, San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
Short-Term Municipal Bond -- National Investor Services Corp for Exclusive Benefit 86.47%
Investment Class of Customers, 55 Water St., Fl 32, New York, NY
10041-3299
-------------------------------------------------------------------------------------------------------------------
National Financial Services Corp for the Exclusive 13.52%
Benefit of our Customers, ATTN Mutual FDS, No Loads,
5/th/ Fl, 200 Liberty St, 1 World Fin Ctr, New York, NY
10281-1003
-------------------------------------------------------------------------------------------------------------------
Smaller Companies -- National Financial Svcs Corp for Exclusive Benefit of 89.52%
Investment Class our Customers, Sal Vella, 200 Liberty St, New York, NY
10281-1000
-------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co, Inc., Special Custody Account, 10.46%
Mutual Funds Department, 101 Montgomery Street, San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Page -68-
<PAGE>
<TABLE>
<S> <C> <C>
___________________________________________________________________________________________________________________
Micro Cap -- Charles Schwab & Co, Inc., Special Custody Account, 89.06%
Investment Class Mutual Funds Department, 101 Montgomery Street, San
Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------
National Investor Services Corp for Exclusive Benefit 8.78%
of Customers, 55 Water St., Fl 32, New York, NY
10041-3299
-------------------------------------------------------------------------------------------------------------------
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY
The Trust is organized as a Delaware business trust and, under Delaware law, the
shareholders of a business trust are not generally subject to liability for the
debts or obligations of the trust. Similarly, Delaware law provides that none of
the Funds will be liable for the debts or obligations of any other Fund.
However, no similar statutory or other authority limiting business trust
shareholder liability exists in other states. As a result, to the extent that a
Delaware business trust or a shareholder is subject to the jurisdiction of the
courts in such other states, the courts may not apply Delaware law and may
thereby subject the Delaware business trust shareholders to liability. To guard
against this risk, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. Notice of such
disclaimer will normally be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification by the relevant Fund for any loss suffered by a
shareholder as a result of an obligation of the Fund. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. The Trustees believe that, in view of the above,
the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
ANNUAL AND SEMI-ANNUAL REPORTS
Shareholders of each Fund receive an annual report containing audited financial
statements and a semi-annual report. All transactions in Institutional shares
and Premier shares of a Fund and dividends and distributions paid by a Fund are
reflected in confirmations issued by the Transfer Agent at the time of the
transaction and/or in monthly statements issued by the Transfer Agent.
A year-to-date statement will be provided by the Transfer Agent.
CONSIDERATION FOR PURCHASES OF SHARES
The Trust generally will not issue shares of the Funds for consideration other
than cash. At the Trust's sole discretion, however, it may issue Fund shares for
consideration other than cash in connection with an acquisition of portfolio
securities (other than municipal debt securities issued by state political
subdivisions or their agencies or instrumentalities) or pursuant to a bona fide
purchase of assets, merger or other reorganization, provided the securities meet
the investment
PAGE-69-
<PAGE>
objectives and policies of the Fund and are acquired by the Fund for investment
and not for resale. An exchange of securities for Fund shares will generally be
a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
INDEPENDENT ACCOUNTANTS
_____________________, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Funds' independent accountants, providing audit services,
including review and consultation in connection with various filings by the
Trust with the Commission and tax authorities.
REGISTRATION STATEMENT
The Trust has filed with the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, a Registration Statement under the Securities Act of 1933, as
amended, with respect to the securities of the Funds and certain other series of
the Trust. If further information is desired with respect to the Trust, the
Funds or such other series, reference is made to the Registration Statement and
the exhibits filed as a part thereof.
FINANCIAL STATEMENTS
The unaudited semi-annual financial statements for Micro Cap for the six month
period ended March 31, 2000 and the audited financial statements for Micro Cap
for the year ended September 30, 1999 are included in, and incorporated by
reference into, this Statement of Additional Information in reliance upon
reports of __________________, the Fund's independent auditors, as experts in
accounting and auditing. The unaudited financial statements for the other Funds
for the six month period ended April 30, 2000 and the audited financial
statements for the other Funds for the year ended October 31, 1999 are included
in, and incorporated by reference into, this Statement of Additional Information
in reliance upon the reports of __________________, the Fund's independent
auditors, as experts in accounting and auditing.
The unaudited semi-annual financial statements of the Funds for the periods
ended on and prior to April 30, 2000 are included in, and incorporated by
reference into, this Statement of Additional Information from the 2000 Semi-
Annual Report to Shareholders of Micro Cap for the year ended March 31, 2000
(filed electronically on May 30, 2000, file no. 811-08006; accession no.
0000950169-00-000558) and the 2000 Semi-Annual Reports to Shareholders of the
other Funds for the year ended April 30, 2000 (filed electronically on June 28,
2000; file no. 811-08006; accession nos. 0000950169-00-000661 and 0000950169-00-
000664), and will be attached to each copy of such Statement of Additional
Information that is distributed.
The audited annual financial statements of the Funds for the periods ended on
and prior to October 31, 1999 are included in, and incorporated by reference
into, this Statement of Additional Information from the 1999 Annual Report to
Shareholders of Micro Cap for the year ended September 30, 1999 (filed
electronically on November 29, 1999, file no. 811-08006; accession no.
0000912057-99-007643) and the 1999 Annual Report to Shareholders of the other
Funds for the year ended October 31, 1999 (filed electronically on December 30,
1999; file no.
PAGE-70-
<PAGE>
811-08006; accession no. 0000912057-99-011088), and will be attached to each
copy of such Statement of Additional Information that is distributed.
PAGE-71-
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
The rating descriptions set forth below are believed to be the most recent
rating descriptions available from Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("Standard & Poor's), Duff & Phelps, Inc.
("Duff") and Fitch IBCA Investors Service ("Fitch IBCA") at the date of this
Statement of Additional Information for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating agencies
may from time to time revise such ratings, they undertake no obligation to do
so, and the ratings indicated do not necessarily represent ratings which will be
given to these securities on the date of a Fund's fiscal year end.
I. LONG-TERM DEBT RATINGS
MOODY'S
Description of four highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2 and 3) in each rating category to indicate the
security's ranking within the category):
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, ie:,
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.
PAGE-72-
<PAGE>
STANDARD & POOR'S (1)
Description of the four highest long-term debt ratings by Standard & Poor's
(Standard & Poor's may apply a plus (+) or minus (-) to a particular rating
classification to show relative standing within the classification):
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
DUFF
Description of the four highest long-term debt ratings by Duff (Duff may
apply a plus or minus to show relative standing within a rating category):
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB: Investment grade. Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
FITCH IBCA
Description of the four highest long-term ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
PAGE-73-
<PAGE>
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issues is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and to repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and to repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have an adverse impact on these bonds, and therefore, impair
timely payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
II. SHORT-TERM DEBT RATINGS
Short-term debt ratings may be assigned, for example, to commercial paper,
master demand notes, bank instruments and letters of credit.
Moody's description of its highest short-term debt rating:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of 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 alternative liquidity.
Standard & Poor's description of its highest short-term debt rating:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
PAGE-74-
<PAGE>
III. SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
Moody's description of its two highest short-term loan / municipal note
ratings:
MIG-1/VMIG-1 This description 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.
Standard & Poor's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be 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.
PAGE-75-
<PAGE>
APPENDIX B
THE ADVISER'S MICRO CAP INVESTMENT RESULTS
Set forth below are investment results for Micro Cap and a composite of accounts
managed by Micro Cap Equity Team of DAMI in accordance with Micro Cap investment
strategy (the "DAMI Micro Cap Composite"). For comparison purposes, performance
information is also shown for Micro Cap and the Russell 2000 (an index of small
capitalization stocks). The Russell 2000 is comprised of issuers that are ranked
according to market capitalization in the bottom 10% of the U.S. equity market.
In contrast, Micro Cap's principal investments are common stocks of issuers that
are ranked (at time of purchase) in the bottom 5% of U.S. equity market.
Each of the Adviser's discretionary, microcap accounts (other than Micro Cap,
which commenced operations on December 18, 1996) is included in the DAMI Micro
Cap Composite. These accounts had the same investment objective as Micro Cap and
were managed using substantially similar, though not necessarily identical,
investment strategies and techniques as those contemplated for Micro Cap.
Because of the similarities in investment strategies and techniques, the Adviser
believes that the accounts included in the DAMI Micro Cap Composite are
sufficiently comparable to Micro Cap to make the performance data listed below
relevant to prospective investors.
The investment results presented on the next page for the DAMI Micro Cap
Composite includes Micro Cap's investment results and are not intended to
predict or suggest the returns that will be experienced by Micro Cap or the
return an investor may achieve by investing in shares of the Fund. Most of the
accounts included in the DAMI Micro Cap Composite were not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the Investment Company Act of 1940 and the
Internal Revenue Code of 1986, as amended. If more of the accounts had been
subject to these requirements, the performance of the DAMI Micro Cap Composite
might have been lower.
The investment results of the DAMI Micro Cap Composite were calculated in
accordance with the Association for Investment Management and Research (AIMR)
Performance Presentation Standards and are shown net of commissions and
transaction costs (including custody fees) and net of the highest investment
advisory fee charged to any account included in the Composite (2.00% for periods
prior to October 1, 1993 and 1.50% for subsequent periods). Micro Cap's
estimated total annual operating expenses are higher than the highest investment
advisory fee charged to any account included in the DAMI Micro Cap Composite. As
a result, it is expected that fees and expenses will reduce Micro Cap's
performance to a greater extent than investment advisory fees have reduced the
performance of accounts included in the DAMI Micro Cap Composite.
PERFORMANCE OF MICRO CAP
--------------------------------------------------------------------------------
TOTAL RETURN FOR YEAR ENDED 77.53%
DECEMBER 31, 1999
--------------------------------------------------------------------------------
PAGE-76-
<PAGE>
________________________________________________________________________________
ANNUALIZED TOTAL RETURN FOR 29.41%
PERIOD FROM DECEMBER 18, 1996 TO
DECEMBER 31, 1999
--------------------------------------------------------------------------------
INVESTMENT TRUST
Micro Cap
Performance of DAMI Micro Cap Composite And Russell 2000
AVERAGE ANNUAL TOTAL RETURN
DAMI MICRO CAP COMPOSITE
YEAR (NET OF FEES) RUSSELL 2000
--------------------------------------------------------------------------------
1999 75.30 43.09
--------------------------------------------------------------------------------
1998 1.14 1.23
--------------------------------------------------------------------------------
1997 20.53 12.95
--------------------------------------------------------------------------------
1996 52.70 11.26
--------------------------------------------------------------------------------
1995 56.38 31.04
--------------------------------------------------------------------------------
1994 15.39 2.43
--------------------------------------------------------------------------------
1993 20.28 13.36
--------------------------------------------------------------------------------
1992 5.58 7.77
--------------------------------------------------------------------------------
1991 77.47 51.19
--------------------------------------------------------------------------------
1990 0.50 17.41
--------------------------------------------------------------------------------
ANNUALIZED TOTAL RETURN FOR 22.01 12.29
PERIOD FROM DECEMBER 31,
1987 TO DECEMBER 31, 1999
--------------------------------------------------------------------------------
PAGE-77-
<PAGE>
INVESTMENT TRUST
One South Street
Baltimore, MD 21202
INVESTMENT ADVISER
Deutsche Asset Management, Inc.
885 Third Avenue
New York, NY 10022
ADMINISTRATOR
Deutsche Asset Management, Inc.
150 South Independence Square West
Philadelphia, Pennsylvania 19106
DISTRIBUTOR
ICC Distributors, Inc.
One South Street
Baltimore, Maryland 21202
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
TRANSFER AGENT
ICCD Company Capital Corp.
One South Street
Baltimore, Maryland 21202
INDEPENDENT ACCOUNTANTS
____________________________
1177 Avenue of the Americas
New York, New York 100036
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
SERVICE INFORMATION
Existing accounts, new accounts, prospectuses, Statements of Additional
Information
applications, and service forms--1-800-730-1313
Telephone Exchanges--1-800-730-1313
Share Price and Performance
Information--1-800-730-1313
PAGE-78-
