As filed via EDGAR with the Securities and Exchange Commission on May 6, 1996.
File No. 811-8084
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM N-1A
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
GROWTH AND INCOME PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
101 Park Avenue
New York, New York 10078
(Address of Principal Executive Office) (ZIP Code)
Registrant's Telephone Number, including Area Code: (212) 492-1600
Thomas M. Lenz
6 St. James Avenue, Suite 900
Boston, Massachusetts 02116
(Name and Address of Agent for Service)
Copies to:
Molly Sheehan, Esq. Gary S. Schpero, Esq.
The Chase Manhattan Bank, N.A. Simpson Thacher & Bartlett
270 Park Avenue 425 Lexington Avenue
New York, New York 10017 New York, New York 10017
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EXPLANATORY NOTE
This Registration Statement of Growth and Income Portfolio has been filed
by the Registrant pursuant to Section 8(b) of the Investment Company Act of
1940, as amended (the "1940 Act"). However, beneficial interests in the
Registrant are not being registered under the Securities Act of 1933, as amended
(the "1933 Act"), since such interests will be offered solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Registrant may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities which are
"accredited investors" as defined in Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any beneficial interests in the Registrant.
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PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
Item 4. General Description of Registrant.
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Growth and Income Portfolio (the "Portfolio") is a non-diversified,
open-end management investment company which was organized in the United States
as a trust under the laws of the State of New York pursuant to a Declaration of
Trust dated as of December 15, 1992.
Beneficial interests in the Portfolio are offered solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities which are
"accredited investors" as defined in Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
The Chase Manhattan Bank, N.A. ("Chase") is the Portfolio's investment
adviser (the "Adviser") and administrator (the "Administrator"). The address of
Chase is 270 Park Avenue, New York, New York 10017. Chase Asset Management, Inc.
("CAM") is the Portfolio's investment sub-adviser (the "Sub-adviser"). The
address of CAM is 1211 Avenue of the Americas, New York, New York 10036.
Growth and Income Portfolio seeks to provide long-term capital appreciation
and dividend income. The Portfolio is not intended to be a complete investment
program, and there is no assurance it will achieve its objectives.
The Portfolio invests in common stocks of issuers with a broad range of
market capitalizations. Under normal market conditions, the Portfolio will
invest at least 80% of its total assets in common stocks. In addition, the
Portfolio may invest up to 20% of its total assets in convertible securities.
The Portfolio's advisers intend to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for positive
change. The advisers believe that the market risk involved in seeking capital
appreciation will be moderated to an extent by the anticipated dividend returns
on the stocks in which the Portfolio invests.
The Portfolio is classified as a "non-diversified" fund under federal
securities law. The Portfolio's assets may be more concentrated in the
securities of any single issuer or group of issuers than if the Portfolio were
diversified.
The Portfolio may invest any portion of its assets not invested as
described above in high quality money market instruments and repurchase
agreements. For temporary defensive purposes, the Portfolio may invest without
limitation in these instruments as well as investment grade debt securities. To
the extent that the Portfolio departs from its investment policies during
temporary defensive periods, its investment objective may not be achieved.
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Other Investment Practices
The Portfolio may also engage in the following investment practices, when
consistent with the Portfolio's overall objective and policies. These practices,
and certain associated risks, are more fully described in Part B below.
Foreign Securities. The Portfolio may invest up to 20% of its total assets
in foreign securities, including Depositary Receipts. Since foreign securities
are normally denominated and traded in foreign currencies, the values of the
Portfolio's foreign investments may be affected favorably or unfavorably by
currency exchange rates and exchange control regulations. There may be less
information publicly available about foreign companies than U.S. companies, and
they are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the U.S. The securities of
foreign companies may be less liquid and more volatile than the securities of
comparable U.S. companies. Foreign settlement procedures and trade regulations
may involve certain risks (such as delay in payment or delivery of securities or
in the recovery of the Portfolio's assets held abroad) and expenses. It is
possible that nationalization or expropriation of assets, imposition of currency
exchange controls, confiscatory taxation, political or financial instability and
diplomatic developments could affect the value of the Portfolio's investments in
certain foreign countries. Foreign laws may restrict the ability to invest in
certain countries or issuers and special tax considerations will apply to
foreign securities. The risks can increase if the Portfolio invests in
securities of issuers in emerging markets.
The Portfolio may invest its assets in securities of foreign issuers in the
form of American Depositary Receipts, European Depositary Receipts, Global
Depositary Receipts or other similar securities representing securities of
foreign issuers (collectively, "Depositary Receipts"). The Portfolio treats
Depositary Receipts as interests in the underlying securities for purposes of
its investment policies. The Portfolio will limit its investment in Depositary
Receipts not sponsored by the issuer of the underlying securities to no more
than 5% of the value of its net assets (at the time of investment).
Supranational and ECU Obligations. The Portfolio may invest in securities
issued by supranational organizations, which include organizations such as The
World Bank, the European Community, the European Coal and Steel Community and
the Asian Development Bank. The Portfolio may also invest in securities
denominated in the ECU, which is a "basket" consisting of specified amounts of
the currencies of certain member states of the European Community. These
securities are typically issued by European governments and supranational
organizations.
Convertible Securities. The Portfolio may invest up to 20% of its net
assets in convertible securities, which are securities generally offering fixed
interest or dividend yields which may be converted either at a stated price or
stated rate for common or preferred stock. Although to a lesser extent than with
fixed-income securities generally, the market value of convertible securities
tends to decline as interest rates increase, and increase as interest rates
decline. Because of the conversion feature, the market value of convertible
securities also tends to vary with fluctuations in the market value of the
underlying common or preferred stock.
Money Market Instruments. The Portfolio may invest in cash or high-quality,
short-term money market instruments. Such instruments may include U.S.
Government securities, commercial paper of domestic and foreign issuers and
obligations of domestic and foreign banks. Investments in
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foreign money market instruments may involve certain risks associated with
foreign investment.
Investment Grade Debt Securities. Investment grade debt securities are
securities rated in the category BBB or higher by Standard & Poor's Corporation
("S&P"), or Baa or higher by Moody's Investors Services, Inc. ("Moody's") or the
equivalent by another national rating organization, or, if unrated, determined
by the advisers to be of comparable quality.
Repurchase Agreements, Securities Loans and Forward Commitments. The
Portfolio may enter into agreements to purchase and resell securities at an
agreed-upon price and time. The Portfolio also has the ability to lend portfolio
securities in an amount equal to not more than 30% of its total assets to
generate additional income. These transactions must be fully collateralized at
all times. The Portfolio may purchase securities for delivery at a future date,
which may increase its overall investment exposure and involves a risk of loss
if the value of the securities declines prior to the settlement date. These
transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction.
Borrowings and Reverse Repurchase Agreements. The Portfolio may borrow
money from banks for temporary or short-term purposes, but will not borrow for
leveraging purposes. The Portfolio may also sell and simultaneously commit to
repurchase a portfolio security at an agreed-upon price and time, to avoid
selling securities during unfavorable market conditions in order to meet
redemptions. Whenever the Portfolio enters into a reverse repurchase agreement,
it will establish a segregated account in which it will maintain liquid assets
on a daily basis in an amount at least equal to the repurchase price (including
accrued interest). The Portfolio would be required to pay interest on amounts
obtained through reverse repurchase agreements, which are considered borrowings
under federal securities laws.
Stand-By Commitments. The Portfolio may enter into put transactions,
including transactions sometimes referred to as stand-by commitments, with
respect to securities in its portfolio. In these transactions, the Portfolio
would acquire the right to sell a security at an agreed upon price within a
specified period prior to its maturity date. These transactions involve some
risk to the Portfolio if the other party should default on its obligation and
the Portfolio is delayed or prevented from recovering the collateral or
completing the transaction. Acquisition of puts will have the effect of
increasing the cost of the securities subject to the put and thereby reducing
the yields otherwise available from such securities.
Other Investment Companies. The Portfolio may invest up to 10% of its total
assets in shares of other investment companies, subject to applicable regulatory
limitations.
STRIPS. The Portfolio may invest up to 20% of its total assets in
separately traded principal and interest components of securities backed by the
full faith and credit of the U.S. Government, including instruments known as
"STRIPS". The value of these instruments tends to fluctuate more in response to
changes in interest rates than the value of ordinary interest-paying debt
securities with similar maturities. The risk is greater when the period to
maturity is longer.
Derivatives and Related Instruments. The Portfolio may invest its assets in
derivative and related instruments to hedge various market risks or to increase
the Portfolio's income or gain. Some of these instruments will be subject to
asset segregation requirements to cover the Portfolio's obligations. The
Portfolio may (i) purchase, write and exercise call and put options on
securities and securities indexes (including using options
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in combination with securities, other options or derivative instruments); (ii)
enter into swaps, futures contracts and options on futures contracts; (iii)
employ forward currency contracts; and (iv) purchase and sell structured
products, which are instruments designed to restructure or reflect the
characteristics of certain other investments.
There are a number of risks associated with the use of derivatives and
related instruments and no assurance can be given that any strategy will
succeed. The value of certain derivatives or related instruments in which the
Portfolio invests may be particularly sensitive to changes in prevailing
economic conditions and market value. The ability of the Portfolio to
successfully utilize these instruments may depend in part upon the ability of
the Portfolio's advisers to forecast these factors correctly. Inaccurate
forecasts could expose the Portfolio to a risk of loss. There can be no
guarantee that there will be a correlation between price movements in a hedging
instrument and in the portfolio assets being hedged. The Portfolio is not
required to use any hedging strategies. Hedging strategies, while reducing risk
of loss, can also reduce the opportunity for gain. Derivatives transactions not
involving hedging may have speculative characteristics, involve leverage and
result in more risk to the Portfolio than hedging strategies using the same
instruments. There can be no assurance that a liquid market will exist at a time
when the Portfolio seeks to close out a derivatives position. Activities of
large traders in the futures and securities markets involving arbitrage,
"program trading," and other investment strategies may cause price distortions
in derivatives markets. In certain instances, particularly those involving
over-the-counter transactions or forward contracts, there is a greater potential
that a counterparty or broker may default. In the event of a default, the
Portfolio may experience a loss. For additional information concerning
derivatives, related instruments and the associated risks, see Part B.
Portfolio Turnover. The frequency of the Portfolio's portfolio transactions
will vary from year to year. The Portfolio's investment policies may lead to
frequent changes in investments, particularly in periods of rapidly changing
market conditions. High portfolio turnover rates would generally result in
higher transaction costs, including brokerage commissions or dealer mark-ups,
and would make it more difficult for the Portfolio to qualify as a registered
investment company under federal tax law. See "Certain Regulatory Matters."
Risk Factors
The net asset value of the beneficial interests of the Portfolio can be
expected to fluctuate based on the value of the securities held by the
Portfolio. The Portfolio does not constitute a balanced or complete investment
program. The Portfolio is subject to the general risks and considerations
associated with equity investing.
Because the Portfolio is "non-diversified," the value of the Portfolio's
beneficial interests is more susceptible to developments affecting issuers in
which the Portfolio invests.
For a discussion of certain other risks associated with the Portfolio's
additional investment activities, see "Other Investment Practices" above.
Item 5. Management of the Portfolio.
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The Portfolio's Board of Trustees provides broad supervision over the
affairs of the Portfolio. See "Trustees and Officers" in Item 14 of Part B for a
complete description of the Trustees of the Portfolio.
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The Portfolio's Advisers. Chase acts as investment adviser to the Portfolio
pursuant to an Investment Advisory Agreement and has overall responsibility for
investment decisions of the Portfolio, subject to the oversight of the Board of
Trustees. Chase is a wholly-owned subsidiary of The Chase Manhattan Corporation,
a bank holding company. Chase and its predecessors have over 100 years of money
management experience. For its investment advisory services to the Portfolio,
Chase is entitled to receive an annual fee computed daily and paid monthly based
at an annual rate equal to 0.40% of the Portfolio's average daily net assets.
Chase is located at 270 Park Avenue, New York, New York 10017.
CAM, a registered investment adviser, is the investment sub-adviser to the
Portfolio pursuant to a Investment Sub-Advisory Agreement between CAM and Chase.
CAM is a wholly-owned operating subsidiary of Chase. CAM makes investment
decisions for the Portfolio on a day-to-day basis. For these services, CAM is
entitled to receive a fee, payable by Chase from its advisory fee, at an annual
rate equal to 0.20% of the Portfolio's average daily net assets. CAM was
recently formed for the purpose of providing discretionary investment advisory
services to institutional clients and to consolidate Chase's investment
management function. The same individuals who serve as portfolio managers for
Chase also serve as portfolio managers for CAM. CAM is located at 1211 Avenue of
the Americas, New York, New York 10036.
Portfolio Managers. Dave Klassen, Director of Domestic Equity Management at
Chase, and Greg Adams, Director of U.S. Equity Research at Chase, have been
responsible for the day-to-day management of the Portfolio since March 1995. Mr.
Klassen joined Chase in March 1992 and, in addition to managing the Portfolio,
is a manager of the Vista Small Cap Equity Fund and the Vista Capital Growth
Portfolio. Prior to joining Chase, Mr. Klassen was a vice president and
portfolio manager at Dean Witter Reynolds, responsible for managing several
mutual funds and other accounts. Mr. Adams joined Chase in 1987 and is also a
manager of the Vista Balanced Fund and the Vista Large Cap Equity Fund. In
addition, Mr. Adams has been responsible for overseeing the proprietary computer
model program used in the U.S. equity selection process.
The Administrator. Chase acts as the administrator for the Portfolio and is
entitled to receive from the Portfolio a fee computed daily and paid monthly at
an annual rate equal to 0.05% of its average daily net assets.
Certain Regulatory Matters. Banking laws, including the Glass-Steagall Act
as currently interpreted, prohibit bank holding companies and their affiliates
from sponsoring, organizing, controlling, or distributing shares of, mutual
funds, and generally prohibit banks from issuing, underwriting, selling or
distributing securities. These laws do not prohibit banks or their affiliates
from acting as investment adviser, administrator or custodian to mutual funds or
from purchasing mutual fund shares as agent for a customer. Chase and the
Portfolio believe that Chase (including its affiliates) may perform the services
to be performed by it as described in this Part A without violating such laws.
If future changes in these laws or interpretations required Chase to alter or
discontinue any of these services, it is expected that the Board of Trustees
would recommend alternative arrangements and that investors would not suffer
adverse financial consequences. State securities laws may differ from the
interpretations of banking law described above and banks may be required to
register as dealers pursuant to state law.
Chase and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of securities purchased on behalf of the
Portfolio, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities so purchased. Chase and its
affiliates deal, trade and invest for their own accounts in
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U.S. Government obligations, municipal obligations and commercial paper and are
among the leading dealers of various types of U.S. Government obligations and
municipal obligations. Chase and its affiliates may sell U.S. Government
obligations and municipal obligations to, and purchase them from, other
investment companies sponsored by the Portfolio's placement agent or affiliates
of the placement agent or the Portfolio. Chase will not invest the Portfolio's
assets in any U.S. Government obligations, municipal obligations or commercial
paper purchased from itself or any affiliate, although under certain
circumstances such securities may be purchased from other members of an
underwriting syndicate in which Chase or an affiliate is a non-principal member.
This restriction may limit the amount or type of U.S. Government obligations,
municipal obligations or commercial paper available to be purchased by the
Portfolio. Chase has informed the Portfolio that in making its investment
decisions, it does not obtain or use material inside information in the
possession of any other division or department of Chase or in the possession of
any affiliate of Chase. Investors in the Portfolio should be aware that, subject
to applicable legal or regulatory restrictions, Chase and its affiliates may
exchange among themselves certain information about the investor and his
account. Transactions with affiliated broker-dealers will only be executed on an
agency basis in accordance with applicable federal regulations.
Expenses. The Portfolio pays the expenses incurred in its operations. These
expenses include investment advisory and administrative fees; the compensation
of the Trustees; registration fees; interest charges; taxes; expenses connected
with the execution, recording and settlement of security transactions; fees and
expenses of the Portfolio's custodian for all services to the Portfolio,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of preparing and mailing reports to investors and to
government offices and commissions; expenses of meetings of investors; fees and
expenses of independent accountants, of legal counsel and of any transfer agent,
registrar or dividend disbursing agent of the Portfolio; insurance premiums; and
expenses of calculating the net asset value of, and the net income on,
beneficial interests of the Portfolio. Service providers to the Portfolio may,
from time to time, voluntarily waive all or a portion of any fees to which they
are entitled.
Item 6. Capital Stock and Other Securities.
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The Portfolio is organized as a trust under the laws of the State of New
York. Under the Portfolio's Declaration of Trust, the Trustees are authorized to
issue beneficial interests in the Portfolio. Each investor is entitled to a vote
in proportion to the amount of its investment in the Portfolio. Investments in
the Portfolio may not be transferred, but an investor may withdraw all or any
portion of its investment at any time at net asset value. Investors in the
Portfolio (e.g., investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all obligations of
the Portfolio. However, the risk of an investor in the Portfolio incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations.
Investments in the Portfolio have no preemptive or conversion rights and
are fully paid and nonassessable, except as set forth below. The Portfolio is
not required to hold annual meetings of investors but the Portfolio will hold
special meetings of investors when in the judgment of the Trustees it is
necessary or desirable to submit matters for an investor vote. Investors have
the right to communicate with other investors to the extent provided in Section
16(c) of the Investment Company Act of 1940, as amended (the "1940 Act"), in
connection with requesting a meeting of investors for the purpose of removing
one or more Trustees, which removal requires a two-thirds vote of the
Portfolio's beneficial interests. Investors also have under
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certain circumstances the right to remove one or more Trustees without a
meeting. Upon liquidation of the Portfolio, investors would be entitled to share
pro rata in the net assets of the Portfolio available for distribution to
investors.
The Portfolio does not intend to distribute to its investors its net
investment income or its net realized capital gains, if any. The end of the
Portfolio's fiscal year is October 31.
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the Portfolio
will be taxable on its share (as determined in accordance with the governing
instruments of the Portfolio) of the Portfolio's taxable income, gain, loss,
deductions and credits in determining its income tax liability. The
determination of such share will be made in accordance with the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio.
Investor inquiries may be directed to the Portfolio's exclusive placement
agent, Signature Broker-Dealer Services, Inc., 6 St. James Avenue, Boston, MA
02116 or to the Portfolio's transfer agent, DST Systems, Inc., at 210 West 10th
Street, Kansas City, Missouri 64105.
Item 7. Purchase of Securities Being Offered.
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Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See "General Description of the
Registrant" above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment in
the Portfolio. No money may be paid to any intermediary in Hong Kong who is not
a dealer or exempt dealer.
The Portfolio reserves the right to cease accepting investments at any time
or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the New York Stock Exchange is open for trading. At the
close of regular trading on the New York Stock Exchange on each such day
(normally 4:00 p.m., Eastern time; however, options are priced at 4:15 p.m.,
Eastern time, the value of each investor's beneficial interest in the Portfolio
will be determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected as of the close of regular trading on such
day, will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio as of the close of regular trading on such day plus
or minus, as the case may be, the amount of net additions to or reductions in
the investor's investment in the Portfolio effected as of the close of regular
trading, and (ii) the denominator of which is the aggregate net asset value of
the Portfolio as of the close of regular trading on such day plus or minus, as
the case may be, the amount
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of net additions to or reductions in the aggregate investments in the Portfolio
by all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as of
the close of regular trading on the following day the New York Stock Exchange is
open for trading.
Item 8. Redemption or Repurchase.
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An investor in the Portfolio may reduce any portion or all of its
investment at any time without charge at the net asset value next determined
after a request in "good order" is furnished by the investor to the Portfolio.
The proceeds of a reduction will be paid in U.S. dollars by the Portfolio
normally on the next business day after the reduction is effected, but in any
event within seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any reduction
may be suspended or the payment of the proceeds therefrom postponed during any
period in which the New York Stock Exchange is closed (other than weekends or
holidays) or trading on such Exchange is restricted, or, to the extent otherwise
permitted by the 1940 Act, if an emergency exists.
Item 9. Pending Legal Proceedings.
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Not applicable.
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PART B
Item 10. Cover Page.
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Not applicable.
Item 11. Table of Contents.
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Page
General Information and History . . . . . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . . . . . B-1
Management of the Fund . . . . . . . . . . . . . . . . . . . B-15
Control Persons and Principal Holders of Securities . . . . . B-20
Investment Advisory and Other Services . . . . . . . . . . . B-20
Brokerage Allocation and Other Practices . . . . . . . . . . B-23
Capital Stock and Other Securities . . . . . . . . . . . . . B-25
Purchase, Redemption and Pricing of Securities . . . . . . . B-27
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . B-28
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . B-28
Calculation of Performance Data . . . . . . . . . . . . . . . B-29
Financial Statements . . . . . . . . . . . . . . . . . . . . B-29
Item 12. General Information and History.
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Not applicable.
Item 13. Investment Objective and Policies.
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Part A sets forth the investment objective and various investment policies
of the Portfolio. This Part B supplements and should be read in conjunction with
the related section of Part A. For descriptions of the securities ratings of
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("Standard & Poor's") and Fitch Investors Service, Inc. ("Fitch"), see Appendix
B.
Investment Policies.
U.S. Government Securities. U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including: U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S.
Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow any
amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the agency
or instrumentality. Agencies and instrumentalities of the U.S. Government
include but are not limited to: Federal Land Banks, Federal Financing Banks,
Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association, Student Loan Marketing Association, United States
Postal Service, Chrysler Corporate Loan Guarantee Board, Small Business
Administration, Tennessee Valley Authority and any other enterprise established
or sponsored by the U.S. Government. Certain U.S. Government Securities,
including U.S. Treasury bills, notes and bonds, Government National Mortgage
Association certificates and Federal Housing Administration debentures, are
supported by the full faith and credit of the United States. Other U.S.
Government Securities are issued
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or guaranteed by federal agencies or government sponsored enterprises and are
not supported by the full faith and credit of the United States. These
securities include obligations that are supported by the right of the issuer to
borrow from the U.S. Treasury, such as obligations of the Federal Home Loan
Banks, and obligations that are supported by the creditworthiness of the
particular instrumentality, such as obligations of the Federal National Mortgage
Association or Federal Home Loan Mortgage Corporation. For a description of
certain obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields than are available from the more common types of government-backed
instruments. However, such specialized instruments may only be available from a
few sources, in limited amounts, or only in very large denominations; they may
also require specialized capability in portfolio servicing and in legal matters
related to government guarantees. While they may frequently offer attractive
yields, the limited-activity markets of many of these securities means that, if
the Portfolio were required to liquidate any of them, it might not be able to do
so advantageously; accordingly, the Portfolio investing in such securities
normally to hold such securities to maturity or pursuant to repurchase
agreements, and would treat such securities (including repurchase agreements
maturing in more than seven days) as illiquid for purposes of its limitation on
investment in illiquid securities.
Bank Obligations. Investments in bank obligations are limited to those of
U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation, and foreign banks (including their
U.S. branches) having total assets in excess of $10 billion (or the equivalent
in other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of United States banks or foreign banks
which are payable at a stated maturity date and bear a fixed rate of interest.
Although fixed time deposits do not have a market, there are no contractual
restrictions on the right to transfer a beneficial interest in the deposit to a
third party. Fixed time deposits subject to withdrawal penalties and with
respect to which the Portfolio cannot realize the proceeds thereon within seven
days are deemed "illiquid" for the purposes of its restriction on investments in
illiquid securities. Deposit notes are notes issued by commercial banks which
generally bear fixed rates of interest and typically have original maturities
ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be made
and the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and
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cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations. Bank obligations may be general obligations of
the parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation. Investors should also be aware
that securities of foreign banks and foreign branches of United States banks may
involve foreign investment risks in addition to those relating to domestic bank
obligations.
Depositary Receipts. The Portfolio will limit its investment in Depository
Receipts not sponsored by the issuer of the underlying security to no more than
5% of the value of its net assets (at the time of investment). A purchaser of an
unsponsored Depositary Receipt may not have unlimited voting rights and may not
receive as much information about the issuer of the underlying securities as
with a sponsored Depositary Receipt.
ECU Obligations. The specific amounts of currencies comprising the ECU may
be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Trustees do not
believe that such adjustments will adversely affect holders of ECU-denominated
securities or the marketability of such securities.
Supranational Obligations. Supranational organizations, include
organizations such as The World Bank, which was chartered to finance development
projects in developing member countries; the European Community, which is a
twelve-nation organization engaged in cooperative economic activities; the
European Coal and Steel Community, which is an economic union of various
European nations steel and coal industries; and the Asian Development Bank,
which is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations of the Asian and
Pacific regions.
Corporate Reorganizations. In general, securities that are the subject of a
tender or exchange offer or proposal sell at a premium to their historic market
price immediately prior to the announcement of the offer or proposal. The
increased market price of these securities may also discount what the stated or
appraised value of the security would be if the contemplated action were
approved or consummated. These investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of these contingencies requires unusually broad knowledge and experience on the
part of the advisers that must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction, but also the financial resources and
business motivation of the offeror as well as the dynamics of the business
climate when the offer or proposal is in progress. Investments in reorganization
securities may tend to increase the turnover ratio of the Portfolio and increase
its brokerage and other transaction expenses.
Warrants and Rights. Warrants basically are options to purchase equity
securities at a specified price for a specific period of time. Their prices do
not necessarily move parallel to the prices of the underlying securities. Rights
are similar to warrants but normally have a shorter duration and are distributed
directly by the issuer to shareholders. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
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Commercial Paper. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Repurchase Agreements. The Portfolio will enter into repurchase agreements
only with member banks of the Federal Reserve System and securities dealers
believed creditworthy, and only if fully collateralized by securities in which
the Portfolio is permitted to invest. Under the terms of a typical repurchase
agreement, the Portfolio would acquire an underlying instrument for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase the instrument and the Portfolio to resell the instrument
at a fixed price and time, thereby determining the yield during the Portfolio's
holding period. This procedure results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
are considered under the 1940 Act to be loans collateralized by the underlying
securities. All repurchase agreements entered into by the Portfolio will be
fully collateralized at all times during the period of the agreement in that the
value of the underlying security will be at least equal to the amount of the
loan, including the accrued interest thereon, and the Portfolio or its custodian
or sub-custodian will have possession of the collateral, which the Board of
Trustees believes will give it a valid, perfected security interest in the
collateral. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been conclusively established. This
might become an issue in the event of the bankruptcy of the other party to the
transaction. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities would not be
owned by the Portfolio, but would only constitute collateral for the seller's
obligation to pay the repurchase price. Therefore, the Portfolio may suffer time
delays and incur costs in connection with the disposition of the collateral. The
Board of Trustees believes that the collateral underlying repurchase agreements
may be more susceptible to claims of the seller's creditors than would be the
case with securities owned by the Portfolio. Repurchase agreements maturing in
more than seven days are treated as illiquid for purposes of the Portfolio's
restrictions on purchases of illiquid securities. Repurchase agreements are also
subject to the risks described below with respect to stand-by commitments.
Forward Commitments. In order to invest the Portfolio's assets immediately,
while awaiting delivery of securities purchased on a forward commitment basis,
short-term obligations that offer same-day settlement and earnings will normally
be purchased. When a commitment to purchase a security on a forward commitment
basis is made, procedures are established consistent with the General Statement
of Policy of the Securities and Exchange Commission concerning such purchases.
Since that policy currently recommends that an amount of the Portfolio's assets
equal to the amount of the purchase be held aside or segregated to be used to
pay for the commitment, a separate account of the Portfolio consisting of cash,
cash equivalents or high quality debt securities equal to the amount of the
Portfolio's commitments securities will be established at the Portfolio's
custodian bank. For the purpose of determining the adequacy of the securities in
the account, the deposited securities will be valued at market value. If the
market value of such securities declines, additional cash, cash equivalents or
highly liquid securities will be placed in the account daily so that the value
of the account will equal the amount of such commitments by the Portfolio.
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Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the Portfolio's portfolio
are subject to changes in value based upon the public's perception of the issuer
and changes, real or anticipated, in the level of interest rates. Purchasing
securities on a forward commitment basis can involve the risk that the yields
available in the market when the delivery takes place may actually be higher or
lower than those obtained in the transaction itself. On the settlement date of
the forward commitment transaction, the Portfolio will meet its obligations from
then available cash flow, sale of securities held in the separate account, sale
of other securities or, although it would not normally expect to do so, from
sale of the forward commitment securities themselves (which may have a value
greater or lesser than the Portfolio's payment obligations). The sale of
securities to meet such obligations may result in the realization of capital
gains or losses.
To the extent the Portfolio engages in forward commitment transactions, it
will do so for the purpose of acquiring securities consistent with its
investment objective and policies and not for the purpose of investment
leverage, and settlement of such transactions will be within 90 days from the
trade date.
Reverse Repurchase Agreements. Reverse Repurchase Agreements involve the
sale of securities held by the Portfolio with an agreement to repurchase the
securities at an agreed upon price and date. The repurchase price is generally
equal to the original sales price plus interest. Reverse repurchase agreements
are usually for seven days or less and cannot be repaid prior to their
expiration dates. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities transferred may decline below the price at
which the Portfolio is obliged to purchase the securities.
Stripped Obligations. The principal and interest components of United
States Treasury bonds with remaining maturities of longer than ten years are
eligible to be traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Under the STRIPS
program, the principal and interest components are separately issued by the
United States Treasury at the request of depository financial institutions,
which then trade the component parts separately. The interest component of
STRIPS may be more volatile than that of United States Treasury bills with
comparable maturities.
Illiquid Securities. For purposes of its limitation on investments in
illiquid securities, the Portfolio may elect to treat as liquid, in accordance
with procedures established by the Board of Trustees, certain investments in
restricted securities for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "Securities Act") and commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act ("Section 4(2) paper"). Rule 144A
provides an exemption from the registration requirements of the Securities Act
for the resale of certain restricted securities to qualified institutional
buyers. Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as the
Portfolio who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale of Section 4(2) paper by the
purchaser must be in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or
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be maintained. The Trustees have adopted policies and procedures for the purpose
of determining whether securities that are eligible for resale under Rule 144A
and Section 4(2) paper are liquid or illiquid for purposes of the limitation on
investment in illiquid securities. Pursuant to those policies and procedures,
the Trustees have delegated to the advisers the determination as to whether a
particular instrument is liquid or illiquid, requiring that consideration be
given to, among other things, the frequency of trades and quotes for the
security, the number of dealers willing to sell the security and the number of
potential purchasers, dealer undertakings to make a market in the security, the
nature of the security and the time needed to dispose of the security. The
Trustees will periodically review the Portfolio's purchases and sales of Rule
144A securities and Section 4(2) paper.
Stand-By Commitments. In a put transaction, the Portfolio acquires the
right to sell a security at an agreed upon price within a specified period prior
to its maturity date, and a stand-by commitment entitles the Portfolio to
same-day settlement and to receive an exercise price equal to the amortized cost
of the underlying security plus accrued interest, if any, at the time of
exercise. Stand-by commitments are subject to certain risks, which include the
inability of the issuer of the commitment to pay for the securities at the time
the commitment is exercised, the fact that the commitment is not marketable by
the Portfolio, and that the maturity of the underlying security will generally
be different from that of the commitment.
Securities Loans. To the extent specified in Part A, the Portfolio is
permitted to lend its securities to broker-dealers and other institutional
investors in order to generate additional income. Such loans of portfolio
securities may not exceed 30% of the value of the Portfolio's total assets. In
connection with such loans, the Portfolio will receive collateral consisting of
cash, cash equivalents, U.S. Government securities or irrevocable letters of
credit issued by financial institutions. Such collateral will be maintained at
all times in an amount equal to at least 102% of the current market value plus
accrued interest of the securities loaned. The Portfolio can increase its income
through the investment of such collateral. The Portfolio continues to be
entitled to the interest payable or any dividend-equivalent payments received on
a loaned security and, in addition, to receive interest on the amount of the
loan. However, the receipt of any dividend-equivalent payments by the Portfolio
on a loaned security from the borrower will not qualify for the
dividends-received deduction. Such loans will be terminable at any time upon
specified notice. The Portfolio might experience risk of loss if the
institutions with which it has engaged in portfolio loan transactions breach
their agreements with the Portfolio. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delays in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower experience financial
difficulty. Loans will be made only to firms deemed by the advisers to be of
good standing and will not be made unless, in the judgment of the advisers, the
consideration to be earned from such loans justifies the risk.
Additional Policies Regarding Derivative and Related Transactions
Introduction. As explained more fully below, the Portfolio may employ
derivative and related instruments as tools in the management of portfolio
assets. Put briefly, a " derivative" instrument may be considered a security or
other instrument which derives its value from the value or performance of other
instruments or assets, interest or currency exchange rates, or indexes. For
instance, derivatives include futures, options, forward contracts, structured
notes and various over-the-counter instruments.
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Like other investment tools or techniques, the impact of using derivatives
strategies or similar instruments depends to a great extent on how they are
used. Derivatives are generally used by portfolio managers in three ways: First,
to reduce risk by hedging (offsetting) an investment position. Second, to
substitute for another security particularly where it is quicker, easier and
less expensive to invest in derivatives. Lastly, to speculate or enhance
portfolio performance. When used prudently, derivatives can offer several
benefits, including easier and more effective hedging, lower transaction costs,
quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for the Portfolio.
The Portfolio may invest its assets in derivative and related instruments
subject only to the Portfolio's investment objective and policies and the
requirement that the Portfolio maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to avoid
leveraging the Portfolio.
The value of some derivative or similar instruments in which the Portfolio
may invest may be particularly sensitive to changes in prevailing interest rates
or other economic factors, and--like other investments of the Portfolio--the
ability of the Portfolio to successfully utilize these instruments may depend in
part upon the ability of the advisers to forecast interest rates and other
economic factors correctly. If the advisers inaccurately forecast such factors
and has taken positions in derivative or similar instruments contrary to
prevailing market trends, the Portfolio could be exposed to the risk of a loss.
The Portfolio might not employ any or all of the strategies described herein,
and no assurance can be given that any strategy used will succeed.
Risk Factors
Set forth below is an explanation of the various derivatives strategies and
related instruments the Portfolio may employ along with risks or special
attributes associated with them. This discussion is intended to supplement Part
A as well as provide useful information to prospective investors. Risk Factors
As explained more fully below and in the discussions of particular
strategies or instruments, there are a number of risks associated with the use
of derivatives and related instruments. There can be no guarantee that there
will be a correlation between price movements in a hedging vehicle and in the
portfolio assets being hedged. An incorrect correlation could result in a loss
on both the hedged assets in the Portfolio and the hedging vehicle so that the
portfolio return might have been greater had hedging not been attempted. This
risk is particularly acute in the case of "cross-hedges" between currencies. The
advisers may inaccurately forecast interest rates, market values or other
economic factors in utilizing a derivatives strategy. In such a case, the
Portfolio may have been in a better position had it not entered into such
strategy. Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains. Strategies not involving hedging may increase
the risk to the Portfolio. Certain strategies, such as yield enhancement, can
have speculative characteristics and may result in more risk to the Portfolio
than hedging strategies using the same instruments. There can be no assurance
that a liquid market will exist at a time when the Portfolio seeks to close out
an option, futures contract or other derivative or related position. Many
exchanges and boards of trade limit the amount of fluctuation permitted in
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option or futures contract prices during a single day; once the daily limit has
been reached on particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain instruments are relatively new and
without a significant trading history. As a result, there is no assurance that
an active secondary market will develop or continue to exist. Finally,
over-the-counter instruments typically do not have a liquid market. Lack of a
liquid market for any reason may prevent the Portfolio from liquidating an
unfavorable position. Activities of large traders in the futures and securities
markets involving arbitrage, "program trading," and other investment strategies
may cause price distortions in these markets. In certain instances, particularly
those involving over-the-counter transactions, forward contracts there is a
greater potential that a counterparty or broker may default or be unable to
perform on its commitments. In the event of such a default, the Portfolio may
experience a loss. In transactions involving currencies, the value of the
currency underlying an instrument may fluctuate due to many factors, including
economic conditions, interest rates, governmental policies and market forces.
Specific Uses and Strategies
Set forth below are explanations of various strategies involving
derivatives and related instruments which may be used by the Portfolio.
Options on Securities, Securities Indexes and Debt Instruments. The
Portfolio may PURCHASE, SELL or EXERCISE call and put options on (i) securities,
(ii) securities indexes, and (iii) debt instruments.
Although in most cases these options will be exchange-traded, the Portfolio
may also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller. As such,
over-the-counter options generally have much less market liquidity and carry the
risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities the Portfolio intends to purchase pending its
ability to invest in such securities in an orderly manner. The Portfolio may
also use combinations of options to minimize costs, gain exposure to markets or
take advantage of price disparities or market movements. For example, the
Portfolio may sell put or call options it has previously purchased or purchase
put or call options it has previously sold. These transactions may result in a
net gain or loss depending on whether the amount realized on the sale is more or
less than the premium and other transaction costs paid on the put or call option
which is sold. The Portfolio may write a call or put option in order to earn the
related premium from such transactions. Prior to exercise or expiration, an
option may be closed out by an offsetting purchase or sale of a similar option.
The Portfolio will not write uncovered options.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, the
Portfolio writing a covered call (i.e., where the underlying securities are held
by the Portfolio) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase
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transaction in order to terminate its obligation under the option and must
deliver the underlying securities at the exercise price.
If a put or call option purchased by the Portfolio is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price or, in the case of
a call, remains less than or equal to the exercise price, the Portfolio will
lose its entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security. There can be no assurance that a liquid market
will exist when the Portfolio seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, the Portfolio may be unable to close out a position.
Futures Contracts and Options on Futures Contracts. The Portfolio may
purchase or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indices, and (iii) options on these futures contracts
("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Portfolio may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
the Portfolio may sell a futures contract--or buy a futures option--to protect
against a decline in value, or reduce the duration, of portfolio holdings.
Likewise, these instruments may be used where the Portfolio intends to acquire
an instrument or enter into a position. For example, the Portfolio may purchase
a futures contract--or buy a futures option--to gain immediate exposure in a
market or otherwise offset increases in the purchase price of securities or
currencies to be acquired in the future. Futures options may also be written to
earn the related premiums.
When writing or purchasing options, the Portfolio may simultaneously enter
into other transactions involving futures contracts or futures options in order
to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. The Portfolio may engage in cross-hedging by purchasing or
selling futures or options on a security or currency different from the security
or currency position being hedged to take advantage of relationships between the
two securities or currencies.
Investments in futures contracts and options thereon involve risks similar
to those associated with options transactions discussed above. The Portfolio
will only enter into futures contracts or options on futures contracts which are
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system.
Forward Contracts. The Portfolio may use foreign currency and interest-rate
forward contracts for various purposes as described below.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. The Portfolio that
may invest in securities denominated in foreign currencies
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may, in addition to buying and selling foreign currency futures contracts and
options on foreign currencies and foreign currency futures, enter into forward
foreign currency exchange contracts to reduce the risks or otherwise take a
position in anticipation of changes in foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be a 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. By entering into a forward foreign currency contract, the Portfolio
"locks in" the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. As a result, the
Portfolio reduces its exposure to changes in the value of the currency it will
deliver and increases its exposure to changes in the value of the currency it
will exchange into. The effect on the value of the Portfolio is similar to
selling securities denominated in one currency and purchasing securities
denominated in another. Transactions that use two foreign currencies are
sometimes referred to as "cross-hedges."
The Portfolio may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investments or
anticipated investments in securities denominated in foreign currencies. The
Portfolio may also enter into these contracts for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
The Portfolio may also use forward contracts to hedge against changes in
interest rates, increase exposure to a market or otherwise take advantage of
such changes. An interest-rate forward contract involves the obligation to
purchase or sell a specific debt instrument at a fixed price at a future date.
Interest Rate and Currency Transactions. The Portfolio may employ currency
and interest rate management techniques, including transactions in options
(including yield curve options), futures, options on futures, forward foreign
currency exchange contracts, currency options and futures and currency and
interest rate swaps. The aggregate amount of the Portfolio's net currency
exposure will not exceed the total net asset value of its portfolio. However, to
the extent that the Portfolio is fully invested while also maintaining currency
positions, it may be exposed to greater combined risk.
The Portfolio will only enter into interest rate and currency swaps on a
net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and currency swaps do not involve the delivery of
securities, the underlying currency, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and currency swaps
is limited to the net amount of interest or currency payments that the Portfolio
is contractually obligated to make. If the other party to an interest rate or
currency swap defaults, the Portfolio's risk of loss consists of the net amount
of interest or currency payments that the Portfolio is contractually entitled to
receive. Since interest rate and currency swaps are individually negotiated, the
Portfolio expects to achieve an acceptable degree of correlation between their
portfolio investments and their interest rate or currency swap positions.
The Portfolio may hold foreign currency received in connection with
investments in foreign securities when it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate.
The Portfolio may purchase or sell without limitation as to a percentage of
its assets forward foreign currency exchange contracts when the
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advisers anticipate that the foreign currency will appreciate or depreciate in
value, but securities denominated in that currency do not present attractive
investment opportunities and are not held by the Portfolio. In addition, the
Portfolio may enter into forward foreign currency exchange contracts in order to
protect against adverse changes in future foreign currency exchange rates. The
Portfolio may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency if its advisers believe that there is a pattern of
correlation between the two currencies. Forward contracts may reduce the
potential gain from a positive change in the relationship between the U.S.
Dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Portfolio than if it had not
entered into such contracts. The use of foreign currency forward contracts will
not eliminate fluctuations in the underlying U.S. dollar equivalent value of the
prices of or rates of return on the Portfolio's foreign currency denominated
portfolio securities and the use of such techniques will subject the Portfolio
to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition, the
Portfolio may not always be able to enter into foreign currency forward
contracts at attractive prices, and this will limit the Portfolio's ability to
use such contract to hedge or cross-hedge its assets. Also, with regard to the
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying the
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
The Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable law. The Portfolio will typically use
interest rate swaps to shorten the effective duration of its portfolio. Interest
rate swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
Structured Products. The Portfolio may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain other investments. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of securities ("structured products")
backed by, or representing interests in, the underlying instruments. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. The Portfolio may invest in structured products which represent
derived investment positions based on relationships among different markets or
asset classes.
The Portfolio may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate,
B-11
<PAGE>
but may also be determined through a dutch auction or a remarketing agent or by
reference to another security) (the "reference rate"). As an example, inverse
floaters may constitute a class of CMOs with a coupon rate that moves inversely
to a designated index, such as LIBOR (London Interbank Offered Rate) or the Cost
of Funds Index. Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate. A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities where the value of
the investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities .
When the Portfolio invests in notes linked to the price of an underlying
instrument, the price of the underlying security is determined by a multiple
(based on a formula) of the price of such underlying security. A structured
product may be considered to be leveraged to the extent its interest rate varies
by a magnitude that exceeds the magnitude of the change in the index rate of
interest. Because they are linked to their underlying markets or securities,
investments in structured products generally are subject to greater volatility
than an investment directly in the underlying market or security. Total return
on the structured product is derived by linking return to one or more
characteristics of the underlying instrument. Because certain structured
products of the type in which the Portfolio may invest may involve no credit
enhancement, the credit risk of those structured products generally would be
equivalent to that of the underlying instruments. The Portfolio may invest in a
class of structured products that is either subordinated or unsubordinated to
the right of payment of another class. Subordinated structured products
typically have higher yields and present greater risks than unsubordinated
structured products. Although the Portfolio's purchase of subordinated
structured products would have similar economic effect to that of borrowing
against the underlying securities, the purchase will not be deemed to be
leverage for purposes of the Portfolio's fundamental investment limitation
related to borrowing and leverage.
Certain issuers of structured products may be deemed to be, "investment
companies" as defined in the 1940 Act. As a result, the Portfolio's investments
in these structured products may be limited by the restrictions contained in the
1940 Act. Structured products are typically sold in private placement
transactions and there currently is no action trading market for structured
products. As a result, certain structured products in which the Portfolio
invests may be deemed illiquid and subject to its limitation on illiquid
investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
Additional Restrictions on the Use of Futures and Option Contracts
The Portfolio is not a "commodity pool" (i.e., a pooled investment vehicle
which trades in commodity futures contracts and options thereon and the operator
of which is registered with the CFTC and futures contracts and futures options
will be purchased, sold or entered into only for bona fide hedging purposes,
provided that the Portfolio may enter into such transactions for purposes other
than bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5% of
the liquidation value of the Portfolio's portfolio, provided, further, that, in
the case of an option that is in-the-money, the in-the-money amount may be
excluded in calculating the 5% limitation.
B-12
<PAGE>
When the Portfolio purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be deposited in a segregated
account with the Portfolio's custodian or sub-custodian so that the amount so
segregated, plus the initial deposit and variation margin held in the account of
its broker, will at all times equal the value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
The Portfolio's ability to engage in the transactions described herein may
be limited by the current federal income tax requirement that the Portfolio
derive less than 30% of its gross income from the sale or other disposition of
stock or securities held for less than three months.
Investment Restrictions
The Portfolio has adopted the following investment restrictions which may
not be changed without approval by a "majority of the outstanding shares" of the
Portfolio which, as used in this Statement of Additional Information, means the
vote of the lesser of (i) 67% or more of the total beneficial interests of a
Portfolio present at a meeting, if the holders of more than 50% of the
outstanding total beneficial interests of a Portfolio are present or represented
by proxy, or (ii) more than 50% of the outstanding total beneficial interests of
a Portfolio.
The Portfolio may not:
(1) borrow money, except that the Portfolio may borrow money for
temporary or emergency purposes, or by engaging in reverse repurchase
transactions, in an amount not exceeding 33-1/3% of the value of its
total assets at the time when the loan is made and may pledge,
mortgage or hypothecate no more than 1/3 of its net assets to secure
such borrowings . Any borrowings representing more than 5% of the
Portfolio's total assets must be repaid before the Portfolio may make
additional investments;
(2) make loans, except that the Portfolio may: (i) purchase and
hold debt instruments (including without limitation, bonds, notes,
debentures or other obligations and certificates of deposit, bankers'
acceptances and fixed time deposits) in accordance with its investment
objectives and policies; (ii) enter into repurchase agreements with
respect to portfolio securities; and (iii) lend portfolio securities
with a value not in excess of one-third of the value of its total
assets;
(3) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of the Portfolio's total assets would be
invested in the securities of companies whose principal business
activities are in the same industry. Notwithstanding the foregoing,
with respect to the Portfolio's permissible futures and options
transactions in U.S. Government securities, positions in such options
and futures shall not be subject to this restriction;
(4) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments but this shall
not prevent the Portfolio from (i) purchasing or selling options and
futures contracts or from investing in securities or other instruments
backed by physical commodities or (ii) engaging in forward purchases
or sales of foreign currencies or securities;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent
B-13
<PAGE>
the Portfolio from investing insecurities or other instruments
backed by real estate or securities of companies engaged in the real
estate business). Investments by the Portfolio in securities backed by
mortgages on real estate or in marketable securities of companies
engaged in such activities are not hereby precluded;
(6) issue any senior security (as defined in the 1940 Act),
except that (a) the Portfolio may engage in transactions that may
result in the issuance of senior securities to the extent permitted
under applicable regulations and interpretations of the 1940 Act or an
exemptive order; (b) the Portfolio may acquire other securities, the
acquisition of which may result in the issuance of a senior security,
to the extent permitted under applicable regulations or
interpretations of the 1940 Act; and (c) subject to the restrictions
set forth above, the Portfolio may borrow money as authorized by the
1940 Act. For purposes of this restriction, collateral arrangements
with respect to permissible options and futures transactions,
including deposits of initial and variation margin, are not considered
to be the issuance of a senior security; or
(7) underwrite securities issued by other persons except insofar
as the Portfolio may technically be deemed to be an underwriter undeR
the Securities Act of 1933 in selling a portfolio security.
For purposes of investment restriction (5) above, real estate includes Real
Estate Limited Partnerships. For purposes of investment restriction (3) above,
industrial development bonds, where the payment of principal and interest is the
ultimate responsibility of companies within the same industry, are grouped
together as an "industry." Supranational organizations are collectively
considered to be members of a single "industry" for purposes of restriction (3)
above.
In addition, the Portfolio is subject to the following nonfundamental
restrictions which may be changed without investor approval:
(1) The Portfolio may not, with respect to 50% of its assets,
hold more than 10% of the outstanding voting securities of any issuer.
(2) The Portfolio may not make short sales of securities, other
than short sales "against the box," or purchase securities on margin
except for short-term credits necessary for clearance of portfolio
transactions, provided that this restriction will not be applied to
limit the use of options, futures contracts and related options, in
the manner otherwise permitted by the investment restrictions,
policies and investment program of the Portfolio.
(3) The Portfolio may not purchase or sell interests in oil, gas
or mineral leases.
(4) The Portfolio may not invest more than 15% of its net assets
in illiquid securities.
(5) The Portfolio may not write, purchase or sell any put or call
option or any combination thereof, provided that this shall not
prevent (i) the writing, purchasing or selling of puts, calls or
combinations thereof with respect to portfolio securities or (ii) with
respect to the Portfolio's permissible futures and options
transactions, the writing, purchasing, ownership, holding or selling
of futures and options positions or of puts, calls or combinations
thereof with respect to futures.
B-14
<PAGE>
(6) The Portfolio may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3%
of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment
companies.
It is the Portfolio's position that proprietary strips, such as CATS and
TIGRS, are United States Government securities. However, the Portfolio has been
advised that the staff of the Securities and Exchange Commission's Division of
Investment Management does not consider these to be United States Government
securities, as defined under the Investment Company Act of 1940, as amended.
For purposes of the Portfolio's investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
In order to permit the sale of its beneficial interests in certain states,
the Portfolio may make commitments more restrictive than the investment policies
and limitations described above and in Part A. Should the Portfolio determine
that any such commitment is no longer in its best interests, it will revoke the
commitment by terminating sales of its beneficial interests in the state
involved. In order to comply with certain federal and state statutes and
regulatory policies, as a matter of operating policy, the Portfolio will not:
(i) invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation, (ii)
invest in warrants, valued at the lower of cost or market, in excess of 5% of
the value of its net assets, and no more than 2% of such value may be warrants
which are not listed on the New York or American Stock Exchanges, or (iii)
purchase or retain in its portfolio any securities issued by an issuer any of
whose officers, directors, trustees or security holders is an officer or Trustee
of the Trust or Portfolio, or is an officer or director of the Adviser, if after
the purchase of the securities of such issuer by the Portfolio one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, all taken at market value.
If a percentage or rating restriction on investment or use of assets set
forth herein or in Part A is adhered to at the time a transaction is effected,
later changes in percentage resulting from any cause other than actions by the
Portfolio will not be considered a violation . If the value of the Portfolio's
holdings of illiquid securities at any time exceeds the percentage limitation
applicable at the time of acquisition due to subsequent fluctuations in value or
other reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
Item 14. Management of the Fund.
- ---------------------------------
The Trustees and officers of the Portfolio and their principal occupations
for at least the past five years are set forth below. Their titles may have
varied during that period. Asterisks indicate those Trustees and officers who
are "interested persons" (as defined in the 1940 Act) of the Portfolio. Unless
otherwise indicated below, the address of each officer other than the Chairman
is 6 St. James Avenue, Suite 900, Boston, Massachusetts 02116.
B-15
<PAGE>
Names, Position(s) with
the Portfolio, Address and Principal Occupations and Business
Age Experience for the Past 5 Years
- -------------------------- ----------------------------------
Stuart W. Cragin, Jr. Trustee. Retired; formerly, President,
Trustee Fairfield Testing Laboratory, Inc. He has
108 Valley Road previously served in a variety of
Cos Cob, CT 06807 marketing, manufacturing and general
Age: 63 management positions with Union Camp
Corp., Trinity Paper & Plastics Corp., and
Conover Industries.
Irving L. Thode Trustee. Retired; Vice President of
Trustee Quotron Systems. He has previously served
80 Perkins Road in a number of executive positions with
Greenwich, CT 06830 Control Data Corp., including President of
Age: 69 its Latin American Operations, and General
Manager of its Data Services business.
H. Richard Vartabedian* Trustee and Chairman. Consultant,
Chairman Republic Bank of New York; formerly,
P.O. Box 296, Beach Road, Senior Investment Officer, Division
Hendrick's Head Executive of the Investment Management
Southport, ME 04576 Division of The Chase Manhattan Bank,
Age: 60 N.A., 1980 through 1991.
Fergus Reid, III Trustee. Chairman of the Board of Trustees
Trustee of Mutual Fund Group and Mutual Fund
202 June Road Trust. Chairman and Chief Executive
Stamford, CT 06903 Officer, Lumelite Corporation, since
Age: 63 September 1985; Trustee, Morgan Stanley
Portfolios.
Joseph J. Harkins* Trustee. Retired; Commercial Sector
Trustee Executive and Executive Vice President of
257 Plantation Circle South The Chase Manhattan Bank, N.A. from 1985
Ponte Vedra Beach, FL 32082 through 1989. He was employed by Chase in
Age: 64 numerous capacities and officer from 1954
through 1989. Director of Blessings
Corporation, Jefferson Insurance Company
of New York, Monticello Insurance Company
and National.
Richard E. Ten Haken Trustee. Former District Superintendent
Trustee of Schools, Monroe No. 2 and Orleans
4 Barnfield Road Counties, New York; Chairman of the Board
Pittsfield, NY 14534 and President, New York State Teachers'
Age: 61 Retirement System.
William J. Armstrong Trustee. Vice President and Treasurer,
Trustee Ingersoll-Rand Company.
49 Aspen Way
Upper Saddle River, NJ 07458
Age: 54
John R.H. Blum Trustee. Attorney in private practice;
Trustee formerly, partner in the law firm of
332 Main Street Richards, O'Neil & Allegaert; Commissioner
Lakeville, CT 06039 of Agriculture, State of Connecticut,
Age: 66 1992-1995.
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<PAGE>
Names, Position(s) with
the Portfolio, Address and Principal Occupations and Business
Age Experience for the Past 5 Years
- -------------------------- ----------------------------------
W. Perry Neff* Trustee. Independent Financial Consultant;
Trustee Director of North America Life Assurance
RR 1 Box 102 Co., Petroleum & Resources Corp. and The
Weston, VT 05181 Adams Express Co.; Director and Chairman
Age: 68 of The Hanover Funds Inc.; Director,
Chairman and President of The Hanover
Investments Funds Inc.
Roland R. Eppley, Jr. Trustee. Retired; formerly President and
Trustee Chief Executive Officer, Eastern States
105 Coventry Place Bankcard Association Inc. (1971-1988);
Palm Beach Gardens, FL Director, Janel Hydraulics, Inc.; Director
33418. of The Hanover Funds, Inc.
Age: 63
W.D. MacCallan Trustee. Director of The Adams Express Co.
Trustee and Petroleum & Resources Corp.; formerly
624 East 45th Street Chairman of the Board and Chief Executive
Savannah, GA 31405 Officer of The Adams Express Co. and
Age: 68 Petroleum & Resources Corp.; Director of
The Hanover Funds, Inc. and The Hanover
Investment Funds, Inc.
David G. Danielson Senior Fund Administrator, Signature
Assistant Treasurer Financial Group, Inc. (since May 1991).
Age: 30
Linda T. Gibson Attorney, Signature Financial Group, Inc.
Assistant Secretary (since June 1991); Assistant Secretary,
Age: 30 Signature Broker-Dealer Services, Inc.
(since November 1992); graduate
student, Boston University School
of Law (from September 1989 to May 1992).
Susan Jakuboski Manager and Senior Fund Administrator,
Assistant Treasurer Signature Financial Group, Inc. (since
Age: 31 August 1994); Assistant Treasurer,
Signature Broker-Dealer Services, Inc.
(since September 1994); Fund Compliance
Administrator, Concord Financial Group,
Inc. (prior to August 1994).
Thomas M. Lenz Vice President and Associate General
Vice President and Assistant Counsel, Signature Financial Group, Inc.
Secretary (since November 1989); Assistant
Age: 37 Secretary, Signature Broker-Dealer
Services, Inc. (since February 1991).
Beth A. Remy Client Services Manager, Signature
Assistant Treasurer Financial Group, Inc. (since November
Age: 30 1993); Senior Fund Administrator,
Signature Financial Group, Inc. (prior to
November 1993).
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<PAGE>
Names, Position(s) with
the Portfolio, Address and Principal Occupations and Business
Age Experience for the Past 5 Years
- -------------------------- ----------------------------------
Andres E. Saldana Legal Counsel, Signature Financial Group,
Assistant Secretary Inc. (since November 1992); Attorney,
Age: 33 Ropes & Gray (prior to November 1992).
The Board of Trustees of the Portfolio presently has an Audit Committee. The
members of the Audit Committee are Messrs. Vartabedian, Cragin, Thode and
Reid. The function of the Audit Committee is to recommend independent auditors
and monitor accounting and financial matters. The Audit Committee met two times
during the fiscal year ended October 31, 1995.
Remuneration of Trustees and Certain Executive Officers.
Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the Adviser is compensated for his or her services according to a
fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the Adviser. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting fee
component. Effective August 21, 1995, each Trustee of the Vista Funds receives a
quarterly retainer of $12,000 and an additional per meeting fee of $1,500.
Members of the Committee receive a meeting fee only if the committee meeting is
held on a day other than the day on which a regularly scheduled meeting is held.
Prior to August 21, 1995, the quarterly retainer was $9,000 and the per-meeting
fee was $1,000. The Chairman of the Trustees receives a 50% increment over
regular Trustee total compensation for serving in such capacity.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1995 for each Trustee of the Portfolio:
Pension or
Compensa- Retirement
tion paid Benefits Total
by Accrued Compensation
Capital as Fund from "Fund
Growth Expenses Complex"(1)
---------- ----------- -------------
Fergus Reid, III, Trustee $ 0 0 $78,456.65
H. Richard Vartabedian, $3,750 0 74,804.44
Trustee
Stuart W. Cragin, Jr., $ 0 0 52,304.39
Trustee
Irving L. Thode, Trustee $ 0 0 52,304.39
Joseph J. Harkins $ 0 0 52,304.39
Richard E. Ten Haken, Trustee $ 0 0 52,304.39
William J. Armstrong, Trustee $ 0 0 52,304.39
John R.H. Blum, Trustee $ 0 0 52,304.39
W. Perry Neff, Trustee $ 0 0 0
Roland R. Eppley, Jr., Trustee $ 0 0 0
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<PAGE>
Pension or
Compensa- Retirement
tion paid Benefits Total
by Accrued Compensation
Capital as Fund from "Fund
Growth Expenses Complex"(1)
---------- ----------- -------------
W.D. MacCallan, Trustee $ 0 0 0
(1) Data reflects total compensation earned during the period January 1, 1995
to December 31, 1995 for service as a Trustee to all thirty-two
(Portfolios) Funds advised by the Adviser.
Vista Funds Retirement Plan for Eligible Trustees
Effective August 21, 1995, the Trustees also instituted a Retirement Plan for
Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not an
employee of the advisers, Administrator or Distributor or any of their
affiliates) may be entitled to certain benefits upon retirement from the Board
of Trustees. Pursuant to the Plan, the normal retirement date is the date on
which the eligible Trustee has attained age 65 and has completed at least five
years of continuous service with one or more of the investment companies advised
by the Adviser (collectively, the "Covered Portfolios"). Each Eligible Trustee
is entitled to receive from the Covered Portfolios an annual benefit commencing
on the first day of the calendar quarter coincident with or following his date
of retirement equal to 10% of the highest annual compensation received from the
Covered Portfolios multiplied by the number of such Trustee's years of service
(not in excess of 10 years) completed with respect to any of the Covered
Portfolios. Such benefit is payable to each eligible Trustee in monthly
installments for the life of the Trustee.
Set forth in the table below are the estimated annual benefits payable to an
eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of December 31, 1995, the estimated credited years
of service for Messrs. Reid, Harkins, Ten Haken, Armstrong, Blum, Vartabedian,
Cragin, Thode, Neff, Eppley and MacCallan are 11, 5, 3, 3, 3, 3, 3, 3, 0, 0, and
0, respectively.
Highest Annual Compensation Paid by All Vista Funds
---------------------------------------------------
40,000 45,000 50,000 55,000
Years of
Service Estimated Annual Benefit Upon Retirement
-------- ----------------------------------------
10 40,000 45,000 50,000 55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
Effective August 21, 1995, the Trustees instituted a Deferred Compensation Plan
for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which each
Trustee (who is not an employee of the advisers, Administrator or Distributor or
any of their affiliates) may enter into agreements with the funds whereby
payment of the Trustee's fees are deferred until the payment date elected by the
Trustee (or the Trustee's termination of service). The deferred amounts are
invested in shares of a Fund on whose Board the Trustee sits, subject to the
Trustee's election. The deferred amounts are paid out in a lump sum or over a
period of several years as elected by the Trustee at the time of deferral. If a
deferring Trustee dies prior to the
B-19
<PAGE>
distribution of amounts held in the deferral account, the balance of the
deferral account will be distributed to the Trustee's designated beneficiary in
a single lump sum payment as soon as practicable after such deferring Trustee's
death. The following Eligible Trustees have executed a deferred compensation
agreement for the 1996 calendar year: Messrs. Ten Haken, Thode and Vartabedian.
Ownership of Shares of the Portfolios. The Trustees and officers as a group
directly or beneficially own less than 1% of the Portfolio.
The Declaration of Trust provides that the Portfolio will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Portfolio, unless, as to liability to the Portfolio or its investors , it is
finally adjudicated that they engaged in wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or with
respect to any matter. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
The Portfolio pays no direct remuneration to any officer of the Portfolio.
Item 15. Control Persons and Principal Holders of Securities.
- --------------------------------------------------------------
As of April 30, 1996, Vista Growth and Income Fund owned approximately
95.9% of the value of the outstanding interests in the Portfolio. Because Vista
Growth and Income Fund controls the Portfolio, Vista Growth and Income Fund may
take actions without the approval of any
other investor.
Vista Growth and Income Fund has informed the Portfolio that whenever it is
requested to vote on any proposal of the Portfolio, it will hold a meeting of
shareholders and will cast its vote as instructed by its shareholders. The other
investors in the Portfolio follow the same or a similar practice.
Item 16. Investment Advisory and Other Services.
- -------------------------------------------------
Adviser and Sub-Adviser
Chase acts as investment adviser to the Portfolio pursuant to an Investment
Advisory Agreement, dated as of May 6, 1996 (the "Advisory Agreement"). Subject
to such policies as the Board of Trustees may determine, Chase is responsible
for investment decisions for the Portfolio. Pursuant to the terms of the
Advisory Agreement, Chase provides the Portfolio with such investment advice and
supervision as it deems necessary for the proper supervision of the Portfolio's
investments. The Adviser continuously provides investment programs and
determines from time to time what securities shall be purchased, sold or
exchanged and what portion of the Portfolio's assets shall be held uninvested.
The Adviser to the Portfolio furnishes, at its own expense, all services,
facilities and personnel necessary in connection with managing the investments
and effecting portfolio transactions for the Portfolio. The Advisory Agreement
for the Portfolio will continue in effect from year to year only if such
continuance is specifically approved at least annually by the Board of Trustees
or by vote of a majority of the Portfolio's outstanding voting securities and by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on such Advisory Agreement.
B-20
<PAGE>
Under the Advisory Agreement, the Adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Portfolio
with greater opportunities and flexibility in accessing investment expertise.
Pursuant to the terms of the Advisory Agreement and the Sub-adviser's
agreement with the Adviser, the Adviser and Sub-adviser are permitted to render
services to others. Each advisory agreement is terminable without penalty by the
Portfolio on not more than 60 days', nor less than 30 days', written notice when
authorized either by a majority vote of the Portfolio's investors or by a vote
of a majority of the Board of Trustees of the Portfolio, or by the Adviser or
Sub-adviser on not more than 60 days', nor less than 30 days', written notice,
and will automatically terminate in the event of its "assignment" (as defined in
the 1940 Act). The advisory agreements provide that the Adviser or Sub-adviser
under such agreement shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the execution of portfolio transactions for the Portfolio, except for wilful
misfeasance, bad faith or gross negligence in the performance of its duties, or
by reason of reckless disregard of its obligations and duties thereunder.
With respect to the Portfolio, the equity research team of the Adviser
looks for two key variables when analyzing stocks for potential investment by
equity portfolios: value and momentum. To uncover these qualities, the team uses
a combination of quantitative analysis, fundamental research and computer
technology to help identify undervalued stocks.
In the event the operating expenses of the Portfolio, including all
investment advisory, administration and sub-administration fees, but excluding
brokerage commissions and fees, taxes, interest and extraordinary expenses such
as litigation, for any fiscal year exceed the most restrictive expense
limitation applicable to the Portfolio imposed by the securities laws or
regulations thereunder of any state in which the beneficial interests of the
Portfolio are qualified for sale, as such limitations may be raised or lowered
from time to time, the Adviser shall reduce its advisory fee (which fee is
described below) to the extent of its share of such excess expenses. The amount
of any such reduction to be borne by the Adviser shall be deducted from the
monthly advisory fee otherwise payable with respect to the Portfolio during such
fiscal year; and if such amounts should exceed the monthly fee, the Adviser
shall pay to the Portfolio its share of such excess expenses no later than the
last day of the first month of the next succeeding fiscal year.
Under the Advisory Agreement, Chase may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement provides
that Chase may render services through its own employees or the employees of one
or more affiliated companies that are qualified to act as an investment adviser
of the Portfolio and are under the common control of Chase as long as all such
persons are functioning as part of an organized group of persons, managed by
authorized officers of Chase.
Chase, on behalf of the Portfolio, has entered into an investment
sub-advisory agreement dated as of May 6, 1996 with Chase Asset Management, Inc.
("CAM"). With respect to the day-to-day management of the Portfolio, under the
sub-advisory agreement, the Sub-adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the records
relating to such purchases and sales. The Sub-adviser may, in its discretion,
provide such services through its own employees or the employees of one or more
affiliated companies that are qualified to act as an investment adviser to the
Portfolio under applicable laws and are under the common control of Chase;
provided that (i) all persons, when providing services under the sub-advisory
agreement, are functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by authorized officers
of the Sub-adviser. This arrangement will not result in the payment of
additional fees by the Portfolio.
B-21
<PAGE>
Chase, a wholly-owned subsidiary of The Chase Manhattan Corporation, a
registered bank holding company, is a commercial bank offering a wide range of
banking and investment services to customers throughout the United States and
around the world. The Chase Manhattan Corporation is the entity resulting from
the merger of The Chase Manhattan Corporation into Chemical Banking Corporation
on March 31, 1996. Chemical Banking Corporation was thereupon renamed The Chase
Manhattan Corporation. Also included among Chase's accounts are commingled trust
funds and a broad spectrum of individual trust and investment management
portfolios. These accounts have varying investment objectives.
CAM is a wholly-owned operating subsidiary of the Adviser. CAM is
registered with the Securities and Exchange Commission as an investment adviser
and was formed for the purpose of providing discretionary investment advisory
services to institutional clients and to consolidate Chase's investment
management function, and the same individuals who serve as portfolio managers
for CAM also serve as portfolio managers for Chase.
In consideration of the services provided by the Adviser pursuant to the
Advisory Agreement, the Adviser is entitled to receive from the Portfolio an
investment advisory fee computed daily and paid monthly based on a rate equal to
a percentage of the Portfolio's average daily net assets specified in Part A.
However, the Adviser may voluntarily agree to waive a portion of the fees
payable to it on a month-to-month basis. For its services under its sub-advisory
agreement, CAM will be entitled to receive such compensation, payable by the
Adviser out of its advisory fee, as is described in Part A.
For the fiscal period November 29, 1993 (commencement of operations)
through October 31, 1994 and the fiscal year ended October 31, 1995, Chase was
paid or accrued the following investment advisory fees with respect to the
Portfolio and voluntarily waived the amounts in parentheses following such fees
with respect to each such period:
Fiscal Period-Ended October 31,
------------------------------------------
1994 1995
------------------ -------------------
Fund payable waived payable waived
- ---- ---------- ------ ---------- ------
Growth and Income Portfolio $4,805,067 -- $6,815,197 --
Administrator
Pursuant to an Administration Agreement (the "Administration Agreement"),
Chase serves as administrator of the Portfolio. Chase provides certain
administrative services to the Portfolio, including, among other
responsibilities, coordinating the negotiation of contracts and fees with, and
the monitoring of performance and billing of, the Portfolio's independent
contractors and agents; preparation for signature by an officer of the Portfolio
of all documents required to be filed for compliance by the Portfolio with
applicable laws and regulations excluding those of the securities laws of
various states; arranging for the computation of performance data, including net
asset value and yield; responding to investor inquiries; and arranging for the
maintenance of books and records of the Portfolio and providing, at its own
expense, office facilities, equipment and personnel necessary to carry out its
duties. The administrator does not have any responsibility or authority for the
management of the Portfolio, the determination of investment policy, or for any
matter pertaining to the distribution of beneficial interests.
Under the Administration Agreement, Chase is permitted to render
administrative service to others. The Administrative Agreement will continue in
effect from year to year with respect to the Portfolio only if such continuance
is specifically approved at least annually by the Board of Trustees of the
Portfolio or by vote of a majority of the Portfolio's outstanding voting
securities and in either case, by a majority of the Trustees who are not parties
in the Administration Agreement or "interested persons" (as defined in the 1940
Act) of any such party. The Administration Agreement is terminable without
penalty by the Portfolio on 60 days' written notice when authorized either by a
majority vote of the Portfolio's investors or by vote of a majority of the Board
of Trustees, including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Portfolio, or by Chase on 60 days'
written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The Administration Agreement also
provides that neither Chase nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration of
the Portfolio except for willful misfeasance, bad faith or gross negligence in
the performance of its or their duties or by reason of reckless disregard of its
or their obligations and duties under the Administration Agreement.
B-22
<PAGE>
In addition, the Administration Agreement provides that, in the event the
operating expenses of the Portfolio, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for any
fiscal year exceed the most restrictive expense limitation applicable to the
Portfolio imposed by the securities laws or regulations thereunder of any state
in which the beneficial interests of the Portfolio are qualified for sale, as
such limitations may be raised or lowered from time to time, Chase shall reduce
its administration fee (which fee is described below) to the extent of its share
of such excess expenses. The amount of any such reduction to be borne by Chase
shall be deducted from the monthly administration fee otherwise payable to Chase
during such fiscal year; and if such amounts should exceed the monthly fee,
Chase shall pay to the Portfolio its share of such excess expenses no later than
the last day of the first month of the next succeeding fiscal year.
In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from the Portfolio a fee computed daily
and paid monthly at an annual rate equal to 0.05% of its average daily net
assets. Chase may voluntarily waive a portion of the fees payable to it with
respect to the Portfolio on a month-to-month basis.
For the fiscal period November 29, 1993 (commencement of operations)
through October 31, 1993 and the fiscal year ended October 31, 1995, Chase was
paid or accrued the following administration fees and voluntarily waived the
amounts in parentheses following such fees:
Fiscal Period-Ended October 31,
----------------------------------------------
1994 1995
--------------------- --------------------
Fund payable waived payable waived
- ---- --------- ------- --------- -------
Growth and Income Portfolio $600,633 -- $851,900 --
Transfer Agent and Custodian
The Portfolio has entered into a Transfer Agency Agreement with DST
Systems, Inc. ("DST") pursuant to which DST acts as transfer agent for the
Portfolio. DST's address is 210 West 10th Street, Kansas City, MO 64105.
Pursuant to a Custodian Agreement, Investors Bank and Trust Co. ("Investors
Bank") acts as the custodian of the assets of the Portfolio and receives such
compensation as is from time to time agreed upon by the Portfolio and Investors
Bank. As custodian, Investors Bank provides oversight and record keeping for the
assets held in the portfolios of the Portfolio. Investors Bank also provides
fund accounting services for the income, expenses and beneficial interests
outstanding for the Portfolio. Investors Bank is located at One First Canadian
Place, Toronto, Canada, M5X 1C8.
B-23
<PAGE>
Independent Accountants
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
independent accountants of the Portfolio, provides the Portfolio with audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
Counsel
Counsel to the Portfolio is Simpson Thacher & Bartlett, 425 Lexington
Avenue, New York, NY 10017.
Hong Kong Representative
The Hong Kong Representative of the Portfolio is The Chase Manhattan Bank,
N.A.-Hong Kong branch, World Trade Center, 280 Gloucester Road, Causeway Bay,
Hong Kong. Copies of this Registration Statement, including exhibits, may be
inspected free of charge at the office of the Hong Kong Representative.
Item 17. Brokerage Allocation and Other Practices.
- ---------------------------------------------------
Specific decisions to purchase or sell securities for the Portfolio are
made by a portfolio manager who is an employee of the Adviser or Sub-advisor and
who is appointed and supervised by senior officers of the Adviser or
Sub-advisor. Changes in the Portfolio's investments are reviewed by the Board of
Trustees. The portfolio manager may serve other clients of the advisers in a
similar capacity.
The frequency of portfolio transactions--the portfolio turnover rate--will
vary from year to year depending upon market conditions. Because a high turnover
rate may increase transaction costs and the possibility of taxable short-term
gains, the advisers will weigh the added costs of short-term investment against
anticipated gains. The Portfolio will engage in portfolio trading if its
advisers believe a transaction, net of costs (including custodian charges), will
help it achieve its investment objectives. For the period November 29, 1993
through October 31, 1994 and the fiscal year ended October 31, 1995 the
Portfolio's portfolio turnover rate was 57% and 71%, respectively.
Under the Advisory Agreement and the sub-advisory agreement, the Adviser
and Sub-adviser shall use their best efforts to seek to execute portfolio
transactions at prices which, under the circumstances, result in total costs or
proceeds being the most favorable to the Portfolio. In assessing the best
overall terms available for any transaction, the Adviser and Sub-adviser
consider all factors they deem relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer, research services provided to the Adviser or
Sub-adviser, and the reasonableness of the commissions, if any, both for the
specific transaction and on a continuing basis. The Adviser and Sub-adviser are
not required to obtain the lowest commission or the best net price for the
Portfolio on any particular transaction, and are not required to execute any
order in a fashion either preferential to the Portfolio relative to other
accounts they manage or otherwise materially adverse to such other accounts.
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser or
Sub-adviser to the Portfolio normally seeks to deal directly with the primary
market makers unless, in its opinion, best execution is available elsewhere. In
the case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the Adviser or Sub-adviser on the
tender of the Portfolio's portfolio securities
B-24
<PAGE>
in so-called tender or exchange offers. Such soliciting dealer fees are in
effect recaptured for the Portfolio by the Adviser and Sub-adviser. At present,
no other recapture arrangements are in effect.
Under the advisory and sub-advisory agreements and as permitted by Section
28(e) of the Securities Exchange Act of 1934, the Adviser or Sub-adviser may
cause the Portfolio to pay a broker-dealer which provides brokerage and research
services to the Adviser or Sub-adviser, the Portfolio and/or other accounts for
which they exercise investment discretion an amount of commission for effecting
a securities transaction for the Portfolio in excess of the amount other
broker-dealers would have charged for the transaction if they determine in good
faith that the greater commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer viewed
in terms of either a particular transaction or their overall responsibilities to
accounts over which they exercise investment discretion. Not all of such
services are useful or of value in advising the Portfolio. The Adviser and
Sub-adviser report to the Board of Trustees regarding overall commissions paid
by the Portfolio and their reasonableness in relation to the benefits to the
Portfolio. The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
The management fees that the Portfolio pays to the Adviser will not be
reduced as a consequence of the Adviser's or Sub-adviser's receipt of brokerage
and research services. To the extent the Portfolio's portfolio transactions are
used to obtain such services, the brokerage commissions paid by the Portfolio
will exceed those that might otherwise be paid by an amount which cannot be
presently determined. Such services generally would be useful and of value to
the Adviser or Sub-adviser in serving one or more of their other clients and,
conversely, such services obtained by the placement of brokerage business of
other clients generally would be useful to the Adviser and Sub-adviser in
carrying out their obligations to the Portfolio. While such services are not
expected to reduce the expenses of the Adviser or Sub-adviser, they would,
through use of the services, avoid the additional expenses which would be
incurred if they should attempt to develop comparable information through their
own staffs.
In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Adviser's or Sub-adviser's other
clients. Investment decisions for the Portfolio and for other clients are made
with a view to achieving their respective investment objectives. It may develop
that the same investment decision is made for more than one client or that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When the Portfolio and one or more other clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Portfolio is
concerned. However, it is believed that the ability of the Portfolio to
participate in volume transactions will generally produce better executions for
the Portfolio.
For the period November 29, 1993 through October 31, 1994 and the fiscal
year ended October 31, 1995 the Portfolio paid brokerage commissions of
$1,515,504 and $2,352,596 respectively.
B-25
<PAGE>
No portfolio transactions are executed with the Adviser, or with any
affiliate of the Adviser, acting either as principal or as broker. Similarly, no
securities transactions are executed with any person or entity which directly or
indirectly controls a beneficial interest in the Portfolio equal to 20% or more
of the net asset value of the Portfolio.
Item 18. Capital Stock and Other Securities.
- ---------------------------------------------
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees of the Portfolio if they
choose to do so and in such event the other investors in the Portfolio would not
be able to elect any Trustee. The Portfolio is not required to hold annual
meetings of investors but the Portfolio will hold special meetings of investors
when in the judgment of the Portfolio's Trustees it is necessary or desirable to
submit matters for an investor vote. No material amendment may be made to the
Portfolio's Declaration of Trust without the affirmative majority vote of
investors (with the vote of each being in proportion to the amount of its
investment).
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two-thirds of its
investors (with the vote of each being in proportion to the amount of their
investment), except that if the Trustees of the Portfolio recommend such sale of
assets, the approval by vote of a majority of the investors (with the vote of
each being in proportion to the amount of its investment) will be sufficient.
The Portfolio may also be terminated (i) upon liquidation and distribution of
its assets, if approved by the vote of two-thirds of its investors (with the
vote of each being in proportion to the amount of its investment), or (ii) by
the Trustees of the Portfolio by written notice to its investors.
The Portfolio is organized as a trust under the laws of the State of New
York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the Portfolio
are not binding upon the Trustees individually but only upon the property of the
Portfolio and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. The Declaration of Trust
B-26
<PAGE>
provides that the trustees and officers will be indemnified by the Portfolio
against liabilities and expenses incurred in connection with litigation in which
they may be involved because of their offices with the Portfolio, unless, as to
liability to the Portfolio or its investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect to any
other matter it is finally adjudicated that they did not act in good faith in
the reasonable belief that their actions were in the best interests of the
Portfolio. In the case of settlement, such indemnification will not be provided
unless it has been determined by a court or other body approving the settlement
or other disposition, or by a reasonable determination, based upon a review of
readily available facts, by vote of a majority of disinterested Trustees or in a
written opinion of independent counsel, that such officers or Trustees have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
The Portfolio will continue in existence until 20 years after the death of
the last survivor of certain specified individuals listed in its Declaration of
Trust unless it is terminated or dissolved earlier in accordance with the
provisions of that Declaration.
The Portfolio will furnish to each of its investors at least annually as of
the end of its fiscal year a report of operations containing a balance sheet and
a statement of income prepared in conformity with generally accepted accounting
principles and an opinion of an independent public accountant on such financial
statements. The Portfolio will also furnish to each of its investors at least
semiannually an interim report of operations containing an unaudited balance
sheet and an unaudited statement of income.
Item 19. Purchase, Redemption and Pricing of Securities Being Offered.
- -----------------------------------------------------------------------
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See "Purchase of Securities" and
"Redemption or Repurchase" in Part A.
The Portfolio's portfolio securities and other assets are valued as
follows:
Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or on the NASDAQ system for unlisted national
market issues, or at the last quoted bid price for securities in which there
were no sales during the day or for unlisted securities not reported on the
NASDAQ system. Bonds and other fixed income securities (other than short-term
obligations, but including listed issues) are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the Board
of Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques that take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-- counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities.
Short-term obligations which mature in 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Futures and option contracts that are traded on commodities or securities
exchanges are normally valued at the settlement price on the exchange on which
they are traded. Portfolio securities (other than short-term obligations) for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
B-27
<PAGE>
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income on short-term obligations is determined on the basis
of interest and discount accrued less amortization of premium.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day that the New York Stock Exchange is open for business. As
of the close of regular trading on the New York Stock Exchange on each such day
(normally 4:00 p.m. Eastern time; however, options are priced at 4:15 p.m.,
Eastern time), the value of each investor's interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the percentage
representing that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or reductions which are to be effected on that day will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio as of the close of regular trading on such day plus
or minus, as the case may be, the amount of net additions to or reductions in
the investor's investment in the Portfolio effected on such day and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of regular trading on such day plus or minus, as the case may be, the
amount of net additions to or reductions in the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of the close of regular trading on the following day the New York
Stock Exchange is open for trading.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in readily marketable securities chosen by the Portfolio and
valued as they are for purposes of computing the Portfolio's net asset value (a
redemption in kind). If payment is made in securities, an investor may incur
transaction expenses in converting these securities into cash.
The Portfolio will not redeem in kind except in circumstances in which the
owner of a beneficial interest in the Portfolio is permitted to redeem in kind
or unless requested by such owner.
Item 20. Tax Status.
- ---------------------
The Portfolio will be classified for federal income tax purposes as a
partnership that will not be a "publicly traded partnership." As a result, the
Portfolio will not be subject to federal income taxation. Instead, the investors
in the Portfolio will take into account, in computing their federal income tax
liability, their share of the Portfolio's income, gains, losses, deductions,
credits and tax preference items for the taxable year of the Portfolio ending
within or with the taxable year of the investor, without regard to whether they
have received any cash distributions from the Portfolio. The Portfolio's taxable
year end is October 31. The Portfolio is organized as a New York trust. The
Portfolio is not subject to any income or franchise tax in the State of New
York.
Under interpretations of the Internal Revenue Service, for purposes of
determining whether an investor in a Portfolio satisfies the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") the
investor will be deemed to own a proportionate share of the Portfolio's assets
and will be deemed to be entitled to the Portfolio's income attributable to that
share. The Portfolio intends to conduct its operations so as to enable investors
to satisfy those requirements.
Distributions received by investors in the Portfolio generally will not
result in the investor's recognizing any gain or loss for federal income tax
purposes, except that (1) gain will be recognized to the extent that any cash
distributed exceeds the investor's basis in its interest in the Portfolio prior
to the distribution, (2) income or gain may be recognized if the
B-28
<PAGE>
distribution is made in liquidation of the investor's entire interest in the
Portfolio and includes a disproportionate share of any unrealized receivables
held by the Portfolio, (3) loss may be recognized if the distribution is made in
liquidation of the investor's entire interest in the Portfolio and consists
solely of cash and/or unrealized receivables and the investor's share of the
Portfolio's losses, and (4) gain or loss may be recognized on a distribution to
an investor that contributed property to the Portfolio. The investor's basis in
its interest in the Portfolio generally will equal the amount of cash and the
basis of any property which the investor invests in the Portfolio, increased by
the investor's share of net income and gains from the Portfolio, and decreased
by the amount of any cash distributions and the basis of any property
distributed from the Portfolio.
The foregoing is intended to be a general summary of certain United States
federal income tax considerations affecting the Portfolio and its investors.
Accordingly, investors are advised to consult their own tax advisers with
respect to the particular federal, state, local and foreign tax consequences of
an investment in the Portfolio.
Item 21. Underwriters.
- ----------------------
Not applicable.
Item 22. Calculation of Performance Data.
- ------------------------------------------
Not applicable.
Item 23. Financial Statements.
- -------------------------------
Audited financial statements and reports thereon are incorporated herein by
reference from the Portfolio's Annual Report to Shareholders for the fiscal year
ended October 31, 1995 as filed with Securities and Exchange commission by
Mutual Fund Group via Edgar on Form N-30D on December 29, 1995, accession
number: 000095 0123-95-003915.
B-29
<PAGE>
APPENDIX A
----------
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
-----------------------------
Federal Farm Credit System Notes and Bonds -- are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
Maritime Administration Bonds -- are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FNMA Bonds -- are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA Debentures -- are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S. Government.
FHA Insured Notes -- are bonds issued by the Farmers Home Administration,
the U.S. Government and are guaranteed by the U.S. Government.
GNMA Certificates -- are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees Paid to GNMA and
the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or FHA-insured
mortgages underlying the Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures may result in the return of the greater part of principal invested
far in advance of the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee. As the prepayment
rate of individual mortgage pools will vary widely, it is not possible to
accurately predict the average life of a particular issue of GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates. Principal which is so prepaid will be reinvested although possibly
at a lower rate. In addition, prepayment of mortgages included in the mortgage
pool underlying a GNMA Certificate purchased at a premium could result in a loss
to the Portfolio. Due to the large amount of GNMA Certificates outstanding and
active participation in the secondary market by securities dealers and
investors, GNMA Certificates are highly liquid instruments. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate. If
agency securities are purchased at a premium above principal, the premium is not
guaranteed by the issuing agency and a decline in the market value to par may
result in a loss of the premium, which may be particularly likely in the event
of a prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.
B-30
<PAGE>
GNMA FHLMC Bonds and GNMA FNMA Bonds -- are mortgage-backed bonds issued by
the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. Government.
GSA Participation Certificates -- are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed by
the U.S. Government.
New Communities Debentures -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
Public Housing Bonds -- are bonds issued by public housing and urban
renewal agencies in connection with programs administered by the Department of
Housing and Urban Development of the U.S. Government, the payment of which is
secured by the U.S. Government.
Penn Central Transportation Certificates -- are certificates issued by Penn
Central Transportation and guaranteed by the U.S. Government.
SBA Debentures -- are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
Washington Metropolitan Area Transit Authority Bonds -- are bonds issued by
the Washington Metropolitan Area Transit Authority and are guaranteed by the
U.S. Government.
FHLMC Bonds -- are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds -- are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
Student Loan Marketing Association ("Sallie Mae") Notes and bonds --are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. Armory Board Bonds -- are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
Export-Import Bank Certificates -- are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.
B-31
<PAGE>
APPENDIX B
----------
DESCRIPTION OF RATINGS
----------------------
A description of the rating policies of Moody's, S&P and Fitch with respect
to bonds and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and
carry the smallest degree of investment risk. 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 qualities
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative
in high degree.
Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers "1", "2", and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2"
B-32
<PAGE>
indicates a mid-range ranking; and the modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Group Corporate Bond Ratings
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being paid.
D--Bonds rated "D" are in default. The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often 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, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
B-33
<PAGE>
Prime-3--Issuers (or related supporting institutions) rated "Prime-3" have
an acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
Standard & Poor's Ratings Group Commercial Paper Ratings
A S&P commercial paper rating is current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded in several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3--Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the bigger designations.
B--Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
Fitch Bond Ratings
AAA--Bonds rated AAA by Fitch are 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.
AA--Bonds rated AA by Fitch are 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+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and
B-34
<PAGE>
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
consequences 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.
Plus and minus signs are used by Fitch to indicate the relative position of
a credit within a rating category. Plus and minus signs, however, are not used
in the AAA category.
Fitch Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch's short-term ratings are as follows:
F-1+--Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of assurance
for timely payment but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, although near-term adverse
changes could cause these securities to be rated below investment grade.
LOC--The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest. However,
such bonds may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.
After purchase by the Portfolio, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio. However,
the Portfolio's investment manager will consider such event in its determination
of whether the Portfolio should continue to hold the security. To the extent the
ratings given by Moody's, S&P or Fitch may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained Part A and Part B.
B-35
<PAGE>
PART C
Item 24. Financial Statements and Exhibits.
- --------------------------------------------
(a) Financial Statements Included in Part A:
Not applicable
Financial Statements Included in Part B:
Audited financial statements and reports thereon are
incorporated herein by reference from the Portfolio's Annual
Report to Shareholders for the fiscal year ended October 31,
1995 as filed with Securities and Exchange commission by
Mutual Fund Group via Edgar on Form N-30D on December 29,
1995, accession number: 000095 0123-95-003915.
Financial Statements Included in Part C:
None.
(b) Exhibits:
1 Declaration of Trust.(1)
2 By-Laws.(1)
5(a) Form of Investment Advisory Agreement.(3)
(b) Form of Investment Sub-Advisory Agreement.(3)
8 Custodian Agreement.(2)
9 Administration Agreement.(2)
(1) Filed as Exhibit to Registrant's Registration Statement on Form N-1A on
October 19, 1993.
(2) Filed as Exhibit to Registrant's Registration Statement on Form N-1A on
February 28, 1994.
(3) Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant.
- ------------------------------------------------------------------------
Not applicable
Item 26. Number of Holders of Securities.
- ------------------------------------------
Number of Record Holders
Title of Class as of April 30, 1996
-------------- ------------------------
Beneficial Interests 3
Item 27. Indemnification.
- --------------------------
Reference is hereby made to Article V of the Registrant's Declaration of
Trust.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and administrator are insured under an errors
and omissions liability insurance policy. The Registrant and its officers are
C-1
<PAGE>
also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940.
Item 28. Business and Other Connections of Investment Adviser.
- ---------------------------------------------------------------
The Chase Manhattan Bank, N.A. (the "Adviser") is a commercial bank
providing a wide range of banking and investment services.
To the knowledge of the Registrant, none of the directors or executive
officers of the Adviser, except those described below, are or have been, at any
time during the past two years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain directors
and executive officers of the Adviser also hold or have held various positions
with bank and non-bank affiliates of the Adviser, including its parent, The
Chase Manhattan Corporation. Each director listed below is also a director of
The Chase Manhattan Corporation.
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with the Employment of a Substantial
Name Adviser Nature During the Past Two Years
- -------------------- ----------------------- ---------------------------------
<S> <C> <C>
Thomas G. Labreque Chairman of the Chairman, Chief Executive
Board, Chief Officer and a Director of The
Executive Officer Chase Manhattan Corporation and
and Director a Director of AMAX, Inc.
Arthur F. Ryan President, Chief President, Chief Operating
Operating Officer Officer, and a Director of The
and Director Chase Manhattan Corporation
Richard J. Boyle Vice Chairman of the Vice Chairman of the Board and a
Board and Director Director of The Chase Manhattan
Corporation and a Trustee of
Prudential Realty Trust
Robert R. Douglass Vice Chairman of the Vice Chairman of the Board and
Board and Director a Director of The Chase
Manhattan Corporation and
Trustee of HRE Properties
Joan Ganz Cooney Director Chairman of the Executive
Committee of the Board of
Trustees, formerly Chief
Executive Officer, of Children's
Television Workshop and a
Director of each of Johnson &
Johnson, Metropolitan Life
Insurance Company and Xerox
Corporation
Edward S. Finkelstein Director Retired Chairman and Chief
Executive Officer and Director
of R. H. Macy & Co., Inc.; and a
Director of Time Warner Inc.
H. Laurance Fuller Director Chairman, President, Chief
Executive Officer and Director
of Amoco Corporation and
Director of Abbott Laboratories
Howard C. Kauffman Director Retired President of Exxon
Corporation and a Director of
each of Pfizer Inc. and Ryder
System, Inc.
Paul W. MacAvoy Director Dean of the Yale School of
Organization and Management
C-2
<PAGE>
Principal Occupation or Other
Position with the Employment of a Substantial
Name Adviser Nature During the Past Two Years
- -------------------- ----------------------- ---------------------------------
David T. McLaughlin Director President and Chief Executive
Officer of The Aspen Institute,
Chairman of Standard Fuse
Corporation and a Director of
each of ARCO Chemical Company
and Westinghouse Electric
Corporation
Edmund T. Pratt, Jr. Director Chairman Emeritus, formerly
Chairman and Chief Executive
Officer, of Pfizer Inc. and a
Director of each of Pfizer Inc.,
Celgene Corp., General Motors
Corporation and International
Paper Company
Henry B. Schacht Director Chairman and Chief Executive
Officer of Cummins Engine
Company, Inc. and a Director of
each of American Telephone and
Telegraph Company and CBS Inc.
A. Alfred Taubman Director Chairman and Director, formerly
also Chief Executive Officer, of
The Taubman Company, Inc.,
majority shareholder and
chairman of Sotheby's Holdings,
Inc., owner of Woodward &
Lothrop, Inc. and its
subsidiary, John Wanamaker, and
Chairman of A&W Restaurants,
Inc. and a Director of
R.H. Macy & Co., Inc.
Donald H. Trautlein Director Retired Chairman and Chief
Executive Officer of Bethlehem
Steel Corporation and a Director
of each of Data General
Corporation and Phoenix Re
Corporation
Kay R. Whitmore Director Chairman of the Board,
President and Chief Executive
Officer and Director of Eastman
Kodak Company
</TABLE>
Item 29. Principal Underwriters.
- ---------------------------------
Not applicable
Item 30. Location of Accounts and Records.
- -------------------------------------------
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Name Address
---- -------
DST Systems, Inc. 210 W. 10th Street
(transfer agent) Kansas City, MO 64105
The Chase Manhattan Bank, N.A. 1211 Avenue of the Americas
(investment adviser and administrator) New York, New York 10036
C-3
<PAGE>
Signature Broker-Dealer Services, Inc. 6 St. James Avenue, Suite 900
(exclusive placement agent) Boston, MA 02116
Investors Bank & Trust Co. One First Canadian Place
(custodian) Toronto, Canada M5X 1C8
Item 31. Management Services.
- ------------------------------
Not applicable
Item 32. Undertakings.
- -----------------------
Not applicable
C-4
<PAGE>
SIGNATURES
Growth and Income Portfolio has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York on the 6th day of May 1996.
GROWTH AND INCOME PORTFOLIO
By /s/ H. Richard Vartabedian
--------------------------------
H. Richard Vartabedian, Chairman
This amendment to the Registration Statement on Form N-1A of Growth and
Income Portfolio has been signed below by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ H. Richard Vartabedian Chairman and Trustee May 6 , 1996
- --------------------------
H. Richard Vartabedian
/s/ Stuart W. Cragin, Jr. Trustee May 6, 1996
- --------------------------
Stuart W. Cragin, Jr.
/s/ Fergus Reid, III Trustee May 6, 1996
- --------------------------
Fergus Reid, III
/s/ Irv Thode Trustee May 6, 1996
- --------------------------
Irv Thode
/s/ Joseph J. Harkins Trustee May 6, 1996
- --------------------------
Joseph J. Harkins
/s/ William J. Armstrong Trustee May 6, 1996
- --------------------------
William J. Armstrong
/s/ Richard E. Ten Haken Trustee May 6, 1996
- --------------------------
Richard E. Ten Haken
/s/ John R. H. Blum Trustee May 6, 1996
- --------------------------
John R. H. Blum
- --------------------------
W. Perry Neff Trustee May 6, 1996
- --------------------------
Roland R. Eppley, Jr. Trustee May 6, 1996
- --------------------------
W. D. MacCallan Trustee May 6, 1996
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NUMBER
- --------------
5(a) Form of Investment Advisory Agreement.
5(b) Form of Investment Sub-Advisory Agreement.
FORM OF INVESTMENT ADVISORY AGREEMENT
BETWEEN
GROWTH AND INCOME PORTFOLIO
AND
THE CHASE MANHATTAN BANK, N.A.
AND ITS SUCCESSOR
AGREEMENT made this 6th day of May, 1996, by and between Growth and
Income Portfolio, a New York business trust (hereinafter the "Trust"), and The
Chase Manhattan Bank, N.A., a national banking association, and its successor,
The Chase Manhattan Bank, a New York State chartered bank (hereinafter the
"Adviser").
WHEREAS, the Trust is registered as an open-end, non-diversified
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Trust desires to retain the Adviser to furnish investment
advisory services to the Trust, and the Adviser represents that it is willing
and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Delivery of Documents. The Trust has delivered to the Adviser
copies of each of the following documents and will deliver to
it all future amendments and supplements thereto, if any:
(a) The Trust's Declaration of Trust;
(b) The By-Laws of the Trust;
(c) Resolutions of the Board of Trustees of the Trust authorizing
the execution and delivery of this Agreement;
(d) The Trust's Registration Statement under the Investment
Company Act of 1940, as amended (the "1940 Act"), on Form N-1A
as filed with the Securities and Exchange Commission (the
"Commission") on October 19, 1993 and all subsequent
amendments thereto relating to the Trust (the "Registration
Statement");
-1-
<PAGE>
(e) Notification of Registration of the Trust under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) The Prospectus and Statement of Additional Information of the
Trust (the "Prospectus").
2. Appointment.
(a) General. The Trust hereby appoints the Adviser to act as
investment adviser for the period and on the terms set forth
in this Agreement. The Adviser accepts such appointment and
agrees to furnish the services herein set forth for the
compensation herein provided.
(b) Employees of Affiliates. The Adviser may, in its discretion,
provide such services through its own employees or the
employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Trust under
applicable laws and are under the control of The Chase
Manhattan Corporation, the parent of the Adviser; provided
that (i) all persons, when providing services hereunder, are
functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by
authorized officers of the Adviser.
(c) Sub-Advisers. It is understood and agreed that the Adviser may
from time to time employ or associate with such other entities
or persons as the Adviser believes appropriate to assist in
the performance of this Agreement with respect to the Trust
(each a "Sub-Adviser"), and that any such Sub-Adviser shall
have all of the rights and powers of the Adviser set forth in
this Agreement; provided that the Trust shall not pay any
additional compensation for any Sub-Adviser and the Adviser
shall be as fully responsible to the Trust for the acts and
omissions of the Sub-Adviser as it is for its own acts and
omissions; and provided further that the retention of any
Sub-Adviser shall be approved in advance by (i) the Board of
Trustees of the Trust and (ii) the shareholders of the Trust
if required under any applicable provisions of the 1940 Act.
The Adviser will review, monitor and report to the Trust's
Board of Trustees regarding the performance and investment
procedures of any Sub-Adviser. In the event that the services
of any Sub-Adviser are terminated, the Adviser may provide
investment advisory services pursuant to this Agreement to the
Trust without a Sub-Adviser and without further shareholder
approval, to the extent consistent with the 1940 Act. A
Sub-Adviser may be an affiliate of the Adviser.
3. Investment Advisory Services.
(a) Management of the Trust. The Adviser hereby undertakes to act
as investment adviser to the Trust. The Adviser shall
regularly provide investment advice to the
-2-
<PAGE>
Trust and continuously supervise the investment and
reinvestment of cash, securities and other property composing
the assets of the Trust and, in furtherance thereof, shall:
(i) supervise all aspects of the operations of the Trust;
(ii) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the economy
generally, the Trust's investment programs, and the
issuers of securities included in the Trust's
portfolio and the industries in which they engage, or
which may relate to securities or other investments
which the Adviser may deem desirable for inclusion in
the Trust's portfolio;
(iii) determine which issuers and securities shall be
included in the portfolio of the Trust;
(iv) furnish a continuous investment program for the
Trust;
(v) in its discretion and without prior consultation with
the Trust, buy, sell, lend and otherwise trade any
stocks, bonds and other securities and investment
instruments on behalf of the Trust; and
(vi) take, on behalf of the Trust, all actions the Adviser
may deem necessary in order to carry into effect such
investment program and the Adviser's functions as
provided above, including the making of appropriate
periodic reports to the Trust's Board of Trustees.
(b) Covenants. The Adviser shall carry out its investment advisory
and supervisory responsibilities in a manner consistent with
the investment objectives, policies, and restrictions provided
in: (i) the Prospectus as revised and in effect from time to
time; (ii) the Trust's declaration of Trust Instrument,
By-Laws or other governing instruments, as amended from time
to time; (iii) the 1940 Act; (iv) other applicable laws; and
(v) such other investment policies, procedures and/or
limitations as may be adopted by the Trust and provided to the
Adviser in writing. The Adviser agrees to use reasonable
efforts to manage the Trust so that it will qualify, and
continue to qualify, as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended,
and regulations issued thereunder (the "Code"), except as may
be authorized to the contrary by the Trust's Board of
Trustees. The management of the Trust by the Adviser shall at
all times be subject to the review of the Trust's Board of
Trustees.
(c) Books and Records. The Adviser shall keep the Trust's books
and records required by applicable law to be maintained by the
Trust with respect to advisory
-3-
<PAGE>
services. The Adviser agrees that all records which it
maintains for the Trust are the property of the Trust and it
will promptly surrender any of such records to the Trust upon
the Trust's request. The Adviser further agrees to preserve
for the periods prescribed by the 1940 Act any such records of
the Trust required to be preserved by such Rule.
(d) Reports, Evaluations and other services. The Adviser shall
furnish reports, evaluations, information or analyses to the
Trust and in connection with the Adviser's services hereunder
as the Trust's Board of Trustees may request from time to time
or as the Adviser may otherwise deem to be desirable. The
Adviser shall make recommendations to the Trust's Board of
Trustees with respect to Trust policies, and shall carry out
such policies as are adopted by the Board of Trustees. The
Adviser shall, subject to review by the Board of Trustees,
furnish such other services as the Adviser shall from time to
time determine to be necessary or useful to perform its
obligations under this Agreement.
(e) Purchase and Sale of Securities. The Adviser shall place all
orders for the purchase and sale of portfolio securities for
the Trust with brokers or dealers selected by the Adviser,
which may include brokers or dealers affiliated with the
Adviser to the extent permitted by the 1940 Act and the
Trust's policies and procedures. The Adviser shall use its
best efforts to seek to execute portfolio transactions at
prices which, under the circumstances, result in total costs
or proceeds being the most favorable to the Trust. In
assessing the best overall 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 or dealer, research
services provided to the Adviser, and the reasonableness of
the commission, if any, both for the specific transaction and
on a continuing basis. In no event shall the Adviser be under
any duty to obtain the lowest commission or the best net price
for the Trust on any particular transaction, nor shall the
Adviser be under any duty to execute any order in a fashion
either preferential to the Trust Fund relative to other
accounts managed by the Adviser or otherwise materially
adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Adviser, the
Trust and/or the other accounts over which the Adviser
exercises investment discretion. The Adviser is authorized to
pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio
transaction for the Trust which is in excess of the amount of
commission another broker or dealer would have charged for
effecting that transaction if the Adviser determines in good
faith
-4-
<PAGE>
that the total commission is reasonable in relation to the
value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular
transaction or the overall responsibilities of the Adviser
with respect to accounts over which it exercises investment
discretion. The Adviser shall report to the Board of Trustees
of the Trust regarding overall commissions paid by the Trust
and their reasonableness in relation to the benefits to the
Trust.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for the Trust, the Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of its other clients if, in the Adviser's
reasonable judgment, such aggregation (i) will result in an
overall economic benefit to the Trust, taking into
consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies
set forth in the Trust's Prospectus. In such event, the
Adviser will allocate the securities so purchased or sold, and
the expenses incurred in the transaction, in an equitable
manner, consistent with its fiduciary obligations to the Trust
and such other clients.
4. Expenses. (a) The Adviser shall, at its expense, provide the Trust
with office space, furnishings and equipment and personnel required by it to
perform the services to be provided by the Adviser pursuant to this Agreement.
The Adviser also hereby agrees that it will supply to any sub-adviser or
administrator (the "Administrator") of the Trust all necessary financial
information in connection with the Administrator's duties under any Agreement
between the Administrator and the Trust.
(b) Except as provided in subparagraph (a), the Trust shall be
responsible for all its expenses and liabilities, including, but not limited to,
taxes; interest; fees (including fees paid to its trustees who are not
affiliated with the Adviser or any of its affiliates); fees payable to the
Securities and Exchange Commission; state securities qualification fees, if any;
association membership dues; costs of preparing and printing Prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian and transfer agent; insurance
premiums; auditing and legal expenses; costs of shareholders' reports and
shareholders' meetings; any extraordinary expenses; and brokerage fees and
commissions, if any, in connection with the purchase or sale of portfolio
securities.
5. Compensation. (a) In consideration of the services to be rendered by
the Adviser under this Agreement, the Trust shall pay the Adviser monthly fees
on the first Business Day (as defined in the Prospectus) of each month based
upon the average daily net assets of the Trust during the preceding month (as
determined on the days and at the time set forth in the Prospectus for
determining net asset value per share) at the annual rate of 0.40%. If the fees
payable to the Adviser pursuant to this paragraph begin to accrue before the end
of any month or if this Agreement terminates before the end of any month, the
fees for the period from such date to the
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<PAGE>
end of such month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the proportion
which such period bears to the full month in which such effectiveness or
termination occurs. For purposes of calculating each such monthly fee, the value
of the Trust's net assets shall be computed in the manner specified in the
Prospectus for the computation of the value of the Trust's net assets in
connection with the determination of the net asset value of the shares of
beneficial interest.
(b) If the aggregate expenses incurred by, or allocated to, the Trust
in any fiscal year shall exceed the lowest expense limitation, if applicable to
the Trust, imposed by state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Adviser shall reduce
its investment advisory fee, but not below zero, to the extent of its share of
such excess expenses; provided, however, there shall be excluded from such
expenses the amount of any interest, taxes, brokerage commissions and
extraordinary expenses (including but not limited to legal claims and
liabilities and litigation costs and any indemnification related thereto) paid
or payable by the Trust. Such reduction, if any, shall be computed and accrued
daily, shall be settled on a monthly basis and shall be based upon the expense
limitation applicable to the Trust as at the end of the last business day of the
month. Should two or more of such expense limitations be applicable at the end
of the last business day of the month, that expense limitation which results in
the largest reduction in the Adviser's fee shall be applicable. For the purposes
of this paragraph, the Adviser's share of any excess expenses shall be computed
by multiplying such excess expenses by a fraction, the numerator of which is the
amount of the investment advisory fee which would otherwise be payable to the
Adviser for such fiscal year were it not for this subsection 6(b) and the
denominator of which is the sum of all investment advisory and administrative
fees which would otherwise be payable by the Trust were it not for the expense
limitation provisions of any investment advisory or administrative agreement to
which the Trust is a party.
(c) In consideration of the Adviser's undertaking to render the
services described in this Agreement, the Trust agrees that the Adviser shall
not be liable under this Agreement for any error of judgment or mistake of law
or for any act or omission or loss suffered by the Trust in connection with the
performance of this Agreement, provided that nothing in this Agreement shall be
deemed to protect or purport to protect the Investment Adviser against any
liability to the Trust or its stockholders to which the Adviser would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of the Adviser's duties under this Agreement or by reason of the
Adviser's reckless disregard of its obligations and duties hereunder or breach
of fiduciary duty with respect to receipt of compensation.
6. Non-Exclusive Services. Except to the extent necessary to perform
the Investment Adviser's obligations under this Agreement, nothing herein shall
be deemed to limit or restrict the right of the Adviser, or any affiliate of the
Adviser, including any employee of the Adviser, to engage in any other business
or to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other corporation, firm, individual or association.
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<PAGE>
7. Effective Date; Modifications; Termination. This Agreement shall
become effective on the date hereof (the "Effective Date"), provided that it
shall have been approved by a majority of the outstanding voting securities of
the Trust, in accordance with the requirements of the 1940 Act, or such later
date as may be agreed by the parties following such shareholder approval.
(a) Subject to prior termination as provided in sub-paragraph (d) of
this paragraph, this Agreement shall continue in force for two years from the
date hereof and shall continue in effect from year to year thereafter, but only
so long as the continuance after such date shall be specifically approved at
least annually by vote of the Trustees of the Trust or by vote of a majority of
the outstanding voting securities of the Trust.
(b) This Agreement may be modified by mutual consent, such consent on
the part of the Trust to be authorized by vote of a majority of the outstanding
voting securities of the Trust.
(c) In addition to the requirements of sub-paragraphs (a) and (b) of
this paragraph, the terms of any continuance or modification of this Agreement
must have been approved by the vote of a majority of those Trustees of the Trust
who are not parties to this Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
(d) Either party hereto may, at any time on sixty (60) days prior
written notice to the other, terminate this Agreement, without payment of any
penalty, by action of its Trustees or Board of Trustees, as the case may be, or
by action of its authorized officers or by vote of a majority of the outstanding
voting securities of the Trust. This Agreement shall terminate automatically in
the event of its assignment as that term is defined under the 1940 Act.
8. Board of Trustees Meetings. The Trust agrees that notice of each
meeting of the Board of Trustees of the Trust will be sent to the Adviser and
that the Trust will make appropriate arrangements for the attendance (as persons
present by invitation) of such person or persons as the Adviser may designate.
9. Governing Law. This Agreement shall be governed by the laws of the
State of New York.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, and their
respective seals to be hereunto affixed, all as of the date written above.
THE CHASE MANHATTAN BANK, N.A. GROWTH AND INCOME PORTFOLIO
By: ______________________________ By:___________________________________
Name: Name:
Title: Title:
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FORM OF INVESTMENT SUBADVISORY AGREEMENT
between
THE CHASE MANHATTAN BANK, N.A.
and
CHASE ASSET MANAGEMENT, INC.
AGREEMENT made this 6th day of May, 1996, by and between The Chase
Manhattan Bank, a New York State chartered bank (the "Adviser"), and Chase Asset
Management, Inc., a Delaware Corporation (the "Sub-Adviser").
WHEREAS, the Adviser provides investment advisory services to the
Growth and Income Portfolio, a New York business trust (the "Trust"), which is
registered as an open-end, non-diversified, management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), pursuant to an
Investment Advisory Agreement dated May 6, 1996 (the "Advisory Agreement"); and
WHEREAS, the Sub-Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment subadvisory services in connection with the Trust and the Sub-Adviser
represents that it is willing and possesses legal authority to so furnish such
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) General. The Adviser hereby appoints the Sub-Adviser to act as
investment subadviser to the Trust for the period and on the
terms set forth in this Agreement. The Sub-Adviser accepts
such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) Employees of Affiliates. The Sub-Adviser may, in its
discretion, provide such services through its own employees or
the employees of one or more affiliated companies that are
qualified to act as an investment subadviser to the Trust
under applicable laws and are under the control of The Chase
Manhattan Corporation, the indirect parent of the Sub-Adviser;
provided that (i) all persons, when providing services
hereunder, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed
at all times by authorized officers of the Sub-Adviser.
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<PAGE>
2. Delivery of Documents. The Adviser has delivered to the
Sub-Adviser copies of each of the following documents along with all amendments
thereto through the date hereof, and will promptly deliver to it all future
amendments and supplements thereto, if any:
(a) the Trust's Declaration of Trust ;
(b) the By-Laws of the Trust;
(c) resolutions of the Board of Trustees of the Trust authorizing
the execution and delivery of the Advisory Agreement and this
Agreement;
(d) the most recent Post-Effective Amendment to the Trust's
Registration Statement under the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Trust under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the currently effective Prospectus and Statement of Additional
Information of the Trust.
3. Investment Advisory Services.
(a) Management of the Trust. The Sub-Adviser hereby undertakes to
act as investment subadviser to the Trust. The Sub-Adviser
shall regularly provide investment advice to the Trust and
continuously supervise the investment and reinvestment of
cash, securities and other property composing the assets of
the Trust and, in furtherance thereof, shall:
(i) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the economy
generally, the Trust's investment programs, and the
issuers of securities included in the Trust's
portfolio and the industries in which they engage, or
which may relate to securities or other investments
which the Sub-Adviser may deem desirable for
inclusion in the Trust's portfolio;
(ii) determine which issuers and securities shall be
included in the portfolio of the Trust;
(iii) furnish a continuous investment program for the
Trust;
(iv) in its discretion, and without prior consultation,
buy, sell, lend and otherwise trade any stocks, bonds
and other securities and investment instruments on
behalf of the Trust, and
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<PAGE>
(v) take, on behalf of the Trust, all actions the
Sub-Adviser may deem necessary in order to carry into
effect such investment program and the Sub-Adviser's
functions as provided above, including the making of
appropriate periodic reports to the Adviser and the
Trust's Board of Trustees.
(b) Covenants. The Sub-Adviser shall carry out its investment
subadvisory responsibilities in a manner consistent with the
investment objectives, policies, and restrictions provided in:
(i) the Trust's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Trust's Declaration of Trust, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act;
(iv) other applicable laws; and (v) such other investment
policies, procedures and/or limitations as may be adopted by
the Trust or the Adviser and provided to the Sub-Adviser in
writing. The Sub-Adviser agrees to use reasonable efforts to
manage the Trust so that it will qualify, and continue to
qualify, as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder (the "Code"), except as may be
authorized to the contrary by the Trust's Board of Trustees.
The management of the Trust by the Sub-Adviser shall at all
times be subject to the review of the Adviser and the Trust's
Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Sub-Adviser
shall keep the Trust's books and records required to be
maintained by, or on behalf of, the Trust with respect to
subadvisory services rendered hereunder. The Sub-Adviser
agrees that all records which it maintains for the Trust are
the property of the Trust and it will promptly surrender any
of such records to the Trust upon the Trust's request. The
Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records
of the Trust required to be preserved by such Rule.
(d) Reports, Evaluations and other services. The Sub-Adviser shall
furnish reports, evaluations, information or analyses to the
Adviser and the Trust and in connection with the Sub-Adviser's
services hereunder as the Adviser and/or the Trust's Board of
Trustees may request from time to time or as the Sub-Adviser
may otherwise deem to be desirable. The Sub-Adviser shall make
recommendations to the Adviser and the Trust's Board of
Trustees with respect to the Trust's policies, and shall carry
out such policies as are adopted by the Board of Trustees. The
Sub-Adviser may, subject to review by the Adviser, furnish
such other services as the Sub-Adviser shall from time to time
determine to be necessary or useful to perform its obligations
under this Agreement.
(e) Purchase and Sale of Securities. The Sub-Adviser shall place
all orders for the purchase and sale of portfolio securities
for the Trust with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated
with the Adviser or the Sub-Adviser to the extent permitted by
the 1940 Act and the Trust's policies and procedures. The
Sub-Adviser shall use its best efforts to seek to execute
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<PAGE>
portfolio transactions at prices which, under the
circumstances, result in total costs or proceeds being the
most favorable to the Trust. In assessing the best overall
terms available for any transaction, the Sub-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 or
dealer, research services provided to the Sub-Adviser, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event
shall the Sub-Adviser be under any duty to obtain the lowest
commission or the best net price for the Trust on any
particular transaction, nor shall the Sub-Adviser be under any
duty to execute any order in a fashion either preferential to
the Trust relative to other accounts managed by the
Sub-Adviser or otherwise materially adverse to such other
accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Sub-Adviser,
the Trust and/or the other accounts over which the Sub-Adviser
exercises investment discretion. The Sub- Adviser is
authorized to pay a broker or dealer who provides such
brokerage and research services a commission for executing a
portfolio transaction for the Trust which is in excess of the
amount of commission another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser
determines in good faith that the total commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall
responsibilities of the Sub-Adviser with respect to accounts
over which it exercises investment discretion. The Sub-Adviser
shall report to the Board of Trustees of the Trust regarding
overall commissions paid by the Trust and their reasonableness
in relation to their benefits to the Trust.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for the Trust, the Sub-Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other clients if, in the Sub-Adviser's
reasonable judgment, such aggregation (i) will result in an
overall economic benefit to the Trust, taking into
consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies
set forth in the Trust's registration statement and the
Trust's Prospectus and Statement of Additional Information. In
such event, the Sub-Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the
transaction, in an equitable manner, consistent with its
fiduciary obligations to the Trust and such other clients.
4. Representations and Warranties.
(a) The Sub-Adviser hereby represents and warrants to the Adviser
as follows:
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<PAGE>
(i) The Sub-Adviser is a corporation duly organized and
in good standing under the laws of the State of
Delaware and is fully authorized to enter into this
Agreement and carry out its duties and obligations
hereunder.
(ii) The Sub-Adviser is registered as an investment
adviser with the Commission under the Advisers Act,
and is registered or licensed as an investment
adviser under the laws of all applicable
jurisdictions. The Sub-Adviser shall maintain such
registrations or licenses in effect at all times
during the term of this Agreement.
(iii) The Sub-Adviser at all times shall provide its best
judgment and effort to the Adviser in carrying out
the Sub-Adviser's obligations hereunder.
(b) The Adviser hereby represents and warrants to the Sub-Adviser
as follows:
(i) The Adviser is a national banking association duly
organized and in good standing under the laws of the
United States of America and is fully authorized to
enter into this Agreement and carry out its duties
and obligations hereunder.
(ii) The Trust has been duly organized as a business trust
under the laws of the State of New York.
(iii) The Trust is registered as an investment company with
the Commission under the 1940 Act, and shares of the
Trust are registered for offer and sale to the public
under the Securities Act of 1933, as amended and all
applicable state securities laws where currently
sold. Such registrations will be kept in effect
during the term of this Agreement.
5. Compensation. (a) As compensation for the services which the
Sub-Adviser is to provide or cause to be provided pursuant to Paragraph 3, the
Adviser shall pay to the Sub-Adviser (or cause to be paid by the Trust directly
to the Sub-Adviser) a fee, which shall be accrued daily and paid in arrears on
the first business day of each month, at an annual rate to be determined between
the parties hereto from time to time, as a percentage of the average daily net
assets of the Trust during the preceding month (computed in the manner set forth
in the Trust's most recent Prospectus and Statement of Additional Information).
Average daily net assets shall be based upon determinations of net assets made
as of the close of business on each business day throughout such month. The fee
for any partial month shall be calculated on a proportionate basis, based upon
average daily net assets for such partial month.
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<PAGE>
(b) The Sub-Adviser shall have the right, but not the
obligation, to voluntarily waive any portion of the sub-advisory fee from time
to time. Any such voluntary waiver will be irrevocable and determined in advance
of rendering sub-investment advisory services by the Sub-Adviser, and shall be
in writing and signed by the parties hereto.
(c) If the aggregate expenses incurred by, or allocated to,
the Trust in any fiscal year shall exceed the lowest expense limitation, if
applicable to the Trust, imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Sub- Adviser shall reduce its investment advisory fee, but not below zero, to
the extent of its share of such excess expenses; provided, however, there shall
be excluded from such expenses the amount of any interest, taxes, brokerage
commissions and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Trust. Such reduction, if any, shall be computed
and accrued daily, shall be settled on a monthly basis and shall be based upon
the expense limitation applicable to the Trust as at the end of the last
business day of the month. Should two or more of such expense limitations be
applicable at the end of the last business day of the month, that expense
limitation which results in the largest reduction in the Sub-Adviser's fee shall
be applicable. For the purposes of this paragraph, the Sub-Adviser's share of
any excess expenses shall be computed by multiplying such excess expenses by a
fraction, the numerator of which is the amount of the investment advisory fee
which would otherwise be payable to the Sub-Adviser for such fiscal year were it
not for this subsection 5(b) and the denominator of which is the sum of all
investment advisory and administrative fees which would otherwise be payable by
the Trust were it not for the expense limitation provisions of any investment
advisory or administrative agreement to which the Trust is a party.
6. Interested Persons. It is understood that, to the extent
consistent with applicable laws, the Trustees, officers and shareholders of the
Trust or the Adviser are or may be or become interested in the Sub-Adviser as
directors, officers or otherwise and that directors, officers and shareholders
of the Sub-Adviser are or may be or become similarly interested in the Trust or
the Adviser.
7. Expenses. The Sub-Adviser will pay all expenses incurred by
it in connection with its activities under this Agreement other than the cost of
securities (including brokerage commissions) purchased for or sold by the Trust.
8. Non-Exclusive Services; Limitation of Sub-Adviser's Liability.
The services of the Sub-Adviser hereunder are not to be deemed exclusive, and
the Sub-Adviser may render similar services to others and engage in other
activities. The Sub-Adviser and its affiliates may enter into other agreements
with the Trust or the Adviser for providing additional services to the Trust or
the Adviser which are not covered by this Agreement, and to receive additional
compensation for such services. In the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of obligations or duties hereunder
on the part of the Sub-Adviser, or a breach of fiduciary duty with
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<PAGE>
respect to receipt of compensation, neither the Sub-Adviser nor any of its
directors, officers, shareholders, agents, or employees shall be liable or
responsible to the Adviser, the Trust or to any shareholder for any error of
judgment or mistake of law or for any act or omission in the course of, or
connected with, rendering services hereunder or for any loss suffered by the
Adviser, the Trust, or any shareholder in connection with the performance of
this Agreement.
9. Effective Date; Modifications; Termination. This Agreement
shall become effective on the date hereof (the "Effective Date") provided that
it shall have been approved by a majority of the outstanding voting securities
of the Trust, in accordance with the requirements of the 1940 Act, or such later
date as may be agreed by the parties following such shareholder approval.
(a) This Agreement shall continue in force for two years from the
Effective Date and shall continue in effect from year to year
thereafter for successive annual periods, provided such
continuance is specifically approved at least annually (i) by
a vote of the majority of the Trustees of the Trust who are
not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose
of voting on such approval, and (ii) by a vote of the Board of
Trustees of the Trust or a majority of the outstanding voting
securities of the Trust.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Trust who are not interested persons of any
party to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement at any time
on sixty (60) days' prior written notice to the other, without
payment of any penalty. A termination of the Sub-Adviser may
be effected by the Adviser, by a vote of the Trust's Board of
Trustees, or by vote of a majority of the outstanding voting
securities of the Trust. This Agreement shall terminate
automatically in the event of its assignment.
10. Limitation of Liability of Trustees and Shareholders. The
Sub-Adviser acknowledges the following limitation of liability:
The terms "Capital Growth Portfolio" and "Trustees of Capital Growth
Portfolio" refer, respectively, to the trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under the
Declaration of Trust, to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of the State of New York, such
reference being inclusive of any and all amendments thereto so filed or
hereafter filed. The obligations of "Capital Growth Portfolio" entered into in
the name or on behalf thereof by any of the Trustees, representatives or agents
are made not individually, but in such capacities and are not binding upon any
of the Trustees, shareholders or representatives of the Trust personally, but
bind only the assets
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<PAGE>
of the Trust, and all persons dealing with the Trust must look solely to the
assets of the Trust for the enforcement of any claims against the Trust.
11. Certain Definitions. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
12. Independent Contractor. The Sub-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees of the Trust
from time to time, have no authority to act for or represent the Trust in any
way or otherwise be deemed an agent of the Trust.
13. Governing Law. This Agreement shall be governed by the laws
of the State of New York, provided that nothing herein shall be construed in a
manner inconsistent with the 1940 Act or the Advisers Act.
14. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby and, to this extent,
the provisions of this Agreement shall be deemed to be severable.
15. Notices. Notices of any kind to be given to the Adviser
hereunder by the Sub-Adviser shall be in writing and shall be duly given if
mailed or delivered to the Adviser at One Chase Manhattan Plaza, New York, New
York 10081 or at such other address or to such individual as shall be so
specified by the Adviser to the Sub-Adviser. Notices of any kind to be given to
the Sub- Adviser hereunder by the Adviser shall be in writing and shall be duly
given if mailed or delivered to the Sub-Adviser at 1211 Avenue of the Americas,
New York, New York 10036 or at such other address or to such individual as shall
be so specified by the Sub-Adviser to the Adviser. Notices shall be effective
upon delivery.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
THE CHASE MANHATTAN BANK, N.A. CHASE ASSET MANAGEMENT, INC.
By: ___________________________ By:_________________________________
Name: Name:
Title: Title:
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