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NORWEST TWO PORTLAND SQUARE
SELECT PORTLAND, MAINE 04101
FUNDS (207) 879-1900
This Prospectus offers shares (the "Shares") of Intermediate
INTERMEDIATE Bond Fund, Income Equity Fund, ValuGrowth Stock Fund and Small
BOND FUND Company Stock Fund (each a "Fund" and collectively the
"Funds"), each a portfolio of Norwest Select Funds, an open-
end management investment company (the "Trust").
INCOME INTERMEDIATE BOND FUND seeks stable current income and
EQUITY FUND competitive total return over an interest rate cycle by
investing in a portfolio of investment grade, intermediate
maturity fixed income securities.
VALUGROWTH-SM- INCOME EQUITY FUND seeks capital appreciation consistent with
STOCK FUND that of the overall equity securities markets and above-
average dividend income by investing primarily in the common
stock of large, income-producing domestic companies.
SMALL COMPANY VALUGROWTH STOCK FUND seeks capital appreciation by investing
STOCK FUND in a diversified portfolio of common stock and securities
convertible into common stock that may be rated or unrated.
SMALL COMPANY STOCK FUND seeks capital appreciation by
investing primarily in the common stock of small and medium
size domestic companies that have a market capitalization well
below that of the average company in the Standard & Poor's 500
Composite Stock Price Index.
This Prospectus sets forth concisely the information
PROSPECTUS concerning the Trust and each Fund that a prospective investor
MAY 1, 1996 should know before investing. Investors should read this
Prospectus and retain it for future reference. The Trust has
filed with the Securities and Exchange Commission ("SEC") a
Statement of Additional Information (the "SAI") dated May 1,
1996 and as supplemented from time to time, which contains
more detailed information about the Trust and the Funds and is
incorporated into this Prospectus by reference. The SAI is
available without charge by contacting the Trust at the
telephone number listed above. Investors should read this
Prospectus and retain it for future reference.
NORWEST SELECT FUNDS IS A FAMILY OF OPEN-END INVESTMENT
COMPANIES COMMONLY KNOWN AS MUTUAL FUNDS. THE SHARES OF MUTUAL
FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY OTHER GOVERNMENT
AGENCY. THE SHARES ALSO ARE NOT OBLIGATIONS, DEPOSITS OR
ACCOUNTS OF, OR ENDORSED OR GUARANTEED BY NORWEST BANK
MINNESOTA, N.A. OR ANY OTHER BANK OR BANK AFFILIATE.
AN INVESTMENT IN SHARES OF ANY MUTUAL FUND IS SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
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TABLE OF CONTENTS
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The Trust. . . . . . . . . . . . . . . .3 Dividends, Distributions, and
Financial Highlights . . . . . . . . . .4 Tax Matters. . . . . . . . . . . . . 18
Investment Objectives, Policies, and Other Information. . . . . . . . 19
and Risk Considerations . . . . . . . .5
Management of the Funds. . . . . . . . 13 Appendix A: Investments,
Purchases and Redemptions Investment Strategies, and
of Shares . . . . . . . . . . . . . . 16 Risk Considerations. . . . . . . . .A-1
</TABLE>
THE TRUST
The Trust is an open-end management investment company that was organized as a
Delaware business trust on December 7, 1993. This Prospectus relates to four
separate portfolios of the Trust: Intermediate Bond Fund, Income Equity Fund,
ValuGrowth Stock Fund and Small Company Stock Fund. Each Fund has its own
distinct investment objective and policies. See "Investment Objectives,
Policies, and Risk Considerations."
Shares of the Trust currently are sold only to separate accounts ("Separate
Accounts") of certain insurance companies (the "Insurance Companies"), as each
Fund of the Trust serves as an investment medium for variable life insurance
policies and variable annuity contracts (collectively the "Contracts") issued by
the Insurance Companies. Shares of the Trust currently are not offered directly
to, and may not be purchased directly by, members of the public but in the
future that Shares of the Trust will be offered to other persons consistent with
the use of the Trust as an investment vehicle for variable insurance products or
to qualified pension or retirement plans. As Shares are currently available for
sale only to Separate Accounts established by the Insurance Companies for the
purpose of issuing Contracts, the terms "shareholder" and "shareholders" in this
Prospectus refer to the Insurance Companies.
The Funds that are offered by this Prospectus serve as underlying investment
vehicles for amounts invested in the Contracts. The Separate Accounts invest in
Shares of one or more of the Funds in accordance with allocation instructions
received from owners of the Contracts. These allocations are described further
in the Prospectus for the Separate Account.
The investment adviser to each Fund (the "Adviser") is Norwest Investment
Management, a part of Norwest Bank Minnesota, N.A. ("Norwest"). Crestone
Capital Management, Inc. ("Crestone" and collectively with the Adviser, the
"Advisers"), an investment advisory subsidiary of Norwest, serves as investment
subadviser to Small Company Stock Fund.
The value of certain benefits under the Contracts will vary with the investment
performance of the Funds. Prospective purchasers should carefully consider the
information about the Trust and the Funds presented in this Prospectus prior to
purchasing a Contract.
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FINANCIAL HIGHLIGHTS
The following information represents selected data for a single outstanding
Share of Intermediate Bond Fund, ValuGrowth Stock Fund and Small Company Stock
Fund for the periods shown. Information for the year ended December 31, 1995
and for the period from June 1, 1994 (commencement of operations) through
December 31, 1994 was audited by KPMG Peat Marwick LLP, independent auditors.
The Funds' financial statements for the fiscal year ended December 31, 1995 and
independent auditors' report thereon are contained in the Annual Report of the
Funds and are incorporated by reference into the SAI. Further information about
each Fund's performance is contained in the Annual Report, which may be obtained
from the Trust without charge. No financial information is presented herein for
Income Equity Fund because, as of the date hereof, that Fund had not yet
commenced operations.
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INTERMEDIATE VALUGROWTH SMALL COMPANY
BOND FUND STOCK FUND STOCK FUND
Year Ended Period Ended Year Ended Period Ended Period Ended
December 31 December 31 December 31 December 31 December 31
----------- ----------- ----------- ----------- -----------
1995 1994(a) 1995 1994(a) 1995(a)
---- ------- ---- ------- -------
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Beginning Net Asset Value per Share $ 9.95 $ 10.00 $ 9.81 $ 10.00 $ 10.00
Net Investment Income 0.33 0.33 0.07 0.07 0.06
Net Realized and Unrealized
Gain/(Loss) on Securities 1.36 (0.38) 2.30 (0.26) 1.54
Distributions From Net Investment
Income (0.66) - (0.14) - (0.06)
Distributions From Net Realized
Gains - - - - (0.33)
------- ------- ------- ------ ------
Ending Net Asset Value per Share $ 10.98 $ 9.95 $ 12.04 $ 9.81 $ 11.21
------- ------- ------- ------ ------
------- ------- ------- ------ ------
Ratios to Average Net Assets:
Expenses(b) 0.60% 0.60%(c) 0.80% 0.80%(c) 0.80%(c)
Net Investment Income 6.33% 6.45%(c) 1.24% 1.67%(c) 1.02%(c)
Total Return 17.08% (0.50%) 24.15% (1.90%) 15.95%
Portfolio Turnover Rate 54.04% 52.61% 25.44% 16.77% 51.16%
Net Assets at the End of
Year/Period (000's Omitted) $3,090 $1,255 $4,793 $1,910 $2,027
(a) Intermediate Bond Fund and ValuGrowth Stock Fund commenced operations on
June 1, 1994. Small Company Stock Fund commenced operations on May 1,
1995.
(b) During the periods various fees and expenses were waived and reimbursed,
respectively. Had such waivers and reimbursements not occurred, the
ratio of expenses to average net assets would have been:
4.67% 9.31%(c) 3.81% 8.00%(c) 5.38%(c)
(c) Annualized.
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INVESTMENT OBJECTIVES, POLICIES, AND RISK CONSIDERATIONS
Each Fund has a stated investment objective which it pursues through separate
investment policies. The differences in objectives and policies among the Funds
can be expected to affect the return of each Fund and the degree of market and
financial risk to which each Fund is subject. For a further description of each
Fund's investments, investment techniques, and additional risk considerations
associated with those investments and techniques, see "Appendix A - Investments,
Investment Strategies, and Risk Considerations" (the "Appendix") and the SAI.
INVESTMENT OBJECTIVES
Each Fund's investment objective may not be changed without the approval of a
majority of the Fund's shareholders. There can be no assurance that any Fund
will achieve its investment objective.
INTERMEDIATE BOND FUND'S investment objective is to provide stable current
income and competitive total return over an interest rate cycle.
INCOME EQUITY FUND'S investment objective is to provide capital appreciation.
VALUGROWTH STOCK FUND'S investment objective is to provide capital appreciation.
SMALL COMPANY STOCK FUND'S investment objective is to provide capital
appreciation.
INVESTMENT POLICIES
INTERMEDIATE BOND FUND
Intermediate Bond Fund seeks to attain its investment objective by investing
primarily in a diversified portfolio of government and corporate securities of
intermediate maturity in an evenly balanced maturity structure. The Fund
emphasizes the use of intermediate maturity securities to lessen interest rate
risk, while employing low-risk yield enhancement techniques to add to the
Fund's return over a complete economic or interest rate cycle (generally four to
six years). Under normal market conditions, the Fund will invest substantially
all of its assets, and at least 65% of its net assets, in fixed income
securities. For a general description of fixed income securities, see
"Additional Investment Policies - Fixed Income Securities and Their
Characteristics." The fixed income securities in which the Fund invests may
include, but are not limited to, U.S. Government Securities, corporate debt
securities, convertible debt securities, taxable municipal securities, mortgage-
backed and asset-backed securities, and short-term investments such as
certificates of deposit, commercial paper and money market funds.
Under normal circumstances, the Fund will invest between 25% and 100% of its
assets in U.S. Government Securities and between 0% and 75% of its assets in
corporate and other debt securities, subject to the diversification requirements
of section 817(h) of the Internal Revenue
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Code of 1986 (the "Code"), as amended. See "Additional Investment Policies -
Investment Limitations - Diversification."
The Fund will purchase securities other than U.S. Government Securities that are
rated, at the time of purchase, within the four highest long-term rating
categories assigned by a nationally recognized statistical rating organization
such as Moody's Investors Service, Standard & Poor's or Fitch Investors
Services, L.P., or which are unrated and determined by the Adviser to be of
comparable quality. For a description of these ratings, see "Additional
Investment Policies - Rating Matters" and the SAI.
The fixed-income securities purchased by the Fund will have various maturities.
The Fund will invest in debt obligations with maturities (or average life in the
case of mortgage-backed, asset-backed and similar securities) ranging from
short-term (including overnight) to 15 years, and it is anticipated that the
Fund's portfolio of securities will have an average dollar-weighted maturity of
between 3 and 10 years.
The securities in which the Fund invests include mortgage-backed and other
asset-backed securities, although the Fund will limit its investment in these
securities to not more than 50% of the Fund's total assets. The Fund may enter
into "dollar roll" transactions, and may purchase "zero coupon" securities. The
Fund will limit its investment in "zero coupon" securities, except those issued
through the U.S. Treasury's STRIPS program, to not more than 10% of the Fund's
total assets. The Fund may also invest in securities that are restricted as to
disposition under the Federal securities laws (sometimes referred to as "private
placements" or "restricted securities"). The Fund may make short sales and may
purchase securities on margin (borrow money in order to purchase securities),
which are considered speculative investment techniques. See "Short Sales" and
"Investments Involving Leverage" in the Appendix. The Fund also may enter into
repurchase agreements (aside from investing for temporary defensive purposes),
may lend its portfolio securities and may purchase portfolio securities on a
when-issued or forward commitment basis.
The corporate debt securities in which the Fund invests may include U.S. dollar
denominated debt of foreign corporate issuers. The Fund also from time to time
may purchase securities issued by the governments of foreign countries or by
those countries' political subdivisions, agencies or instrumentalities, as well
as by supranational organizations such as the International Bank for
Reconstruction and Development. Investments in foreign issuers will not exceed
25% of the Fund's total assets. For a further discussion of risks associated
with investment in foreign issuers, see "Foreign Securities" in the Appendix.
In order to manage its exposure to different types of investments, the Fund may
enter into interest rate and mortgage swap agreements and may purchase and sell
interest rate caps, floors and collars. The Fund may also engage in certain
strategies involving options (both exchange-traded and over-the-counter) to
attempt to enhance the Fund's return and may attempt to reduce the overall risk
of its investments ("hedge") by using options and futures contracts. The Fund's
ability to use these strategies may be limited by market considerations,
regulatory limits and tax considerations. The Fund may write covered call and
put options, buy put and call options, buy
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and sell interest rate futures contracts, and buy options and write covered
options on those futures contracts. An option is covered if, so long as the Fund
is obligated under the option, it owns an offsetting position in the underlying
security or futures contract or maintains a segregated account of liquid, high-
grade debt instruments with a value at all times sufficient to cover the Fund's
obligations under the option.
INCOME EQUITY FUND
Income Equity Fund seeks to attain its investment objective by investing
primarily in the common stock of large domestic companies that the Adviser
perceives to have above-average return potential based on current market
valuations. Primary emphasis is placed on investing in securities of companies
with above-average dividend income. In selecting securities for the Fund, the
Adviser uses various valuation measures, including above-average dividend yields
and below industry average price to earnings, price to book and price to sales
ratios. The Fund considers large companies to be those whose market
capitalization is at least $600 million at the time of the Fund's purchase.
Market capitalization refers to the total market value of a company's
outstanding shares of common stock. The Fund intends under normal conditions to
invest substantially all of its assets, and at least 65% of its total assets, in
common stock.
The Fund may invest in preferred stock and securities convertible into common
stock and may purchase American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and other similar securities of foreign issuers.
See "Convertible Securities," "Foreign Securities" and "ADRs and EDRs" in the
Appendix. The Fund also may purchase warrants and options with respect to
equity securities. Under normal circumstances, the Fund will invest less than
5% of its total assets in warrants and options.
VALUGROWTH STOCK FUND
ValuGrowth Stock Fund seeks to attain its investment objective by investing
principally in medium and large capitalization companies (greater than $500
million market capitalization) that, in the view of the Adviser, possess above-
average growth characteristics and attractive valuations. Market capitalization
refers to the total market value of a company's outstanding shares of common
stock, calculated by multiplying the market value of the company's shares by the
total number of shares outstanding. The Fund intends under normal market
conditions to invest substantially all of its assets, and at least 65% of its
net assets, in common stock.
The Fund seeks to identify and invest in companies whose earnings and dividends
the Adviser believes will grow faster than inflation and the economy in general,
and whose growth the Adviser believes has not yet been fully reflected in the
market price of the companies' shares. In seeking these investments, the
Adviser relies primarily on a company-by-company analysis (rather than a broader
analysis of industry or economic sector trends) and considers such matters as
the quality of a company's management, the existence of a leading or dominant
position in a major product line or market, the soundness of the company's
financial position, and the maintenance of a relatively high rate of return on
invested capital and shareholders' equity. Once companies are identified as
possible investments, the Adviser applies a number of valuation
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measures to determine the relative attractiveness of each company and selects
the companies whose shares are most attractively priced.
The Fund also may invest in selected companies the Adviser regards as "special
situations." Special situation companies often have the potential for
significant future earnings growth but have not performed well in the recent
past. These situations may include management turnarounds, corporate or asset
restructurings, or significantly undervalued assets. Such investments are the
exception, not the rule, and must satisfy the Adviser's valuation parameters.
The Fund may invest in securities convertible into common stock, including
convertible debt and convertible preferred stock. The Fund also may invest up
to 20% of its assets in foreign issuers and in sponsored and unsponsored
American Depository Receipts ("ADRs"). See "Foreign Securities" and "ADRs and
EDRs" in the Appendix. The Fund may purchase warrants and options with respect
to equity securities. Under normal circumstances, the Fund will invest less
than 5% of its total assets in warrants and options. The Fund also may enter
into repurchase agreements (aside from investing for temporary defensive
purposes) and may lend its portfolio securities.
SMALL COMPANY STOCK FUND
Small Company Stock Fund seeks to attain its investment objective by investing
primarily in the common stock of small and medium size domestic companies that
have a market capitalization well below that of the average company in the
Standard & Poor's 500 Composite Stock Price Index. Small and medium companies
are those whose market capitalization is less than $1 billion at the time of the
Fund's purchase, although it is anticipated that investments primarily will be
in companies with capitalization of less than $750 million. Market
capitalization refers to the total market value of a company's outstanding
shares of common stock, calculated by multiplying the market value of the
company's shares by the total number of shares outstanding.
In selecting securities for the Fund, the Advisers seek securities with
significant price appreciation potential, and attempt to identify companies that
show above-average growth, as compared to long-term overall market growth. The
companies in which the Fund invests may be in a relatively early stage of
development or may produce goods and services that have favorable prospects for
growth due to increasing demand or developing markets. Frequently, such
companies have a small management group and single product or product line
expertise that, in the view of the Advisers, may result in an enhanced
entrepreneurial spirit and greater focus which may allow the firms to be
successful. The Advisers believe that such companies may develop into
significant business enterprises and that an investment in such companies offers
a greater opportunity for capital appreciation than an investment in larger,
more established entities. Small companies frequently retain a large part of
their earnings for research, development and investment in capital assets,
however, so that the prospects for immediate dividend income are limited.
The securities in which the Fund invests may be listed on a securities exchange
or traded in the over-the-counter securities market, and may be included in the
National Association of Securities
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Dealers Automated Quotation (NASDAQ) National Market System. Equity securities
owned by the Fund that are traded in the over-the-counter market or on a
regional securities exchange may not be traded every day or in the volume
typical of securities trading on a national securities exchange. As a result,
disposition by the Fund of a portfolio security, to meet redemption requests by
shareholders or otherwise, may require the Fund to sell these securities at a
discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over a lengthy period of time.
The Fund may invest up to 20% of its assets in foreign issuers and in sponsored
and unsponsored American Depository Receipts ("ADRs"). See "Foreign Securities"
and "ADRs and EDRs" in the Appendix. The Fund also may enter into repurchase
agreements (aside from investing for temporary defensive purposes) and may lend
its portfolio securities.
The Fund may invest in debt securities that are rated, at the time of purchase,
within the three highest long-term categories assigned by a nationally
recognized statistical rating organization such as Moody's Investors Service,
Standard & Poor's or Fitch Investors Services, L.P., or which are unrated and
determined by the Adviser to be of comparable quality. See "Additional
Investment Policies - Fixed Income Securities and Their Characteristics" and "-
Rating Matters." The Fund intends, however, under normal market conditions to
invest at least 65% of its net assets in common stock.
ADDITIONAL INVESTMENT CONSIDERATIONS AND RISK FACTORS. Investments in smaller
companies generally involve greater risks than investments in larger companies
due to the small size of the issuer and the fact that the issuer may have
limited product lines, less access to financial markets and less management
depth. In addition, many of the securities of these firms trade less frequently
and in lower volumes than securities issued by larger firms. The result is that
the short-term price volatility of those small company securities is greater
than the price volatility of the securities of larger, more established
companies that are widely held. The securities of small companies may also be
more sensitive to market changes generally than the securities of large
companies.
ADDITIONAL INVESTMENT POLICIES
All investment policies of a Fund that are designated as fundamental, and each
Fund's investment objective, may not be changed without the approval of the
holders of a majority of that Fund's outstanding voting securities. A majority
of a Fund's outstanding voting securities means the lesser of 67% of the shares
of the Fund present or represented at a shareholders meeting at which the
holders of more than 50% of the shares are present or represented, or more than
50% of the outstanding shares of a Fund. Except as otherwise indicated,
investment policies of the Funds are not fundamental and may be changed by the
Trust's Board of Trustees (the "Board") without shareholder approval.
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INVESTMENT LIMITATIONS
The Funds have adopted the investment limitations listed below, each of which is
a nonfundamental policy of the Funds except as noted. Other investment
limitations, including additional provisions with respect to the limitations
listed below, are described in the SAI.
DIVERSIFICATION. As a fundamental policy, each Fund is "diversified" as defined
in the Investment Company Act of 1940 (the "1940 Act"). Accordingly, each Fund
may not, with respect to 75% of its assets, purchase a security other than a
U.S. Government Security if, as a result, more than 5% of the Fund's total
assets would be invested in the securities of a single issuer or the Fund would
own more than 10% of the outstanding voting securities of any single issuer. As
nonfundamental policies, except with respect to investment in U.S. Government
Securities, no more than 5% of a Fund's total assets (10% with respect to
ValuGrowth Stock Fund) will be invested in the securities of any single issuer
and no Fund will own more than 10% (5% with respect to Intermediate Bond Fund)
of the voting securities of any one issuer.
Purchases of securities for each of the Funds also will be limited in
accordance with the diversification requirements established by section
817(h) of the Code. To comply with regulations under section 817(h), each
Fund is required to diversify its investments so that on the last day of each
quarter of a calendar year no more than 55% of the value of its total assets
is represented by any one investment, no more than 70% is represented by any
two investments, no more than 80% is represented by any three investments,
and no more than 90% is represented by any four investments. In calculating
these percentages, securities of a given issuer generally are treated as one
investment, and each U.S. Government agency and instrumentality is treated as
a separate issuer. Any security issued, guaranteed, or insured (to the
extent so guaranteed or insured) by the United States or an agency or
instrumentality of the United States is treated by the Fund as a security
issued by the U.S. Government, agency or instrumentality, whichever is
applicable.
Compliance with the diversification rules under section 817(h) of the Code will
generally limit the ability of the Funds, and particularly Intermediate Bond
Fund, to invest greater than 55% of total assets in direct obligations of the
U.S. Treasury (or any other issuer) or to invest primarily in securities issued
by a single agency or instrumentality of the U.S. Government. Failure to comply
with these diversification requirements may result in immediate taxation to the
Contract owners of all returns credited to Contracts.
CONCENTRATION. Each Fund is prohibited from concentrating its assets in the
securities of issuers in any industry. As a fundamental policy, each Fund may
not purchase securities if, immediately after the purchase, more than 25% of the
value of the Fund's total assets would be invested in the securities of issuers
conducting their principal business activities in the same industry; provided,
however, that there is no limit on investments in U.S. Government Securities,
foreign government securities or repurchase agreements covering U.S. Government
Securities.
ILLIQUID SECURITIES. Each of the Funds limits its purchase of illiquid
securities. No Fund may acquire securities or invest in repurchase agreements
with respect to any securities if, as a result,
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more than 15% of the Fund's net assets taken at current value would be invested
in securities that are not readily marketable, including securities that are
illiquid by virtue of legal or contractual restrictions on the sale of such
securities.
BORROWING AND LENDING. As a fundamental policy, each Fund may borrow money for
temporary or emergency purposes, including the meeting of redemption requests,
but not in excess of 33 1/3% of the value of the Fund's assets as computed
immediately after the borrowing. Borrowing for other than temporary or
emergency purposes or meeting redemption requests is limited to 5% of the value
of each Fund's total assets. Where a Fund establishes a segregated account to
limit the amount of leveraging of the Fund with respect to certain investment
techniques, the Fund does not treat those techniques as involving borrowings.
See "Investments Involving Leverage" in the Appendix. As a fundamental policy,
no Fund may make any loans except for loans of portfolio securities, through the
use of repurchase agreements, and through the purchase of debt securities that
are otherwise permitted investments for the Fund. No Fund will lend portfolio
securities in excess of 33 1/3% of the value of the Fund's total assets.
MARGIN AND SHORT SALES. Each Fund may purchase securities on margin and make
short sales of securities. As a borrowing, the Fund's purchase of securities on
margin is subject to the limitations on and risks involved with borrowing.
Although permitted to do so, the Funds have no current intention of employing
either of these investment techniques in any material amount. The Funds may,
however, enter into short sales against the box. See "Short Sales" in the
Appendix.
FIXED INCOME SECURITIES AND THEIR CHARACTERISTICS
Although each Fund (other than ValuGrowth Stock Fund) may invest only in
investment-grade fixed income securities, an investment in a Fund is subject to
risk even if all fixed income securities in the Fund's portfolio are paid in
full at maturity. All fixed income securities, including U.S. Government
Securities, can change in value when there is a change in interest rates, the
issuer's actual or perceived creditworthiness, or the issuer's ability to meet
its obligations.
The market value of the interest-bearing debt securities held by the Funds will
be affected by changes in interest rates. There is normally an inverse
relationship between the market value of securities sensitive to prevailing
interest rates and actual changes in interest rates. In other words, a decrease
in interest rates produces an increase in market value, while an increase in
interest rates produces a decrease in market value. Moreover, the longer the
remaining maturity of a security, the greater will be the effect of interest
rate changes on the market value of that security. Changes in the ability of an
issuer to make payments of interest and principal and in the market's perception
of an issuer's creditworthiness will also affect the market value of the debt
securities of that issuer. The possibility exists that the ability of any
issuer to pay, when due, the principal of and interest on its debt securities
may be materially impaired.
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RATING MATTERS
The Funds' investments are subject to "credit risk" relating to the financial
condition of the issuers of the securities that each Fund holds. To limit
credit risk, each Fund (other than ValuGrowth Stock Fund) may only purchase
securities that are rated in the four highest long-term rating categories
assigned by a nationally recognized statistical rating organization
("NRSRO"). In addition, Small Company Stock Fund may only purchase securities
that are rated in the three highest long-term rating categories assigned by
an NRSRO. For example, the four highest rating categories for corporate bonds
are Aaa, Aa, A and Baa in the case of Moody's Investors Service ("Moody's")
and AAA, AA, A and BBB in the case of Standard & Poor's ("S&P") and Fitch
Investors Services, L.P. ("Fitch"). Fixed income securities rated in these
categories are generally considered to be investment grade securities,
although Moody's indicates that securities rated Baa have speculative
characteristics. Short-term debt, including commercial paper, rated in the
two highest categories of an NRSRO -Prime-1 and Prime-2 in the case of
Moody's, A and B in the case of S&P and F-1+ and F-1 in the case of Fitch -
have the strongest ability for timely debt repayment. A description of the
rating categories of various NRSROs is contained in the SAI.
The Funds also may purchase unrated securities if the Adviser determines the
security to be of comparable quality to a rated security that the Fund may
purchase. Unrated securities may not be as actively traded as rated securities.
Each Fund may retain a security whose rating has been lowered below the Fund's
lowest permissible rating category (or that are unrated and determined by the
Adviser to be of comparable quality to securities whose rating has been lowered
below the Fund's lowest permissible rating category) if the Adviser determines
that retaining the security is in the best interests of the Fund. Because a
downgrade often results in a reduction in the market price of the security, sale
of a downgraded security may result in a loss.
VARIABLE AND FLOATING RATE SECURITIES
The securities in which the Funds invest (including mortgage-related
securities) may have variable or floating rates of interest. These
securities pay interest at rates that are adjusted periodically according to
a specified formula, usually with reference to some interest rate index or
market interest rate (the "underlying index"). The interest paid on these
securities is a function primarily of the underlying index upon which the
interest rate adjustments are based. Such adjustments minimize changes in the
market value of the obligation and, accordingly, enhance the ability of the
Fund to maintain a stable net asset value. Similar to fixed rate debt
instruments, variable and floating rate instruments are subject to changes in
value based on changes in market interest rates or changes in the issuer's
creditworthiness. The rate of interest on securities purchased by a Fund may
be tied to Treasury or other government securities or indices on those
securities as well as any other rate of interest or index. Certain variable
rate securities (including mortgage-related securities) pay interest at a
rate that varies inversely to prevailing short-term interest rates (sometimes
referred to as inverse floaters). For instance, upon reset the interest rate
payable on a security may go down when the underlying index has risen. During
times when short-term interest rates are relatively low as compared to
long-term interest rates a Fund may attempt to enhance its yield by
purchasing inverse floaters. Certain inverse
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floaters may have an interest rate reset mechanism that multiplies the
effects of changes in the underlying index. This form of leverage may have
the effect of increasing the volatility of the security's market value while
increasing the security's, and thus the Fund's, yield. Total Return Bond
Fund limits its investment in variable and floating rate securities to 5% of
its assets.
There may not be an active secondary market for certain floating or variable
rate instruments (particularly inverse floaters and similar instruments)
which could make it difficult for a Fund to dispose of the instrument during
periods that the Fund is not entitled to exercise any demand rights (such as
puts) it may have. A Fund could, for this or other reasons, suffer a loss
with respect to an instrument. The Adviser monitors the liquidity of each
Fund's investment in variable and floating rate instruments, but there can be
no guarantee that an active secondary market will exist.
TEMPORARY DEFENSIVE POSITION
When business or financial conditions warrant, each Fund may assume a
temporary defensive position and invest all or any portion of its assets in
cash or in cash equivalents, including (i) short-term U.S. Government
Securities, (ii) prime quality short-term instruments of U.S. depository
institutions, (iii) prime quality commercial paper, (iv) repurchase
agreements covering any of the securities in which the Fund may invest
directly and (v) to the extent permitted by the 1940 Act, shares of money
market mutual funds. Prime quality instruments are those rated in the two
highest rating categories assigned by an NRSRO. During periods when and to
the extent that a Fund has assumed a temporary defensive position, it may not
be pursuing its investment objective. The Funds may also invest in these
securities or hold cash pending investment in other securities.
MANAGEMENT OF THE FUNDS
The business of the Trust is managed under the direction of the Board. The
Board formulates the general policies of the Funds and generally meets
quarterly to review the results of the Funds, monitor investment activities
and practices and discuss other matters affecting the Funds and the Trust.
The SAI contains general background information about the trustees and
officers of the Trust.
INVESTMENT ADVISORY SERVICES
NORWEST INVESTMENT MANAGEMENT
The Adviser serves as investment adviser of each Fund pursuant to investment
advisory agreements between Norwest and the Trust. Subject to the general
supervision of the Board, the Adviser makes investment decisions for each
Fund and continuously reviews, supervises and administers each Fund's
investment program. The Adviser is a part of Norwest, which is a subsidiary
of Norwest Corporation, a multi-bank holding company incorporated under the
laws of Delaware in 1929. As of December 31, 1995, Norwest Corporation was
the 11th largest bank holding company in the United States in terms of
assets. Norwest became a subsidiary of
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Norwest Corporation in 1929 and, as of December 31, 1995, the Adviser managed
or provided investment advice with respect to assets totaling approximately
$23 billion.
For its services under its investment advisory agreements, the Adviser
receives from the Trust, with respect to each Fund, an advisory fee based on
the average daily net assets of the respective Fund at the following annual
rates: Intermediate Bond Fund, 0.60%; Income Equity Fund, 0.80%; ValuGrowth
Stock Fund, 0.80%; and Small Company Stock Fund, 0.80%. Advisory fees are
accrued daily and paid monthly.
CRESTONE CAPITAL MANAGEMENT, INC.
To assist Norwest in carrying out its obligations under the investment
advisory agreement with respect to Small Company Stock Fund, Norwest has
entered into an investment subadvisory agreement among the Trust, Norwest and
Crestone. Crestone, which is located at 7720 East Belleview Avenue, Suite
220, Englewood Colorado 80111, is a subsidiary of Norwest and is registered
with the SEC as an investment adviser. Crestone provides investment advice
regarding companies with small capitalization to various clients, including
institutional investors. As of December 31, 1995, Crestone managed assets
with a value of approximately $300 million.
Pursuant to the investment subadvisory agreement, Crestone makes investment
decisions for Small Company Stock Fund and continuously reviews, supervises
and administers the Fund's investment program with respect to that portion,
if any, of the Fund's portfolio that Norwest believes should be invested
using Crestone as investment subadviser. Currently, Crestone manages the
entire portfolio of the Fund and has since the Fund's inception. The Adviser
supervises the performance of Crestone, including Crestone's adherence to the
Fund's investment objective and policies and pays Crestone a fee for its
investment subadvisory services.
PORTFOLIO MANAGERS
Many persons on the advisory staff of each of the Adviser and Crestone
contribute to the investment advisory services provided to each Fund, as
applicable. The following persons, however, are primarily responsible for
the day to day management of the Funds' investment portfolios and, except
where noted, have been since inception of the Funds:
INTERMEDIATE BOND FUND - Ms. Marjorie H. Grace. Ms. Grace has been a Vice
President of Norwest since 1992, has served as a portfolio manager for the
Fund since January 1996; a portfolio manager for other funds at Norwest
since 1992; an Institutional Salesperson with Norwest Investment Services,
Inc. from 1991-1992; a portfolio manager with United Bank of Colorado from
1989-1991; and Vice President and portfolio manager with Colombia Savings
and Loan from 1987-1989.
INCOME EQUITY FUND - Mr. David L. Roberts. Mr. Roberts, a Senior Vice
President of Norwest since 1991, has been associated with Norwest for 22
years in various investment related capacities.
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VALUGROWTH STOCK FUND - Mr. David S. Lunt, CFA. Mr. Lunt has been a Vice
President of Norwest or its affiliates since 1992. Prior thereto, Mr. Lunt
served as a security analyst and portfolio manager for First Tier Bank.
Mr. Lunt has served as portfolio manager of the Fund since January 1996.
SMALL COMPANY STOCK FUND - Mr. Kirk McCown, CFA. Mr. McCown is the founder,
President and a Director of Crestone, which was incorporated in 1990.
MANAGEMENT AND DISTRIBUTION SERVICES
Subject to the supervision of the Board, Forum Financial Services, Inc.
("Forum") supervises the overall management of the Trust (other than
portfolio management), including the Trust's receipt of services for which
the Trust is obligated to pay, and provides the Trust with general office
facilities pursuant to a management agreement with the Trust. Forum provides
persons satisfactory to the Board to serve as officers of the Trust. As of
the date of this Prospectus, Forum acted as manager and distributor of
registered investment companies and collective investment funds with assets
of approximately $15.5 billion. Forum, whose principal business address is
Two Portland Square, Portland, Maine, is a registered broker-dealer and
investment adviser and is a member of the National Association of Securities
Dealers, Inc.
For its management services and facilities, Forum receives, with respect to
each Fund, a fee at an annual rate of 0.20% of the average daily net assets
of the Fund. These fees are accrued daily and paid monthly. Pursuant to a
separate distribution agreement with the Trust, Forum acts as the agent of
the Trust in connection with the offering of Shares of the Funds. Forum
receives no payments for its services pursuant to its distribution agreement.
In addition, none of the Funds has adopted a distribution plan and,
accordingly, no Fund currently incurs Rule 12b-1 fees.
SHAREHOLDER SERVICES AND CUSTODY
Norwest serves as transfer agent and dividend disbursing agent for the Trust
(in this capacity, the "Transfer Agent"). The Transfer Agent maintains an
account for each shareholder of the Trust, performs other transfer agency and
shareholder service functions, and acts as dividend disbursing agent for the
Trust. Norwest also serves as the Trust's custodian and may appoint certain
subcustodians to custody the foreign securities and other assets held in
foreign countries of those Funds that invest in foreign securities. For
these services, Norwest is compensated at an aggregate annual rate of up to
0.10% of each Fund's average daily net assets.
EXPENSES OF THE FUNDS
Each Fund is obligated to pay for all of its expenses. These expenses
include: interest charges; taxes; brokerage fees and commissions; insurance
premiums; applicable fees and expenses under the Trust's contracts with the
Advisers, Forum, the Transfer Agent and any custodian; fees of pricing,
interest, dividend, credit and other reporting services; costs of membership
in trade
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associations; auditing, legal and compliance expenses; costs of preparing and
printing the Trust's prospectuses, statements of additional information,
proxy materials, and shareholder reports and delivering them to existing
Contract owners; compensation of certain of the Trust's trustees, officers
and employees and other personnel performing services for the Trust; and
registration fees and related expenses.
Each Fund's expenses comprise Trust expenses attributable to the Fund, which
are allocated to the Fund, and expenses not attributable to the Fund, which
are allocated among the Fund and all other portfolios of the Trust in
proportion to their average net assets. The Advisers, Forum and the Transfer
Agent may each elect to waive all or a portion of their fees for any or all
Funds. Any such waivers will have the effect of increasing a Fund's yield
and total return for the period during which the waiver was in effect. No
fee waivers may be recouped at a later date. Neither the fees payable to the
Adviser, Forum or the Transfer Agent, nor the expenses of the Funds, are
fixed or specified under the terms of the Contracts. Subject to any
necessary approvals, these fees may be increased or decreased. For this or
other reasons, each Fund's expenses may increase or decrease from year to
year.
PURCHASES AND REDEMPTIONS OF SHARES
The Trust currently offers its Shares only to Insurance Companies. It is
possible at some later date that Shares of the Trust may be offered to other
persons consistent with the use of the Trust as an investment vehicle for
variable insurance products or to qualified pension or retirement plans.
Shares of the Funds currently are sold to Separate Accounts of Fortis
Benefits Insurance Company ("Fortis") to fund variable annuity contracts. In
the future, Shares may be sold to Separate Accounts of Fortis to fund
variable life insurance policies and to other Insurance Companies that are
not affiliated with Fortis. The Trust currently does not foresee any
disadvantages to Contract owners arising from offering of the Trust's shares
to separate accounts of other Insurance Companies or to Separate Accounts
funding both variable life insurance policies and variable annuity contracts.
It is possible however, that the interests of owners of various Contracts
participating in the Trust might at some time be in conflict. The Board and
the Insurance Companies whose Separate Accounts invest in the Trust, in
accordance with any procedures that may be agreed to by the Trust and the
Insurance Companies, will monitor events in order to identify any material
irreconcilable conflicts between the interests of all Contract owners
participating in Separate Accounts utilizing the Trust, and to determine what
action, if any, should be taken in response thereto. Material irreconcilable
conflicts could result from, for example, (1) changes in state insurance
laws, (2) changes in Federal income and other tax laws, (3) changes in the
investment management of any of the Funds, or (4) differences in voting
instructions given by Contract owners. Actions taken in response to a
material irreconcilable conflict could include the sale of Trust Shares by
one or more of the Separate Accounts investing in the Trust, which could have
adverse consequences to other shareholders. In addition, the Board,
consistent with the terms under which the Insurance Companies participate in
the Trust, may refuse to sell Shares of any Fund to any Separate Account or
may suspend or terminate the offering of Shares of any Fund, if such action
is required by law or regulatory authority or is in
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the best interests of the shareholders of the Fund. The costs of resolving
any such material irreconcilable conflicts will not be borne by Contract
owners.
Shares of each Fund may be purchased or redeemed by shareholders on each day
when the Trust values its assets. Such purchases and redemptions for the
Separate Accounts are effected at the net asset value per share for each Fund
determined as of that same date. Shares of a Fund are sold and redeemed at
their respective net asset values (without a sales charge) next computed
after instructions from a Contract owner are received by an Insurance Company
whose Separate Account invests in the Trust. Other procedures concerning the
purchase and redemption of shares will be determined by agreement between the
shareholders and the Trust or its Transfer Agent.
Normally, redemption proceeds are paid to a Fund's record shareholder
immediately following, but in no event later than seven days following,
acceptance of a redemption order. The right of redemption may not be
suspended nor the payment dates postponed for more than seven days except
when the New York Stock Exchange is closed (or when trading thereon is
restricted) for any reason other than its customary weekend or holiday
closings or under any emergency or other circumstances as determined by the
SEC. Proceeds of redemptions normally are paid in cash. However, payments
may be made wholly or partially in portfolio securities if the Board
determines that payment in cash would be detrimental to the best interests of
the Fund. The Trust may at its option effect a redemption in portfolio
securities if the particular shareholder is redeeming more than $250,000 or
1% of the Fund's total net assets, whichever is less, during any 90-day
period.
Contract owners do not deal directly with the Trust with respect to the
purchase or redemption of Shares, and should refer to the Prospectus for
their Separate Account for information on allocation of premiums and on
transfers of account value among divisions of the pertinent Insurance Company
Separate Accounts that invest in each Fund.
Shares of the Funds are continuously sold and redeemed at a price equal to
their net asset value at 4:00 p.m., Eastern Time, on all weekdays except New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas ("Fund Business Day") without charge.
The Trust determines the net asset value per Share of each Fund on each Fund
Business Day by dividing the value of the Fund's net assets (i.e., the value
of its securities and other assets less its liabilities) by the number of
Shares outstanding at the time the determination is made.
Securities for which market quotations are readily available are valued at
current market value, or, in the absence of readily available market
quotations, at fair value as determined by the Board. Current market value
of securities may be provided by independent pricing services of the type
commonly used in the investment company industry. Debt securities may be
valued at prices supplied by pricing services based on broker or dealer
supplied valuations or matrix pricing, a method of valuing securities by
reference to the value of other securities with similar characteristics, such
as rating, interest rate and maturity, without regard to sale or bid prices,
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when this pricing method is believed to accurately reflect the fair market
value of these securities.
DIVIDENDS, DISTRIBUTIONS, AND TAX MATTERS
DIVIDENDS AND DISTRIBUTIONS
Dividends of net investment income are declared and paid annually by the
Funds. Each Fund's net capital gain, if any, is distributed at least
annually. All dividends and distributions of each Fund are automatically
reinvested in additional Shares of the Fund at the Fund's net asset value as
of the payment date for the dividend unless the shareholder elects to have
all dividends and distributions paid in cash.
TAX MATTERS
Each Fund is treated as a separate corporation for Federal income tax
purposes and intends to qualify for each fiscal year as a "regulated
investment company" under the Code, as amended. In addition, each Fund
intends to distribute all of its net investment income and capital gain each
year. Accordingly, the Funds do not expect to be liable for Federal income
or excise taxes on their net investment income and capital gain.
Future regulations or rulings addressing the circumstances in which a
Contract owner's control of the investments of a Separate Account may cause
the Contract owner, rather than the Insurance Company, to be treated as the
owner of the assets held by the Separate Account. If the Contract owner is
considered the owner of the securities underlying the Separate Account,
income and gains produced by those securities would be included currently in
the Contract owner's gross income. It is not known what standard would be
set forth in any regulations or rulings. Any standard may apply only
prospectively, although retroactive application is possible.
In the event that rules or regulations are adopted, there can be no assurance
that the Funds will be able to operate as currently described herein, or that
the Trust will not have to change any Fund's investment objective or
investment policies. While each Fund's investment objective is fundamental
and may be changed only by a vote of a majority of the Fund's outstanding
shares, the Board has reserved the right in its sole discretion to modify the
investment policies and investment limitations of each Fund that are not
fundamental policies as they deem necessary or appropriate to minimize the
risk of any such prospective rules and regulations from causing the Contract
owners to be considered the owners of the shares of the Funds.
OTHER INFORMATION
FUND PERFORMANCE
Each Fund's performance may be quoted in advertising in terms of yield or
total return. Both types are based on historical results and are not
intended to indicate future performance. The Funds' advertisements may
reference ratings and rankings among similar funds by independent
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evaluators such as Morningstar, Inc. and Lipper Analytical Services, Inc. In
addition, the performance of a Fund may be compared to recognized indices of
market performance. The comparative material found in the Funds'
advertisements, sales literature or reports to shareholders may contain
performance ratings. This material is not to be considered representative or
indicative of future performance.
YIELD
A Fund's yield is a way of showing the rate of income earned by the Fund as a
percentage of the Fund's Share price. Yield is calculated by dividing the
net investment income of the Fund for the stated period by the average number
of Shares entitled to receive dividends and expressing the result as an
annualized percentage rate based on the Fund's Share price at the end of the
period. Each Fund may also quote a compounded annualized yield which assumes
the reinvestment of dividends and distributions paid by the Fund, and
therefore will be somewhat higher than the annualized yield for the same
period.
TOTAL RETURN
Total Return refers to the average annual compounded rates of return over
some representative period that would equate an initial amount invested at
the beginning of a stated period to the ending redeemable value of the
investment, after giving effect to the reinvestment of all dividends and
distributions and expenses of the Fund during the period. Because average
annual returns tend to smooth out variations in a Fund's returns,
shareholders should recognize that they are not the same as actual
year-by-year results.
VARIABLE CONTRACT CHARGES
Performance figures of the Funds will not reflect charges made pursuant to
the terms of the Contracts funded by Separate Accounts that invest in the
Fund's Shares. Fund performance information may be presented in conjunction
with performance information relating to the Contracts. Purchasers of
Contracts issued by Insurance Companies should therefore recognize that the
yield and total return on the Separate Account assets relating to their
Contract which is invested in Shares of any of the Funds would be lower than
the yield and total return of the Fund for the same period.
BANKING LAW MATTERS
Federal banking laws and regulations generally permit a bank or bank
affiliate to act as investment adviser, transfer agent, or custodian to an
investment company. Forum believes that the Adviser and any other bank or
bank affiliate that may perform these or similar services may perform the
services described in this Prospectus for the Trust and its shareholders
without violating applicable Federal banking laws or regulations.
Federal or state statutes or regulations and judicial or administrative
decisions or interpretations relating to the activities of banks and their
affiliates, however, could prevent a bank or bank
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affiliate from continuing to perform all or a part of the activities
contemplated by this Prospectus. In this event, changes in the operation of
the Trust might occur. It is not expected that shareholders would suffer any
material adverse financial consequences as a result of any of these
occurrences.
PORTFOLIO TRANSACTIONS
Each of the Advisers places orders for the purchase and sale of assets it
manages with brokers and dealers selected by and in the discretion of the
Adviser. The Advisers seek "best execution" of portfolio transactions, but a
Fund may pay higher than the lowest available commission rates when an
Adviser believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction.
Subject to the Funds' policy of obtaining the best price consistent with
quality of execution of transactions, the Advisers may employ Norwest
Investment Services, Inc. and any other broker-dealer affiliates of the
Adviser (collectively "Affiliated Brokers") to effect brokerage transactions
for the Funds. A Fund's payment of commissions to an Affiliated Broker is
subject to procedures adopted by the Board to ensure that the commissions
will not exceed the usual and customary broker's commissions charged by
unaffiliated brokers. No specific portion of a Fund's brokerage will be
directed to Affiliated Brokers and in no event will a broker affiliated with
the Adviser directing the transaction receive brokerage transactions in
recognition of research services provided to the Adviser.
The Adviser, and with respect to Small Company Sock Fund, Crestone,
anticipate that the annual turnover rate in each Fund will be less than 100%.
An annual turnover rate of 100% would occur if all of the securities in a
Fund were replaced once in a period of one year. With respect to Income
Equity Fund, ValuGrowth Stock Fund and Small Company Stock Fund, a higher
portfolio turnover rate may result in increased brokerage costs to the Fund.
SHAREHOLDER VOTING AND OTHER RIGHTS
Each Share of a Fund has equal dividend, distribution, liquidation and voting
rights, and fractional Shares have those rights proportionately. Delaware
law does not require a registered investment company to hold annual meetings
of shareholders, and it is anticipated that shareholder meetings will be held
only when specifically required by Federal or Delaware law. Shareholders have
available certain procedures for the removal of Trustees.
Shareholders of the Trust are given certain voting rights. Each Share of
each Fund will be given one vote, unless a different allocation of voting
rights is required under applicable law for an open-end investment company
that is an investment medium for variable insurance products. Shareholders of
the Funds will vote Shares in the Separate Accounts as required by law and
interpretations thereof, as may be amended or changed from time to time.
Under current law and interpretations thereof, an Insurance Company is
generally required to request voting instructions from Contract owners and to
vote Shares in the Separate Account in proportion with the voting
instructions received. Under certain circumstances, however, an Insurance
Company may
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disregard voting instructions received from Contract owners. Contract owner
voting rights are described in the Prospectus for the Contracts.
There are no conversion or preemptive rights in connection with Shares of the
Trust. All Shares when issued in accordance with the terms of their offering
will be fully paid and nonassessable by the Trust. Shares are redeemable at
net asset value. Upon redeeming Shares of the Fund, a record shareholder
will receive the portion of the Fund's net assets represented by the redeemed
Shares.
As of May 1, 1996, Shares of the Funds were sold only to Separate Accounts of
Fortis. As of that date, Fortis owned substantially all of the outstanding
shares of Intermediate Bond Fund, ValuGrowth Stock Fund and Small Company
Stock Fund. Prior to the offering of Income Equity Fund's Shares, Forum will
be that Fund's sole shareholder and, therefore, a controlling person of that
Fund.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT
OF ADDITIONAL INFORMATION AND THE FUNDS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF THE FUNDS' SHARES, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
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NORWEST SELECT FUNDS
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
This Statement of Additional Information ("SAI") supplements the Prospectuses
dated May 1, 1996 offering shares (the "Shares") of Intermediate Bond Fund,
Income Equity Fund, ValuGrowth-SM- Stock Fund and Small Company Stock Fund
(each a "Fund" and collectively the "Funds"). Each Fund is a separate
portfolio of Norwest Select Funds, a registered open-end, management
investment company (the "Trust").
TABLE OF CONTENTS
Page
----
1. The Trust . . . . . . . . . . . . . . . . . . . . 2
2. Investment Policies . . . . . . . . . . . . . . . 2
3. Investment Limitations. . . . . . . . . . . . . . 16
4. Performance Data. . . . . . . . . . . . . . . . . 18
5. Management. . . . . . . . . . . . . . . . . . . . 21
6. Other Information . . . . . . . . . . . . . . . . 30
Appendix A - Description of Securities Ratings . . . . A-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY AN INVESTOR WITHOUT CHARGE BY
CONTACTING THE COMPANY'S DISTRIBUTOR, FORUM FINANCIAL SERVICES, INC., TWO
PORTLAND SQUARE, PORTLAND, MAINE 04101.
<PAGE>
1. THE TRUST
The Trust was organized as a Delaware business trust on December 7, 1993. The
Trust is a series company that currently consists of four separate portfolios,
Intermediate Bond Fund, Income Equity Fund, ValuGrowth Stock Fund and Small
Company Stock Fund.
Shares of the Trust currently are sold only to separate accounts ("Separate
Accounts") of insurance companies ("Insurance Companies") to serve as the
investment medium for variable life insurance policies and variable annuity
contracts issued by the Insurance Companies (collectively the "Contracts").
The Funds serve as underlying investment vehicles for amounts invested in the
Contracts.
The Separate Accounts, which will be the owners of the Shares, will invest in
the Shares in accordance with instructions received from the owners of the
Contracts. Contract owners should consider that the investment experience of
the Fund or Funds they select will affect the value of and the benefits provided
under their Contract. The Prospectus for the Contracts (which are not issued by
the Trust) describes the relationship between increases or decreases in the net
asset value of Shares (and any distributions on the Shares) and the benefits
provided under a Contract.
2. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in the
Prospectus concerning the Funds' investments, investment techniques and
strategies and the risks associated therewith. No Fund may make any investment
or employ any investment technique or strategy not referenced in the Prospectus
as relating to that Fund. For example, while the SAI describes "swap"
transactions below, only those Funds whose investment policies, as described in
the Prospectus, allow the Fund to invest in swap transactions may do so.
DEFINITIONS
As used in this SAI, the following terms shall have the meanings listed:
"Adviser" shall mean Norwest Investment Management, a part of Norwest Bank
Minnesota, N.A. and investment adviser to each Fund.
"Advisers" shall mean, collectively, the Adviser and Crestone Capital
Management, Inc.
"Board" shall mean the Board of Trustees of the Trust.
"Crestone" shall mean Crestone Capital Management, Inc., investment adviser
to Small Company Stock Fund.
"Moody's" shall mean Moody's Investors Service, a nationally recognized
statistical rating organization.
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"Norwest" shall mean Norwest Bank Minnesota, N.A.
"NRSRO" shall mean a nationally recognized statistical rating organization.
"SEC" shall mean the United States Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's, a nationally recognized statistical
rating organization.
"U.S. Government Securities" shall mean obligations issued or guaranteed by
the United States Government, its agencies or instrumentalities.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
RATINGS AS INVESTMENT CRITERIA
Moody's, S&P and other NRSROs are private services that provide ratings of the
credit quality of debt obligations, including convertible securities. A
description of the range of ratings assigned to various types of bonds and other
securities by several NRSROs is included in Appendix A to this SAI. The Funds
may use these ratings to determine whether to purchase, sell or hold a security.
However, ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices. If an issue of securities ceases to be rated or
if its rating is reduced after it is purchased by a Fund, the Adviser (or
Crestone, in the case of Small Company Stock Fund) will determine whether the
Fund should continue to hold the obligation. Credit ratings attempt to evaluate
the safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, NRSROs may fail to make timely changes in
credit ratings. An issuer's current financial condition may be better or worse
than a rating indicates.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the
holder to receive interest paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible debt securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common stocks
of the same or similar issuers. Convertible securities rank senior to common
stock in a corporation's capital structure but are usually subordinated to
comparable nonconvertible securities. Although no securities investment is
without some risk, investment in convertible securities generally entails less
risk than investment in the issuer's common stock. However, the extent to which
such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
Convertible
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securities have unique investment characteristics in that they generally
(1) have higher yields than common stocks, but lower yields than comparable
non-convertible securities, (2) are less subject to fluctuation in value than
the underlying stocks since they have fixed income characteristics and (3)
provide the potential for capital appreciation if the market price of the
underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by a comparison of its yield with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value, and,
generally, the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by a Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
WARRANTS
Warrants, which are options to purchase an equity security at a specified price
(usually representing a premium over the applicable market value of the
underlying equity security at the time of the warrant's issuance) and usually
during a specified period of time. Unlike convertible securities and preferred
stocks, warrants do not pay a fixed dividend. Investments in warrants involve
certain risks, including the possible lack of a liquid market for the resale of
the warrants, potential price fluctuations as a result of speculation or other
factors and failure of the price of the underlying security to reach a level at
which the warrant prudently can be exercised (in which case the warrant may
expire without being exercised, resulting in the loss of the Fund's entire
investment therein). To the extent a Fund may invest in warrants, no Fund may
invest in warrants if (i) more than 5% of the value of the Fund's net assets
will be invested in warrants (valued at the lower of cost or market) or
(ii) more than 2% of the value of the Fund's net assets would be invested in
warrants which are not listed on the New York Stock Exchange or the American
Stock Exchange. For purpose of the preceding limitation, warrants acquired
by a Fund in units or attached to securities are deemed to have no value.
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ZERO COUPON U.S. GOVERNMENT SECURITIES
In addition to the investments in Zero Coupon U.S. Government Securities
described in the Prospectus, the Funds may invest in other types of related zero
coupon securities. For instance, a number of banks and brokerage firms separate
the principal and interest portions of U.S. Treasury securities and sell them
separately in the form of receipts or certificates representing undivided
interests in these instruments. These instruments are generally held by a bank
in a custodial or trust account on behalf of the owners of the securities and
are known by various names, including Treasury Receipts ("TRs"), Treasury
Investment Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury
Securities ("CATS").
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on mortgage assets to make
payments, mortgage-backed securities may contain elements of credit enhancement.
Credit enhancement falls into two categories: (1) liquidity protection; and
(2) protection against losses resulting after default by an obligor on the
underlying assets and collection of all amounts recoverable directly from the
obligor and through liquidation of the collateral. Liquidity protection refers
to the provisions of advances, generally by the entity administering the pool of
assets (usually the bank, savings association or mortgage banker that
transferred the underlying loans to the issuer of the security), to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting after default and liquidation ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. A Fund will not pay any additional fees for such credit
enhancement, although the existence of credit enhancement may increase the price
of security.
Examples of credit enhancement arising out of the structure of the transaction
include (i) "senior-subordinated securities" (multiple class securities with one
or more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), (ii) creation
of "spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets are held in
reserve against future losses) and (iii) "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceeds
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that covered by
credit enhancement protection could adversely affect the return on an investment
in such a security.
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OTHER MORTGAGE-RELATED SECURITIES
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
Government in connection with the savings and loan crisis, holds assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquires such assets in its corporate capacity. These
assets include, among other things, single family and multi-family mortgage
loans, as well as commercial mortgage loans. In order to dispose of such assets
in an orderly manner, RTC has established a vehicle registered with the SEC
through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that RTC
holds or has acquired, as described above, and are supported by one or more of
the types of private credit enhancements used by private mortgage lenders.
It is anticipated that in the future the Federal Deposit Insurance Corporation
(which also holds mortgage loans as a conservator or receiver of insolvent banks
or in its corporate capacity) or other governmental agencies or
instrumentalities may establish vehicles for the issuance of mortgage-backed
securities that are similar in structure and in types of credit enhancements to
RTC securities.
ASSET-BACKED SECURITIES
A Fund may invest in asset-backed securities, which have structural
characteristics similar to mortgage-backed securities but have underlying assets
that are not mortgage loans or interests in mortgage loans. Asset-backed
securities are securities that represent direct or indirect participations in,
or are secured by and payable from, assets such as motor vehicle installment
sales contracts, installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts and special
purpose corporations.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution.
Asset-backed securities present certain risks that are not presented by
mortgage-backed debt securities or other securities in which a Fund may invest.
Primarily, these securities do not always have the benefit of a security
interest in comparable collateral. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and Federal consumer credit laws, many of which give such debtors the right to
set off certain amounts owed on the credit cards, thereby reducing the balance
due. Automobile receivables generally are secured by automobiles. Most issuers
of automobile receivables permit the loan servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the asset-backed securities. In addition,
because of the large number of vehicles involved in a typical issuance and the
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on repossessed
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collateral may not, in some cases, be available to support payments on these
securities. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
INTEREST RATE PROTECTION TRANSACTIONS
A Fund may enter into interest rate protection transactions, including interest
rate swaps, caps, collars and floors. Interest rate swap transactions involve
an agreement between two parties to exchange interest payment streams that are
based, for example, on variable and fixed rates that are calculated on the basis
of a specified amount of principal (the "notional principal amount") for a
specified period of time. Interest rate cap and floor transactions involve an
agreement between two parties in which the first party agrees to make payments
to the counterparty when a designated market interest rate goes above (in the
case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which the payments are
made when a designated market interest rate either goes above a designated
ceiling or goes below a designated floor on predetermined dates or during a
specified time period.
A Fund expects to enter into interest rate protection transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The Funds intend to use these transactions as a
hedge and not as a speculative investment.
A Fund may enter into interest rate protection transactions on an asset-based
basis, depending on whether it is hedging its assets or its liabilities, and
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these interest
rate protection transactions are entered into for good faith hedging purposes,
and inasmuch as segregated accounts will be established with respect to such
transactions, the Funds believe such obligations do not constitute senior
securities. The net amount of the excess, if any, of a Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of cash, U.S. Government Securities or other liquid
high grade debt obligations having an aggregate net asset value at least equal
to the accrued excess will be maintained in a segregated account by a custodian
that satisfies the requirements of the 1940 Act. The Funds also will establish
and maintain such segregated accounts with respect to its total obligations
under any interest rate swaps that are not entered into on a net basis and with
respect to any interest rate caps, collars and floors that are written by the
Funds.
A Fund will enter into interest rate protection transactions only with financial
institutions believed by the Advisers to present minimal credit risks. If there
is a default by the other party to such a transaction, the Fund will have to
rely on its contractual remedies (which may be limited by bankruptcy, insolvency
or similar laws) pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap
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documentation. Caps, collars and floors are more recent innovations for which
documentation is less standardized and, accordingly, they are less liquid than
swaps.
FUTURES AND OPTIONS
A Fund may engage in certain options strategies in order to enhance the Fund's
income and may engage in certain options and futures strategies to attempt to
hedge the Fund's portfolio. The instruments in which the Funds may invest
include (i) options on fixed income securities, fixed income securities indices
and foreign currencies, (ii) interest rate and foreign currency futures
contracts ("futures contracts"), and (iii) options on futures contracts. Use of
these instruments is subject to regulation by SEC, the several options and
futures exchanges upon which options and futures are traded, and the Commodities
Futures Trading Commission ("CFTC").
The various strategies referred to herein and in the Prospectus are intended to
illustrate the type of strategies that are available to, and may be used by, the
Advisers in managing a Fund's portfolio. No assurance can be given, however,
that any strategies will succeed.
The Funds will not use leverage in their option income and hedging strategies.
In the case of transactions entered into as a hedge, a Fund will hold
securities, currencies or other options or futures positions whose values are
expected to offset ("cover") its obligations thereunder. A Fund will not enter
into a hedging strategy that exposes the Fund to an obligation to another party
unless it owns either (1) an offsetting ("covered") position or (2) cash, U.S.
Government Securities or other liquid, high-grade debt securities with a value
sufficient at all times to cover its potential obligations. When required by
applicable regulatory guidelines, the Fund will set aside cash, U.S. Government
Securities or other liquid, high-grade debt securities in a segregated account
with its custodian in the prescribed amount. Any assets used for cover or held
in a segregated account cannot be sold or closed out while the hedging or option
income strategy is outstanding, unless they are replaced with similar assets.
As a result, there is a possibility that the use of cover or segregation
involving a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS STRATEGIES
A Fund may purchase put and call options written by others and write (sell) put
and call options covering specified securities, stock index-related amounts or
currencies. A put option (sometimes called a "standby commitment") gives the
buyer of the option, upon payment of a premium, the right to deliver a specified
amount of a security or currency to the writer of the option on or before a
fixed date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of a
security or currency on or before a fixed date, at a predetermined price. The
predetermined prices may be higher or lower than the market value of the
underlying currency or security. A Fund may buy or sell both exchange-traded
and over-the-counter ("OTC") options. A Fund will purchase or write an option
only if that option is traded on a recognized U.S. options exchange or if the
Advisers believe that
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a liquid secondary market for the option exists. When a Fund purchases an OTC
option, it relies on the dealer from which it has purchased the OTC option to
make or take delivery of the securities or currency underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction. OTC
options and the securities underlying these options currently are treated as
illiquid securities by the Funds.
Upon selling an option, a Fund receives a premium from the purchaser of the
option. Upon purchasing an option the Fund pays a premium to the seller of the
option. The amount of premium received or paid by the Fund is based upon
certain factors, including the market price of the underlying securities index,
the relationship of the exercise price to the market price, the historical price
volatility of the underlying securities index, the option period, supply and
demand and interest rates.
A Fund may purchase call options on debt securities that an Adviser intends to
include in the Fund's portfolio in order to fix the cost of a future purchase.
Call options may also be purchased as a means of participating in an anticipated
price increase of a security on a more limited risk basis than would be possible
if the security itself were purchased. In the event of a decline in the price
of the underlying security, use of this strategy would serve to limit the
potential loss to the Fund to the option premium paid; conversely, if the market
price of the underlying security increases above the exercise price and the Fund
either sells or exercises the option, any profit eventually realized will be
reduced by the premium paid. A Fund may similarly purchase put options in order
to hedge against a decline in market value of securities held in its portfolio.
The put enables the Fund to sell the underlying security at the predetermined
exercise price; thus the potential for loss to the Fund is limited to the option
premium paid. If the market price of the underlying security is lower than the
exercise price of the put, any profit the Fund realizes on the sale of the
security would be reduced by the premium paid for the put option less any amount
for which the put may be sold.
The Adviser may write call options when it believes that the market value of the
underlying security will not rise to a value greater than the exercise price
plus the premium received. Call options may also be written to provide limited
protection against a decrease in the market price of a security, in an amount
equal to the call premium received less any transaction costs.
A Fund may purchase and write put and call options on fixed income security
indices in much the same manner as the options discussed above, except that
index options may serve as a hedge against overall fluctuations in the fixed
income securities markets (or market sectors) or as a means of participating in
an anticipated price increase in those markets. The effectiveness of hedging
techniques using index options will depend on the extent to which price
movements in the index selected correlate with price movements of the securities
which are being hedged. Index options are settled exclusively in cash.
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SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
A Fund may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if a Fund wished
to terminate its potential obligation to sell securities or currencies under a
call option it had written, a call option of the same type would be purchased by
the Fund. Closing transactions essentially permit the Fund to realize profits
or limit losses on its options positions prior to the exercise or expiration of
the option. In addition:
(1) The successful use of options depends upon the Advisers' ability to
forecast the direction of price fluctuations in the underlying securities or
currency markets, or in the case of an index option, fluctuations in the market
sector represented by the index.
(2) Options normally have expiration dates of up to nine months. Options that
expire unexercised have no value. Unless an option purchased by a Fund is
exercised or unless a closing transaction is effected with respect to that
position, a loss will be realized in the amount of the premium paid.
(3) A position in an exchange-listed option may be closed out only on an
exchange which provides a market for identical options. Most exchange-listed
options relate to equity securities. Exchange markets for options on foreign
currencies are relatively new and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options traded in
the OTC markets (currently the primary markets for options on foreign
currencies) only by negotiating directly with the other party to the option
contract or in a secondary market for the option if such market exists. There
is no assurance that a liquid secondary market will exist for any particular
option at any specific time. If it is not possible to effect a closing
transaction, a Fund would have to exercise the option which it purchased in
order to realize any profit. The inability to effect a closing transaction on
an option written by a Fund may result in material losses to the Fund.
(4) A Fund's activities in the options markets may result in a higher portfolio
turnover rate and additional brokerage costs.
FUTURES STRATEGIES
A futures contract is a bilateral agreement wherein one party agrees to accept,
and the other party agrees to make, delivery of cash, an underlying debt
security or the currency as called for in the contract at a specified future
date and at a specified price. For futures contracts with respect to an
interest rate or securities index, delivery is of an amount of cash equal to a
specified dollar amount times the difference between the index value at the time
of the contract and the close of trading of the contract.
A Fund may sell interest rate futures contracts in order to continue to receive
the income from a fixed income security, while endeavoring to avoid part of or
all of a decline in the market value of that security which would accompany an
increase in interest rates.
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A Fund may purchase call options on a futures contract as a means of obtaining
temporary exposure to market appreciation at limited risk. This strategy is
analogous to the purchase of a call option on an individual security, in that it
can be used as a temporary substitute for a position in the security itself.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING
No price is paid upon entering into futures contracts; rather, a Fund is
required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash or U.S. Government Securities generally
equal to 5% or less of the contract value. This amount is known as initial
margin. Subsequent payments, called variation margin, to and from the broker
are made on a daily basis as the value of the futures position varies. When
writing a call on a futures contract, variation margin must be deposited in
accordance with applicable exchange rules. The initial margin in futures
transactions is in the nature of a performance bond or good-faith deposit on the
contract that is returned to the Fund upon termination of the contract, assuming
all contractual obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a market for such
futures contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for a Fund to close a
position, and in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin. In addition:
(1) Successful use by a Fund of futures contracts and related options will
depend upon the Advisers' ability to predict movements in the direction of the
overall securities and currency markets, which requires different skills and
techniques than predicting changes in the prices of individual securities.
(2) Futures contracts relate not to the current level of the underlying
instrument but to the anticipated levels at some point in the future; thus, for
example, trading of stock index futures may not reflect the trading of the
securities which are used to formulate an index or even actual fluctuations in
the relevant index itself. As a result, the price of futures contracts may not
correlate perfectly with movement in the price of the hedged securities or
currencies due to price distortions in the futures market or otherwise. There
may be several reasons unrelated to the value of the underlying securities or
currencies which cause this situation to occur. As a result, a
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correct forecast of general market trends still may not result in successful
hedging through the use of futures contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for any
particular contract at any particular time. In such event, it may not be
possible to close a position, and in the event of adverse price movements, the
Fund will continue to be required to make daily cash payments of variation
margin.
(4) Like other options, options on futures contracts have a limited life. A
Fund will not trade options on futures contracts on any exchange or board of
trade unless and until, in the Adviser's opinion, the market for such options
has developed sufficiently that the risks in connection with options on futures
transactions are not greater than the risks in connection with futures
transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at the
time of purchase. This amount and the transaction costs is all that is at risk.
Sellers of options on futures contracts, however, must post an initial margin
and are subject to additional margin calls which could be substantial in the
event of adverse price movements.
(6) A Fund's activities in the futures markets may result in a higher portfolio
turnover rate and additional transaction costs in the form of added brokerage
commissions.
REVERSE REPURCHASE AGREEMENTS
Generally, a reverse repurchase agreement enables a Fund to recover for the term
of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by a Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
investment technique.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Funds may purchase securities on a when-issued or delayed delivery basis.
In those cases, the purchase price and the interest rate payable on the
securities are fixed on the transaction date and delivery and payment may take
place a month or more after the date of the transaction. At the time a Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction as a purchase and thereafter reflect
the value each day of such securities in determining its net asset value.
A Fund will make commitments for such when-issued transactions only when it has
the intention of actually acquiring the securities. To facilitate such
acquisitions, the Fund will maintain with its custodian a separate account with
portfolio securities in an amount at least equal to such
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commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities, sales of the securities held in the separate
account or from other available sources of cash. If a Fund chooses to dispose
of the right to acquire a when-issued security prior to its acquisition, it
could, as with the disposition of any other portfolio obligation, incur a gain
or loss due to market fluctuation.
SHORT SALES
The Funds may make short sales of securities they own or have the right to
acquire at no added cost through conversion or exchange of other securities they
own (referred to as short sales "against the box"). Intermediate Bond Fund may
make short sales of securities which it does not own or have the right to
acquire. A short sale that is not made "against the box" is a transaction in
which a Fund sells a security it does not own in anticipation of a decline in
the market price for the security. Short sales that are not made "against the
box" create opportunities to increase the Fund's return but, at the same time,
involve special risk considerations and may be considered a speculative
technique. Since the Fund in effect profits from a decline in the price of the
securities sold short without the need to invest the full purchase price of the
securities on the date of the short sale, the Fund's net asset value per share,
will tend to increase more when the securities it has sold short decrease in
value, and to decrease more when the securities it has sold short increase in
value, than would otherwise be the case if it had not engaged in such short
sales. Short sales theoretically involve unlimited loss potential, as the
market price of securities sold short may continuously increase, although a Fund
may mitigate such losses by replacing the securities sold short before the
market price has increased significantly. Under adverse market conditions a
Fund might have difficulty purchasing securities to meet its short sale delivery
obligations, and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor those sales.
If the Fund makes a short sale "against the box," the Fund will not immediately
deliver the securities sold and would not receive the proceeds from the sale.
The seller is said to have a short position in the securities sold until it
delivers the securities sold, at which time it receives the proceeds of the
sale. The Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Adviser believes that the price
of a security may decline, causing a decline in the value of a security owned by
the Fund or a security convertible into or exchangeable for such security. In
such case, any future losses in the Fund's long position would be reduced by an
offsetting future gain in the short position.
A Fund will only enter into short sales "against the box" when an equivalent
amount of the securities sold is segregated at the Fund's custodian. A Fund's
ability to enter into short sales transactions is limited by certain tax
requirements.
BORROWING AND LEVERAGE
Borrowing for investment purposes, lending securities, entering into reverse
repurchase agreements, purchasing when-issued and delayed delivery securities,
selling securities short, and
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engaging in dollar roll transactions involve the use of "leverage" when cash
made available to a Fund is used to make portfolio invesments. So long as a
Fund is able to realize a net return on its investment portfolio that is higher
than interest expense incurred, if any, leverage will result in higher current
net investment income being realized by the Fund than if the Fund were not
leveraged. On the other hand, interest rates change from time to time, as does
their relationship to each other, depending upon such factors as supply and
demand, monetary and tax policies and investor expectations. Changes in such
factors could cause the relationship between the cost of leveraging and the
yield to change so that rates involved in the leveraging arrangement may
substantially increase relative to the yield on the obligations in which the
proceeds of the leveraging have been invested. To the extent that the interest
expense involved in leveraging approaches the net return on the Fund's
investment portfolio, the benefit of leveraging will be reduced, and, if the
interest expense on borrowings were to exceed the net return to shareholders,
the Fund's use of leverage would result in a lower rate of return than if the
Fund were not leveraged. Similarly, the effect of leverage in a declining
market could be a greater decrease in net asset value per share than if the Fund
were not leveraged. In an extreme case, if the Fund's current investment income
were not sufficient to meet the interest expense of leveraging, it could be
necessary for the Fund to liquidate certain of its investments at an
inappropriate time. The use of leverage may be considered speculative.
In order to limit the risks involved in various transactions involving leverage,
the Trust's custodian will set aside and maintain in a segregated account cash,
U.S. Government Securities and other liquid, high-grade debt securities in
accordance with SEC guidelines. The account's value, which is marked to market
daily, will be at least equal to the Fund's commitments under these
transactions. The Fund's commitments include (i) the Fund's obligations to
repurchase securities under a reverse repurchase agreement, settle when-issued
and forward commitment transactions and make payments under a cap or floor and
(ii) the greater of the market value of securities sold short or the value of
the securities at the time of the short sale (reduced by any margin deposit).
The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each interest rate swap will be calculated on a
daily basis and an amount at least equal to the accrued excess will be
maintained in the segregated account. If the Fund enters into an interest rate
swap on other than a net basis, the Fund will maintain the full amount accrued
on a daily basis of the Fund's obligations with respect to the swap in the
segregated account. The use of a segregated account in connection with
leveraged transactions may result in a Fund's portfolio being 100% leveraged.
DOMESTIC AND FOREIGN BANK OBLIGATIONS
A Fund may invest in fixed-time deposits or certificates of deposit, which are
payable at their stated maturity date and bear a fixed rate of interest and
generally may be withdrawn on demand by the Fund, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation and could reduce the Fund's yield.
Although fixed-time deposits do not in all cases have a secondary market, there
are no contractual restrictions on the Fund's right to transfer a beneficial
interest in the deposits to third parties. Deposits subject to early withdrawal
penalties or that mature in more than seven days are treated as illiquid
securities if there is no readily available market for the securities.
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Bankers' acceptances are negotiable obligations of a bank to pay a draft which
has been drawn by a customer and are usually backed by goods in international
trade. A Fund's investments in the obligations of foreign banks and their
branches, agencies or subsidiaries may be obligations of the parent, of the
issuing branch, agency or subsidiary, or both. Investments in foreign bank
obligations are limited to banks and branches located in countries which the
Adviser believes do not present undue risk. Investments that a Fund may make in
securities of foreign branches of domestic banks and domestic and foreign
branches of foreign banks may involve certain risks, including future political
and economic developments, the possible imposition of foreign withholding taxes
on interest income payable on such securities, the possible seizure or
nationalization of foreign deposits, differences from domestic banks in
applicable accounting, auditing and financial reporting standards, and the
possible establishment of exchange controls or other foreign governmental laws
or restrictions applicable to the payment of certificates of deposit or time
deposits which might affect adversely the payment of principal and interest on
such securities held by a Fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased OTC options and repurchase agreements
maturing in more than seven days.
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid. The Board has delegated the function of
making day-to-day determinations of liquidity to the Advisers, pursuant to
guidelines approved by the Board. The Advisers take into account a number of
factors in reaching liquidity decisions, including but not limited to: (1) the
frequency of trades and quotations for the security; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (3) the willingness of dealers to undertake to make a market in the
security; and (4) the nature of the marketplace trades, including the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer. The Advisers monitors the liquidity of the
securities in each Fund's portfolio and reports periodically on such decisions
to the Board.
TEMPORARY DEFENSIVE POSITION
When a Fund assumes a temporary defensive position, it may invest in (i) short-
term U.S. Government Securities, (ii) certificates of deposit, bankers'
acceptances and interest-bearing savings deposits of commercial banks doing
business in the United States that, at the time of investment, have total assets
in excess of one billion dollars and are insured by the Federal Deposit
Insurance Corporation, (iii) commercial paper of prime quality rated Prime-2 or
higher by Moody's or A-2 or higher by S&P or, if not rated, determined by an
Adviser to be of comparable quality, (iv) repurchase agreements covering any of
the securities in which the Fund may invest directly and (v) money market mutual
funds.
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The Funds may invest in the securities of other investment companies within the
limits prescribed by the 1940 Act. Under normal circumstances, each Fund
intends to invest less than 5% of the value of its net assets in the securities
of other investment companies. In addition to the Fund's expenses (including
the various fees), as a shareholder in another investment company, a Fund would
bear its pro rata portion of the other investment company's expenses (including
fees).
3. INVESTMENT LIMITATIONS
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of a
Fund's assets or purchases and redemptions of Shares will not be considered a
violation of the limitation.
FUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are fundamental
policies of the Fund and cannot be changed without the affirmative vote of a
majority of the Fund's outstanding voting securities (as defined in the
Prospectus).
(1) DIVERSIFICATION: With respect to 75% of its assets, the Fund may not
purchase a security other than a U.S. Government Security if, as a result,
more than 5% of the Fund's total assets would be invested in the securities
of a single issuer or the Fund would own more than 10% of the outstanding
voting securities of any single issuer; provided, however, that each Fund
may invest all or a portion of its assets in another diversified, open-end
management investment company with substantially the same investment
objective, policies and restrictions as the Fund.
(2) CONCENTRATION: The Fund may not purchase securities if, immediately
after the purchase, more than 25% of the value of the Fund's total assets
would be invested in the securities of issuers conducting their principal
business activities in the same industry; provided, however that there is
no limit on investments in U.S. Government Securities, repurchase
agreements covering U.S. Government Securities, foreign government
securities, mortgage-backed or housing-related securities, municipal
securities, and issuers domiciled in a single country; that financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance and diversified
finance); that utility companies are classified according to their services
(for example, gas, gas transmission, electric and gas, electric and
telephone); and that each Fund may invest all of a portion of its assets in
another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
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(3) BORROWING: Each Fund may borrow money for temporary or emergency
purposes, including the meeting of redemption requests; but not in excess
of 33 1/3% of the value of the Fund's total assets (as computed immediately
after the borrowing).
(4) ISSUANCE OF SENIOR SECURITIES: The Fund may not issue senior
securities except to the extent permitted by the 1940 Act.
(5) UNDERWRITING ACTIVITIES: The Fund may not underwrite securities of
other issuers, except to the extent that the Fund may be considered to be
acting as an underwriter in connection with the disposition of portfolio
securities.
(6) MAKING LOANS: The Fund may not make loans, except the Fund may enter
into repurchase agreements, purchase debt securities that are otherwise
permitted investments and lend portfolio securities.
(7) PURCHASES AND SALES OF COMMODITIES: The Fund may not purchase or sell
physical commodities or contracts, options or options on contracts to
purchase or sell physical commodities, provided that currencies and
currency-related contracts and contracts on indices are not deemed to be
physical commodities.
(8) PURCHASES AND SALES OF REAL ESTATE: The Fund may not purchase or sell
real estate or any interest therein, except that the Fund may invest in
debt obligations secured by real estate or interests therein or securities
issued by companies that invest in real estate or interests therein.
NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are not
fundamental policies of the Fund and may be changed by the Board.
(1) BORROWING: Borrowings for other than temporary or emergency purposes
or meeting redemption requests may not exceed an amount equal to 5% of the
Fund's net assets.
(2) DIVERSIFICATION: Purchases of securities for the Fund also will be
limited in accordance with the diversification requirements for insurance
products established by section 817(h) of the Internal Revenue Code of
1986.
(3) ILLIQUID SECURITIES: Each Fund may not acquire securities or invest
in repurchase agreements with respect to any securities if, as a result,
more than (i) 15% of the Fund's net assets (taken at current value) would
be invested in repurchase agreements not entitling the holder to payment of
principal within seven days and in securities which are not readily
marketable, including securities that are not readily marketable by virtue
of restrictions on the sale of such securities to the public without
registration under the
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Securities Act of 1933 ("Restricted Securities") or (ii) 10% of the Fund's
total assets would be invested in Restricted Securities.
(4) OTHER INVESTMENT COMPANIES: No Fund may invest in securities of
another investment company, except to the extent permitted by the 1940 Act.
(5) UNSEASONED ISSUERS: The Fund may not invest in securities (other than
fully-collateralized debt obligations and eligible mortgage-backed and
asset-backed securities) issued by companies that have conducted continuous
operations for less than three years, including the operations of
predecessors, unless guaranteed as to principal and interest by an issuer
in whose securities the Fund could invest, if, as a result, more than 5% of
the value of the Fund's total assets would be so invested; provided, that
the Fund may invest all of a portion of its assets in another diversified,
open-end management investment company with substantially the same
investment objective, policies and restrictions as the Fund.
(6) PLEDGING: The Fund may not pledge, mortgage, hypothecate or encumber
any of its assets except to secure permitted borrowings.
(7) INVESTMENTS BY OFFICERS AND TRUSTEES: The Fund may not invest in or
hold securities of any issuer if, to the Trust's knowledge, officers and
trustees of the Trust or the Adviser or Crestone, individually owning
beneficially more than one-half of 1% of the securities of the issuer, in
the aggregate own more than 5% of the issuer's securities.
(8) OIL, GAS, AND MINERAL INVESTMENTS AND REAL ESTATE: The Fund may not
invest in interests in oil, gas, or other mineral leases of interests in
other mineral exploration or development programs, and the Fund may not
invest in real estate limited partnerships.
(9) SECURITIES WITH VOTING RIGHTS: Intermediate Bond Fund may not purchase
securities having voting rights at the time of purchase, except securities
of other investment companies.
4. PERFORMANCE DATA
The Funds may quote performance in various ways. These quotations may from time
to time be used in advertisements, shareholder reports or other communications
to shareholders. All performance information supplied by the Funds in
advertising is historical and is not intended to indicate future returns. Each
Fund's net asset value fluctuates in response to market conditions and other
factors, and the value of the Fund's Shares when redeemed may be worth more or
less than their original cost. Each Fund's yield and total return (as well as
any other performance measurement) fluctuates in response to market conditions
and other factors.
In performance advertising each Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Inc., Lipper Analytical Services, Inc.,
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IBC/Donoghue, Inc. or other companies which track the investment performance of
investment companies ("Fund Tracking Companies"). Each Fund may also compare
any of its performance information with the performance of recognized stock,
bond and other indices, including but not limited to Standard & Poor's 500
Composite Stock Index, Russell 2000 Index, Morgan Stanley - Europe, Australian
and Far East Index, Lehman Brothers Intermediate Government Index, Lehman
Brothers Intermediate Government/Corporate Index, Salomon Brothers Bond Index,
Shearson Lehman Bond Index, the Dow Jones Industrial Average, U.S. Treasury
bonds, bills or notes and changes in the Consumer Price Index as published by
the U.S. Department of Commerce. The Funds may refer to general market
performances over past time periods such as those published by Ibbotson
Associates (for instance, its "Stocks, Bonds, Bills and Inflation Yearbook").
In addition, the Funds may refer in such materials to mutual fund performance
rankings and other data published by Fund Tracking Companies. Performance
advertising may also refer to discussions of the Funds and comparative mutual
fund data and ratings reported in independent periodicals, such as newspapers
and financial magazines.
Performance figures for a Fund do not include fees and charges of the Separate
Accounts or Contracts. A Fund will not advertise its performance unless such
advertisement is accompanied by information reflecting the performance of the
applicable Separate Account.
YIELD CALCULATIONS
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield for any given
period is not an indication or representation by the Fund of future yields or
rates of return on the Fund's Shares. The yields of each Fund are not fixed or
guaranteed, and an investment in a Fund is not insured or guaranteed.
Accordingly, yield information may not necessarily be used to compare Shares of
a Fund with investment alternatives which, like money market instruments or bank
accounts, may provide a fixed rate of interest. Also, it may not be appropriate
to compare a Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30 day or one-month period, net of expenses, by the
average number of Shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced
with respect to bonds purchased at a premium over their par value by subtracting
a portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
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TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
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Period total return is calculated according to the following formula:
PT = (ERV DIVIDED BY P-1)
Where:
PT = period total return.
The other definitions are the same as in average annual total return above.
The average annual total return of each class of each Fund for the periods ended
December 31, 1995 was as follows. The actual dates of the commencement of each
Fund's operations is listed in the Fund's financial statements.
One Year Five Years Since Inception
-------- ---------- ---------------
Intermediate Bond Fund 17.08% N/A 10.12%
ValuGrowth Stock Fund 24.15% N/A 13.26%
Small Company Stock Fund N/A N/A 15.95%
5. MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Funds is indicated by an asterisk.
John Y. Keffer and David R. Keffer are brothers.
John Y. Keffer, Chairman and President.*
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Financial Corp. (a registered transfer agent), Forum
Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Director, Trustee and officer of various registered investment companies
for which Forum Financial Services, Inc. serves as manager, administrator
and/or distributor. His address is Two Portland Square, Portland, Maine
04101.
Robert C. Brown, Trustee.*
Director, Federal Farm Credit Banks Funding Corporation and Farm Credit
System Financial Assistance Corp. Prior thereto, he was Manager of the
Capital Markets Group,
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Norwest Corporation (a multi-bank holding company and parent of Norwest)
until 1991. His address is 1431 Landings Place, Sarasota, Florida 34231.
Donald H. Burkhardt, Trustee.
Principal, The Burkhardt Law Firm. His address is 777 South Steele Street,
Denver, Colorado 80209.
James C. Harris, Trustee.
President and sole Director of James C. Harris & Co., Inc. (a financial
consulting firm). Mr. Harris is also a liquidating Trustee and former
Director of First Midwest Corporation, a small business investment company.
His address is 6950 France Avenue South, Minneapolis, Minnesota 55435.
Richard M. Leach, Trustee.
Chief Executive Officer, Tee Box Company (a golf equipment manufacturer),
since January 1994 and President of Richard M. Leach Associates (a
financial consulting firm) since 1992. Prior thereto, Mr. Leach was Senior
Adviser of Taylor Investments (a registered investment adviser), a Director
of Mountainview Broadcasting (a radio station) and Managing Director,
Digital Techniques, Inc. (an interactive video design and manufacturing
company). His address is P.O. Box 1888, New London, New Hampshire 03257.
Timothy J. Penny, Trustee
Senior Counselor to the public relations firm Himle-Horner since 1994.
Prior thereto Mr. Penny was the Representative to the United States
Congress from Minnesota's First Congressional District. His address is
500 North State Street, Waseca, Minnesota 56095.
Donald C. Willeke, Trustee
Principal of the law firm of Willeke & Daniels. His address is
201 Ridgewood Avenue, Minneapolis, Minnesota 55403.
Michael D. Martins, Vice President and Treasurer
Fund Accounting Manager, Forum Financial Corp., with which he has been
associated since 1995. Prior thereto, Mr. Martins was at the audit firm of
Deloitte & Touche LLP. Mr. Martins is also an officer of various
registered investment companies for which Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. His address is
Two Portland Square, Portland, Maine 04101.
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David I. Goldstein, Vice President and Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also an officer of various
registered investment companies for which Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. His address is
Two Portland Square, Portland, Maine 04101.
David R. Keffer, Vice President, Assistant Secretary and Assistant Treasurer.
Chief Financial Officer, Forum Financial Services, Inc. Mr. Keffer is also
an officer of various registered investment companies for which Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine 04101.
Sara M. Clark, Vice President and Assistant Treasurer.
Managing Director, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, from 1991 to 1994 Ms. Clark was
Controller of Wright Express Corporation (a national credit card company)
and for six years prior thereto was employed at Deloitte & Touche LLP as an
accountant. Ms. Clark is also an officer of various registered investment
companies for which Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
Thomas G. Sheehan, Vice President and Assistant Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1993. Prior thereto, Mr. Sheehan was Special Counsel to the Division
of Investment Management of the SEC. Mr. Sheehan is also an officer of
various registered investment companies for which Forum Financial Services,
Inc. serves as manager, administrator and/or distributor. His address is
Two Portland Square, Portland, Maine 04101.
Renee A. Walker, Assistant Secretary.
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, Ms. Walker was an administrator at
Longwood Partners (the manager of a hedge fund partnership) for a year.
After graduating from college, from 1991 to 1993 Ms. Walker was a sales
representative assistant at PaineWebber Incorporated (a broker-dealer).
Her address is Two Portland Square, Portland, Maine 04101.
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Christopher J. Kelley, Assistant Secretary.
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto and subsequent to attending law
school, Mr. Kelley was employed at Putnam Investments in legal and
compliance capacities. His address is Two Portland Square, Portland, Maine
04101.
TRUSTEE COMPENSATION
Each Trustee of the Trust is paid a quarterly retainer fee of $4,000 for the
Trustee's service to the Trust and to Norwest Advantage Funds, a separate
registered open-end management investment company for which each Trustee serves
as trustee. In addition, each Trustee is paid $3,000 for each Board meeting
attended (whether in person or by electronic communication) and is paid $1,000
for each Committee meeting attended on a date when a Board meeting is not held.
Trustees are also reimbursed for travel and related expenses incurred in
attending meetings of the Board. Mr. Keffer received no compensation for his
services as Trustee for the past year and no officer of the Trust is compensated
by the Trust. In addition, Mr. Keffer currently is not compensated or
reimbursed for his expenses in serving as Trustee.
Mr. Burkhardt, Chairman of the Trust's and Norwest Advantage Funds' audit
committees, receives additional compensation of $1,000 from the Trust and $5,000
from Norwest Advantage Funds for his services as Chairman. Mr. Penny was
appointed a Trustee in January 1996 and, accordingly, was not paid any
compensation during the Trust's last fiscal year.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Norwest Advantage Funds, combined. Information is
presented for the year ended October 31, 1995, the fiscal year end of certain
portfolios of Norwest Advantage Funds.
Total Compensation From
Total Compensation the Trust and Norwest
from the Trust Advantage Funds
-------------- --------------
Mr. Brown $2,613 $26,177
Mr. Burkhardt $3,114 $33,023
Mr. Harris $2,610 $25,177
Mr. Leach $2,611 $25,177
Mr. Willeke $0 $14,000
Neither the Trust or Norwest Advantage Funds has adopted any from of retirement
plan covering Trustees or officers.
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INVESTMENT ADVISORY SERVICES
NORWEST INVESTMENT MANAGEMENT
The Adviser is required to furnish at its expense all services, facilities and
personnel necessary in connection with managing each Fund's investments and
effecting portfolio transactions for each Fund. Under its advisory agreements,
Norwest may delegate its responsibilities to any investment subadviser approved
by the Board and the shareholders of the respective Fund with respect to all or
a portion of the assets of the Fund.
The investment advisory agreement between each Fund and Norwest will continue in
effect only if such continuance is specifically approved at least annually by
the Board or by vote of the shareholders of the Fund, and in either case by a
majority of the Trustees who are not parties to the investment advisory
agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the investment advisory agreement.
The investment advisory agreement with respect to a Fund is terminable without
penalty by the Fund with respect to that Fund on 60 days' written notice when
authorized either by vote of the Fund's shareholders or by a vote of a majority
of the Board, or by the Adviser on not more than 60 days' nor less than 30 days'
written notice, and will automatically terminate in the event of its assignment.
The investment advisory agreements also provide that, with respect to each Fund,
neither the Adviser nor its personnel shall be liable for any error of judgment
or mistake of law or for any act or omission in the performance of its or their
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of the Adviser's or their duties or by reason of
reckless disregard of its or their obligations and duties under the agreement.
The investment advisory agreements provide that the Adviser may render service
to others.
The advisory fees are accrued daily and paid monthly. Norwest, in its sole
discretion, may waive all or any portion of its advisory fee with respect to
each Fund. The following table shows the dollar amount of fees payable under
the investment advisory agreements between Norwest and the Trust with respect to
each Fund, the amount of each fee that was waived by Norwest, if any, and the
actual fee received by Norwest. The data is for the past three fiscal years or
shorter period if the Fund has been in operation for a shorter period. As of
December 31, 1995, Income Equity Fund had not commenced operations.
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Advisory Advisory Advisory
Fee Fee Fee
Payable Waived Retained
------- ------ --------
Intermediate Bond Fund
Year Ended December 31, 1995 $12,501 $12,501 $0
Period Ended December 31, 1994 $3,852 $3,852 $0
ValuGrowth Stock Fund
Year Ended December 31, 1995 $24,138 $24,138 $0
Period Ended December 31, 1994 $6,307 $6,307 $0
Small Company Stock Fund
Period Ended December 31, 1995 $7,663 $7,663 $0
SUBADVISER - SMALL COMPANY STOCK FUND
To assist the Adviser in carrying out its obligations under the investment
advisory agreement with respect to the Small Company Stock Fund, the Adviser has
entered into an investment subadvisory agreement with Crestone, 7720 East
Belleview Avenue, Suite 220, Englewood, Colorado 80111. Crestone is registered
with the SEC as an investment adviser and is a non-wholly owned subsidiary of
Norwest. Pursuant to the investment subadvisory agreement, Crestone makes
investment decisions for the Fund and continuously reviews, supervises and
administers the Fund's investment program with respect to that portion, if any,
of the Fund's portfolio that the Adviser believes should be invested using
Crestone as a subadviser. Currently, Crestone manages the entire portfolio of
the Fund and has since the Fund's inception. The Adviser supervises the
performance of Crestone, including its adherence to the Portfolio's investment
objective and policies and pays Crestone a fee for its investment management
services. For its services under the, the Adviser pays Crestone a fee based on
the Fund's average daily net assets at an annual rate of 0.40% on the first $30
million; 0.30% on the next $30 million; 0.20% on the next $40 million and 0.15%
on all sums in excess of $100 million.
Crestone has conducted investment management services since its organization in
1990. As of December 31, 1995, Crestone provided investment management services
to over 40 clients and managed approximately $300 million in assets.
ADMINISTRATION AND DISTRIBUTION
Forum Financial Services, Inc. ("Forum") supervises the overall management of
the Trust (which includes, among other responsibilities, negotiation of
contracts and fees with, and monitoring of performance and billing of, the
Trust's transfer agent and custodian and arranging for maintenance of books and
records of the Trust) and provides the Trust with general office facilities
pursuant to a management agreement.
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The management agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by the shareholders and,
in either case, by a majority of the Trustees who are not parties to the
management agreement or interested persons of any such party.
The management agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to any Fund by vote of that Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The management agreement also provides that, with respect to
each Fund, neither Forum nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the performance of its
or their duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of Forum's or their duties or by reason of
reckless disregard of its or their obligations and duties under the management
agreement.
Forum is also the Trust's distributor and acts as the agent of the Trust in
connection with the offering of Shares of each Fund on a "best efforts" basis
pursuant to a distribution agreement.
Management fees are accrued daily and paid monthly. Forum, in its sole
discretion, may waive all or any portion of its management fee with respect to
each Fund. The following table shows the dollar amount of fees payable under
the management agreement between Forum and the Trust with respect to each Fund,
the amount of fee that was waived by Forum, if any, and the actual fee received
by Forum. The data is for the past three fiscal years or shorter period if the
Fund has been in operation for a shorter period. As of December 31, 1995,
Income Equity Fund had not commenced operations.
Management Management Management
Fee Payable Fee Waived Fee Retained
----------- ---------- ------------
Intermediate Bond Fund
Year Ended December 31, 1995 $4,167 $4,167 $0
Period Ended December 31, 1994 $1,284 $1,284 $0
ValuGrowth Stock Fund
Year Ended December 31, 1995 $6,035 $6,035 $0
Period Ended December 31, 1994 $1,577 $1,577 $0
Small Company Stock Fund
Period Ended December 31, 1995 $1,916 $1,916 $0
TRANSFER AGENT AND CUSTODIAN
Norwest serves as transfer agent and dividend disbursing agent for the Trust (in
this capacity, the "Transfer Agent"). The Transfer Agent maintains an account
for each shareholder of the Trust performs other transfer agency and shareholder
service functions, and acts as dividend disbursing agent for the Trust. Norwest
also serves as the Trust's custodian for the Trust (in this capacity
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"Custodian") and may appoint certain subcustodians to act as custodian for the
foreign securities and other assets held in foreign countries of those Funds
that invest in foreign securities. The Custodian's responsibilities include
safeguarding and controlling the Trust's cash and securities, determining income
and collecting interest on Fund investments.
Pursuant to rules adopted under the 1940 Act, each Fund may maintain its foreign
securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board following a consideration of a number of factors, including
(but not limited to) the reliability and financial stability of the institution;
the ability of the institution to perform capably custodial services for the
Fund; the reputation of the institution in its national market; the political
and economic stability of the country in which the institution is located; and
further risks of potential nationalization or expropriation of Fund assets. The
custodian employs qualified foreign subcustodians to provide custody of the
Funds' foreign assets in accordance with applicable regulations.
For its services as Transfer Agent, Norwest is compensated at an annual rate of
0.05% of each Fund's average daily net assets. For its services as Custodian,
Norwest is paid an account adminstration fee plus securities holding and
transaction fees which, collectively, may not exceed an annual rate of 0.05% of
each Fund's average daily net assets. The transfer agency agreement and
custodian agreement between the Trust and Norwest each will continue in effect
only if such continuance is specifically approved at least annually by the Board
or by a vote of the shareholders of the Trust and in either case by a majority
of the Trustees who are not parties to the respective agreements or interested
persons of any such party, at a meeting called for the purpose of voting on the
respective agreements.
Transfer agent fees are accrued daily and paid monthly. Norwest, in its sole
discretion, may waive all or any portion of its transfer agent fee with respect
to each Fund. The following table shows the dollar amount of transfer agent
fees payable to Norwest, the amount of the fee that was waived by Norwest, if
any, and the actual fee received by Norwest. The data is for the past three
fiscal years or shorter period if the Fund has been in operation for a shorter
period. As of December 31, 1995, Income Equity Fund had not commenced
operations.
Transfer Agent Transfer Agent Transfer Agent
Fee Payable Fee Waived Fee Retained
----------- ---------- ------------
Intermediate Bond Fund
Year Ended December 31, 1995 $1,667 $1,667 $0
Period Ended December 31, 1994 $514 $514 $0
ValuGrowth Stock Fund
Year Ended December 31, 1995 $2,414 $2,414 $0
Period Ended December 31, 1994 $631 $631 $0
Small Company Stock Fund
Period Ended December 31, 1995 $766 $766 $0
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PORTFOLIO ACCOUNTING
Forum Financial Corp. ("FFC"), an affiliate of Forum, performs portfolio
accounting services for each Fund pursuant to a fund accounting agreement with
the Trust. The fund accounting agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board or by a vote
of the shareholders of the Trust and in either case by a majority of the
Trustees who are not parties to the fund accounting agreement or interested
persons of any such party, at a meeting called for the purpose of voting on the
fund accounting agreement.
Under its agreement, FFC prepares and maintains books and records of each Fund
on behalf of the Trust that are required to be maintained under the 1940 Act,
calculates the net asset value per share of each Fund and dividends and capital
gain distributions and prepares periodic reports to shareholders and the SEC.
For its services, FFC receives from the Trust with respect to each Fund a fee of
$36,000 per year. In addition, FFC is paid an additional $12,000 per year with
respect to Funds with more than 25% of their total assets invested in asset-
backed securities, that have more than 100 security positions or that have a
monthly portfolio turnover rate of 10% or greater.
FFC is required to use its best judgment and efforts in rendering fund
accounting services and is not liable to the Trust for any action or inaction in
the absence of bad faith, willful misconduct or gross negligence. FFC is not
responsible or liable for any failure or delay in performance of its fund
accounting obligations arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control and the Trust has agreed to
indemnify and hold harmless FFC, its employees, agents, officers and directors
against and from any and all claims, demands, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character arising out of or in any way related to FFC's actions
taken or failures to act with respect to a Fund or based, if applicable, upon
information, instructions or requests with respect to a Fund given or made to
FFC by a duly authorized officer of the Trust. This indemnification does not
apply to FFC's actions or failures to act in cases of FFC's own bad faith,
willful misconduct or gross negligence.
The fund accounting agreement became effective in December 1994. Prior thereto,
Norwest served as each Fund's fund accountant pursuant to an agreement with the
Trust identical in all material respects to the fund accounting agreement.
The following table shows the dollar amount of fund accounting fees payable with
respect to each Fund, the amount of fee that was waived, if any, and the actual
fee received. The data is for the past three fiscal years or shorter period if
the Fund has been in operation for a shorter period. As of December 31, 1995,
Income Equity Fund had not commenced operations.
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Accounting Accounting Accounting
Fee Payable Fee Waived Fee Retained
----------- ---------- ------------
Intermediate Bond Fund
Year Ended December 31, 1995 $38,000 $8,000 $30,000
Period Ended December 31, 1994 $22,000 $22,000 $0
ValuGrowth Stock Fund
Year Ended December 31, 1995 $38,000 $8,000 $30,000
Period Ended December 31, 1994 $21,000 $21,000 $0
Small Company Stock Fund
Period Ended December 31, 1995 $25,000 $5,000 $20,000
6. OTHER INFORMATION
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis.
The Trust may redeem Shares involuntarily, from time to time, to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for Shares purchased by the shareholder or to collect any charge
relating to transactions effected for the benefit of a shareholder which is
applicable to the Shares as provided in the Prospectus.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partially in portfolio securities if the Board determines that
payment in cash would be detrimental to the best interests of the Fund and its
shareholders. If payment for Shares redeemed is made wholly or partially in
portfolio securities, brokerage costs may be incurred by the shareholder in
converting securities to cash.
DETERMINATION OF NET ASSET VALUE
Securities owned by a Fund for which market quotations are readily available are
valued at current market value. The Funds value their securities as follows. A
security listed or traded on an exchange is valued at its last sale price (prior
to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the
security is valued at the mean of the last bid and asked prices. All other
securities for which OTC market quotations are readily available generally are
valued at the mean of the current bid and asked prices. When market quotations
are not readily available, securities are valued at fair value as determined in
good faith by the Board. Debt securities may be valued on the basis of
valuations furnished by pricing services which utilize electronic data
processing techniques to determine valuations for normal institutional-size
trading units of debt securities, without regard to sale or bid prices, when
such valuations are believed to more accurately reflect the fair market
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value of such securities. All assets and liabilities of a Fund denominated in
foreign currencies are converted into United States dollars at the mean of the
bid and asked prices of such currencies against the United States dollar last
quoted by a major bank.
Under procedures adopted by the Board, a net asset value for a Fund later
determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at a net asset value determined to have been
inaccurate will be adjusted, although in certain circumstances, such as where
the difference between the original net asset value and the recalculated net
asset value divided by the recalculated net asset value is 0.005 (1/2 of 1%) or
less or shareholder transactions are otherwise insubstantially affected, further
action is not required.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds will be made independently from those for any
other client account or investment company that is or may in the future become
managed by an Adviser or its affiliates. Investment decisions are the product
of many factors including basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may
sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as is possible,
averaged as to price and allocated between such clients in a manner which, in
the respective Adviser's opinion, is equitable to each and in accordance with
the amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients. In addition, when purchases or sales of the
same security for a Fund and other client accounts managed by an Adviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
Purchases and sales of fixed income portfolio securities are generally effected
as principal transactions. These securities are normally purchased directly
from the issuer or from an underwriter or market maker for the securities.
There usually are no brokerage commissions paid for such purchases. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers include the spread between the bid and ask prices. In the case of
securities traded in the foreign and domestic OTC markets, there is generally no
stated commission, but the price usually includes an undisclosed commission or
markup. In underwritten offerings, the price includes a disclosed fixed
commission or discount.
Purchases and sales of equity securities on exchanges are generally effected
through brokers who charge commissions except in the OTC markets. Allocations
of transactions to brokers and dealers and the frequency of transactions are
determined by the Advisers in their best judgment and in a manner deemed to be
in the best interest of shareholders rather than by any formula.
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The primary consideration is prompt execution of orders in an effective manner
and at the most favorable price available to a Fund. In transactions on stock
exchanges in the United States, these commissions are negotiated, whereas on
foreign stock exchanges these commissions are generally fixed. Where
transactions are executed in the OTC market, a Fund will seek to deal with the
primary market makers; but when necessary in order to obtain best execution, it
will utilize the services of others. In all cases the Funds will attempt to
negotiate best execution.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with securities transactions, the Advisers take into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below) and any
risk assumed by the executing broker. The Advisers may also take into account
payments made by brokers effecting transactions for a Fund (i) to the Fund or
(ii) to other persons on behalf of the Fund for services provided to it for
which it would be obligated to pay.
In addition, the Advisers may give consideration to research services furnished
by brokers to the Advisers for their use and may cause a Fund to pay these
brokers a higher amount of commission than may be charged by other brokers.
Such research and analysis may be used by the Advisers in connection with
services to clients other than the Funds, and an Adviser's fees are not reduced
by reason of the Adviser's receipt of the research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and subject to the obligation to seek the most
favorable price and execution available and such other policies as the Board may
determine, the Advisers may consider sales of Shares of the Funds as a factor in
the selection of broker-dealers to execute portfolio transactions for the Funds.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board has authorized the Advisers to employ affiliates to
effect securities transactions of the Funds, provided certain other conditions
are satisfied. Payment of brokerage commissions to an affiliate of the Adviser
for effecting such transactions is subject to Section 17(e) of the 1940 Act,
which requires, among other things, that commissions for transactions on
securities exchanges paid by a registered investment company to a broker which
is an affiliated person of such investment company, or an affiliated person of
another person so affiliated, not exceed the usual and customary brokers'
commissions for such transactions. It is the Funds' policy that commissions
paid to Norwest Investment Management, Inc. and other affiliates of the Adviser
will, in the judgment of the Advisers, be (i) at least as favorable as
commissions contemporaneously charged by the affiliate on comparable
transactions for its most favored unaffiliated customers and (ii) at least as
favorable as those which would be charged on comparable transactions by other
qualified brokers having comparable execution capability. The Board, including
a majority of the non-interested Trustees, has adopted procedures to ensure that
commissions paid to affiliates of the Adviser by the Funds satisfy the foregoing
standards.
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The following table shows the dollar amount of brokerage commssions paid by each
Fund. The data is for the past three fiscal years or shorter period if the Fund
has been in operation for a shorter period. As of December 31, 1995, Income
Equity Fund had not commenced operations.
Brokerage
Commissions
-----------
Intermediate Bond Fund
Year Ended December 31, 1995 $0
Period Ended December 31, 1994 $0
ValuGrowth Stock Fund
Year Ended December 31, 1995 $8,751
Period Ended December 31, 1994 $8,004
Small Company Stock Fund
Year Ended December 31, 1995 $2,115
TAXATION
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code").
To qualify as a regulated investment company, each Fund generally must, among
other things: (i) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income derived with respect to its business of investing in such stock,
securities or currencies; (ii) derive in each taxable year less than 30% of its
gross income from the sale or other disposition of certain assets held less than
three months including stocks, securities, and certain foreign currencies,
futures, options, forward and similar contracts; (iii) diversify its holdings so
that, at the end of each quarter of the taxable year, (a) at least 50% of the
market value of the Fund's assets is represented by cash, U.S. Government
Securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the purpose
of this calculation to an amount not greater than 5% of the value of the Fund's
total assets and 10% of the outstanding voting securities of such issuer, and
(b) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government Securities or the
securities of other regulated investment companies); and (iv) distribute at
least 90% of its investment company taxable income (which includes, among other
items, dividends, interest, and net short-term capital gains in excess of any
net long-term capital losses) each taxable year. In addition, each Fund must
satisfy another tax diversification test at the end of each calendar quarter
pursuant to Code section 817(h). This latter test is described in the
Prospectus.
As a regulated investment company, a Fund generally will not be subject to
Federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains
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in excess of the sum of net short-term capital losses and capital loss
carryovers from prior years), if any, that it distributes to shareholders. Each
Fund intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and any net capital gains. In
addition, amounts not distributed by a Fund on a timely basis in accordance with
a calendar year distribution requirement may be subject to a nondeductible 4%
excise tax. To avoid the tax, a Fund must distribute (or be deemed to have
distributed) during each calendar year, (i) at least 98% of its ordinary income
(not taking into account any capital gains or losses) for the calendar year,
(ii) at least 98% of its capital gains in excess of its capital losses for the
twelve month period ending on October 31 for the calendar year (adjusted for
certain ordinary losses), and (iii) all ordinary income and capital gains for
previous years that were not distributed during such years. Each Fund intends
to make its distributions in accordance with the calendar year distribution
requirement. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by a Fund during October, November, or December
of that year to shareholders of record on a date in such a month and paid by the
Fund during January of the following calendar year. Such distributions will be
taxable to shareholders for the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
If a Fund invests in shares of a foreign investment company, the Fund may be
subject to U.S. Federal income tax on a portion of an "excess distribution"
from, or the gain from the sale of part or all of the shares in such company.
In addition, an interest charge may be imposed with respect to deferred taxes
arising from such distribution or gains.
Certain investments by a Fund, including investments in zero coupon debt
instruments, may cause the Fund to recognize income in a period in which no
corresponding cash or other payment is received. Such amounts will nonetheless
generally be required to be distributed in the period in which recognized.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues interest or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts, and options, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered 60% long-term and 40% short-term
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capital gain or loss. Each Fund can elect to exempt its section 1256 contracts
which are part of a "mixed straddle" (as described below) from the application
of section 1256.
With respect to OTC put and call options, gain or loss realized by a Fund upon
the lapse or sale of such options held by such Fund will be either long-term or
short-term capital gain or loss depending upon the Fund's holding period with
respect to such option. However, gain or loss realized upon the lapse or
closing out of such options that are written by a Fund will be treated as short-
term capital gain or loss. In general, if a Fund exercises an option, or an
option that a Fund has written is exercised, gain or loss on the option will not
be separately recognized but the premium received or paid will be included in
the calculation of gain or loss upon disposition of the property underlying the
option.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by such Fund may constitute a
"straddle" for Federal income tax purposes. A straddle of which at least one,
but not all, the positions are section 1256 contracts may constitute a "mixed
straddle." In general, straddles are subject to certain rules that may affect
the character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that (i) loss realized on
disposition of one position of a straddle not be recognized to the extent that a
Fund has unrealized gains with respect to the other position in such straddle;
(ii) a Fund's holding period in straddle positions be suspended while the
straddle exists (possibly resulting in gain being treated as short-term capital
gain rather than long-term capital gain); (iii) losses recognized with respect
to certain straddle positions which are part of a mixed straddle and which are
non-section 1256 positions be treated as 60% long-term and 40% short-term
capital loss; (iv) losses recognized with respect to certain straddle positions
which would otherwise constitute short-term capital losses be treated as long-
term capital losses; and (v) the deduction of interest and carrying charges
attributable to certain straddle positions may be deferred. Various elections
are available to a Fund which may mitigate the effects of the straddle rules,
particularly with respect to mixed straddles. In general, the straddle rules
described above do not apply to any straddles held by a Fund all of the
offsetting positions of which consist of section 1256 contracts.
Distributions of any investment company taxable income (which includes among
other items, dividends, interest, and any net realized short-term capital gain
in excess of net realized long-term capital losses) are treated as ordinary
income for tax purposes in the hands of a shareholder. Net capital gain (the
excess of net long-term capital gain over net short-term capital losses) will,
to the extent distributed, be treated as long term capital gain in the hands of
a shareholder regardless of the length of time a shareholder may have held the
Shares.
The 30% limitation and the diversification requirements applicable to a Fund's
assets may limit the extent to which a Fund will be able to engage in
transactions in options, futures contracts, forward contracts and swap
contracts.
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INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, MA 02110, independent auditors,
acts as auditors for the Trust and has since the Trust commenced operations.
OWNERSHIP OF FUND SHARES
Prior to the public issuance of Shares of Income Equity Fund, due to its initial
investment, Forum will own all outstanding Shares of the Fund and, accordingly,
may be deemed to be a controlling person of the Fund. Upon investment in that
Fund by public shareholders, Forum will not be a controlling person of the Fund.
As of May 1, 1996, the Trustees and officers of the Trust in the aggregate owned
less than 1% of the outstanding Shares of each Fund.
Fortis Benefits Insurance Co., P.O. Box 64271, St. Paul, MN 55164 ("Fortis")
owned of record Shares of the Funds in the amounts and percentages listed:
FUND SHARE BALANCE % OF FUND
Intermediate Bond Fund 329,448.414 98.94%
ValuGrowth Stock Fund 490,021.049 99.31%
Small Company Stock Fund 227,503.171 100.00%
As of March 31, 1996, Fortis owned of record 99.34% of the outstanding Shares of
the Trust.
ADDITIONAL INFORMATION ABOUT THE TRUST
Currently, the Trust is divided into four separate series. The Trust has
received an order from the SEC permitting the issuance and sale of separate
classes of shares representing interests in each of the Trust's existing Funds,
but to date, no separate classes of any Fund exist.
The Trust's shareholders are not personally liable for the obligations of the
Trust under Delaware law. The Delaware Business Trust Act (the "Delaware Act")
provides that a shareholder of a Delaware business trust shall be entitled to
the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust shareholder liability exists in many other states,
including Texas. As a result, to the extent that the Trust or a shareholder is
subject to the jurisdiction of courts in those states, the courts may not apply
Delaware law, and may thereby subject the Trust's shareholders to liability. To
guard against this risk, the Trust Instrument of the Trust disclaims shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation and instrument entered into by
the Trust or its Trustees, and provides for indemnification out of Trust
property of any shareholder held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss beyond his
investment because of shareholder liability is limited to circumstances in which
(1) a court
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refuses to apply Delaware law, (2) no contractual limitation of liability is in
effect, and (3) the Trust itself is unable to meet its obligations. In light of
Delaware law, the nature of the Trust's business, and the nature of its assets,
the Board believes that the risk of personal liability to a Trust shareholder is
extremely remote.
FINANCIAL STATEMENTS
The financial statements of each Fund as of and for the period ended December
31, 1995 (which include statements of assets and liabilities, statements of
operations, statements of changes in net assets, notes to financial statements,
financial highlights, schedules of investments and the auditors' report thereon)
are included in the Annual Report to Shareholders of the Trust and are
incorporated herein by reference.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the Securities Act of
1933 and the 1940 Act with respect to the securities offered hereby, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The registration statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract of other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
MUNICIPAL AND CORPORATE BONDS
MOODY'S. The two highest ratings of Moody's Investors Service ("Moody's") for
municipal and corporate bonds are Aaa and Aa. Bonds rated Aaa are judged by
Moody's to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Bonds rated Aa are judged to be of high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities. The generic rating Aa
may be modified by the addition of the numerals 1, 2 or 3. The modifier 1
indicates that the security ranks in the higher end of the Aa rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of such rating category.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment 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.
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.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
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.
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Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
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.
S&P. The two highest ratings of Moody's for municipal and corporate bonds are
Aaa and Aa. The two highest ratings of Standard & Poor's ("S&P") for municipal
and corporate bonds are AAA and AA. Bonds rated AAA have the highest rating
assigned by S&P to a debt obligation. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to
pay interest and repay principal and differ from the highest rated issues only
in small degree. The AA through CCC ratings may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within that rating
category.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher-rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. They normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay.
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 obligation. 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. Bonds are rated D when the issue is in payment default, or the
obligor has filed for bankruptcy.
FITCH. The two highest ratings of Fitch Investors Service, LP ("Fitch") for
municipal and corporate bonds are AAA and AA. Bonds rated AAA are judged by
Fitch 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. Bonds rated AA 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. Plus (+) and minus (-) signs are used
with a rating symbol to indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are not used in the AAA
category.
Bonds rated A 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.
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Bonds rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
Bonds rated B are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
Bonds rated CCC have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
Bonds rated CC are minimally protected. Default in payment of interest and/or
principal seems probable over time.
Bonds rated C are in imminent default in payment of interest or principal.
Bonds rated DDD, DD and D are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery. Plus and minus are not used in the DDD, DD
or D category.
SHORT TERM MUNICIPAL LOANS
MOODY'S. Moody's highest rating for short-term municipal loans is MIG-1/VMIG-1.
A rating of MIG-1/VMIG-1 denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing. Loans bearing the MIG-2/VMIG-
2 designation are of high quality. Margins of protection are ample although not
so large as in the MIG-1/VMIG-1 group. A rating of MIG 3/VMIG 3 denotes
favorable quality. All security elements are accounted for but there is lacking
the undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be less
well established. A rating of MIG 4/VMIG 4 denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
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S&P. S&P's highest rating for short-term municipal loans is SP-1. S&P states
that short-term municipal securities bearing the SP-1 designation have very
strong or strong capacity to pay principal and interest. Those issues rated SP-
1 which are determined to possess overwhelming safety characteristics will be
given a plus (+) designation. Issues rated SP-2 have satisfactory capacity to
pay principal and interest. Issues rated SP-3 have speculative capacity to pay
principal and interest.
FITCH. 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.
Short-term issues rated F-1+ are regarded as having the strongest degree of
assurance for timely payment. Issues assigned a rating of F-1 reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
Issues assigned a rating of F-2 have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1.
OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S. Moody's two highest ratings for short-term debt, including commercial
paper, are Prime-1 and Prime-2, both are judged investment grade, to indicate
the relative repayment ability of rated issuers.
Issuers 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 structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P. S&P's two highest commercial paper ratings are A and B. Issues assigned
an A rating are regarded as having the greatest capacity for timely payment.
Issues in this category are delineated with the numbers 1, 2 and 3 to indicate
the relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming
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or very strong. Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation. The capacity for
timely payment on issues with an A-2 designation is strong. However, the
relative degree of safety is not as high as for issues designated A-1. A-3
issues have a satisfactory capacity for timely payment. They are, however,
somewhat more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations. Issues rated B are regarded as
having only an adequate capacity for timely payment. However, such capacity may
be damaged by changing conditions or short-term adversities.
FITCH. The Fitch ratings for commercial paper are discussed above under "Short
Term Municipal Loans".
PREFERRED STOCK
MOODY'S. Moody's rates preferred stock issues as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade preferred stock, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue rated b generally lacks the characteristics of a desirable investment.
Assurance of dividend payments and maintenance of other terms of the issue over
any long period of time may be small.
An issue rated caa is likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status of payments.
An issue rated ca is speculative in a high degree and is likely to be in arrears
on dividends with little likelihood of eventual payments.
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An issue rated c is in the lowest rated class of preferred or preference stock.
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 in each rating classification:
the modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
S&P. S&P rates preferred stock issues as follows:
A rating of AAA is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
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FITCH. Preferred stocks assigned an AAA rating are the highest quality. Strong
asset protection, conservative balance sheet ratios, and positive indications of
continued protection of preferred dividend requirements are prerequisites for an
AAA rating.
Preferred or preference issues assigned an AA rating are very high quality.
Maintenance of asset protection and dividend paying ability appears assured but
not quite to the extent of the AAA classification.
Preferred or preference issues assigned an A rating are good quality. Asset
protection and coverages of preferred dividends are considered adequate and are
expected to be maintained.
Preferred or preference issues assigned a BBB rating are reasonably safe but
lack the protections of the A to AAA categories. Current results should be
watched for possible signs of deterioration.
Preferred or preference issues assigned a BB rating are considered speculative.
The margin of protection is slim or subject to wide fluctuations. The longer-
term financial capacities of the enterprises cannot be predicted with assurance.
Issues assigned a B rating are considered highly speculative. While earnings
should normally cover dividends, directors may reduce or omit payment due to
unfavorable developments, inability to finance, or wide fluctuations in
earnings.
Issues assigned a CCC rating are extremely speculative and should be assessed on
their prospects in a possible reorganization. Dividend payments may be in
arrears with the status of the current dividend uncertain.
Dividends are not currently being paid and may be in arrears on an issue
assigned a CC rating. The outlook for future payments cannot be assured.
Dividends are not currently being paid and may be in arrears on an issue
assigned a C rating. Prospects for future payments are remote.
An issue is assigned a D rating if the issuer is in default on its debt
obligations and has filed for reorganization or liquidation under the bankruptcy
law.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, CCC, CC, C, and D categories.
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APPENDIX A - INVESTMENTS, INVESTMENT STRATEGIES,
AND RISK CONSIDERATIONS
This Appendix describes in detail the investments, investment strategies and
risk considerations set forth in the Prospectus under the heading "Investment
Objectives, Policies, and Risk Considerations." The Funds that may utilize the
particular investment or investment strategy are identified parenthetically.
COMMON STOCK AND PREFERRED STOCK (INCOME EQUITY FUND, VALUGROWTH STOCK FUND AND
SMALL COMPANY STOCK FUND). Common stockholders are the owners of the company
issuing the stock and, accordingly, vote on various corporate governance matters
such as mergers. They are not creditors of the company, but rather, upon
liquidation of the company are entitled to their pro rata share of the company's
assets after creditors (including fixed income security holders) and, if
applicable, preferred stockholders are paid. Preferred stock is a class of
stock having a preference over common stock as to dividends and, in the
alternative, as to the recovery of investment. A preferred stockholder is a
shareholder in the company and not a creditor of the company as is a holder of
the company's fixed income securities. In addition, holders of preferred stock
have certain preferred voting rights in various corporate matters. Dividends
paid to common and preferred stockholders are distributions of the earnings of
the company and not interest payments, which are expenses of the company.
Equity securities owned by a Fund may be traded in the over-the-counter market
or on a regional securities exchange and may not be traded every day or in the
volume typical of securities traded on a national securities exchange. As a
result, disposition by the Fund of a portfolio security to meet redemptions by
shareholders or otherwise may require the Fund to sell these securities at a
discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over a lengthy period of time. The
market value of common and preferred stock is often based upon investor
perceptions and not necessarily the book value or other objective measure of a
company's worth. The Funds may invest in warrants, which are options to
purchase an equity security from the issuer at a specified price (usually for a
premium over the applicable market value of the underlying equity security at
the time of the warrant's issuance) and usually during a specified period of
time.
CONVERTIBLE SECURITIES (ALL FUNDS). Convertible securities, including
convertible debt and convertible preferred stock, are fixed income securities
which may be converted at a stated price within a specific amount of time into a
specified number of shares of common stock. These securities are usually senior
to common stock in a corporation's capital structure, but usually are
subordinated to non-convertible debt securities. In general, the value of a
convertible security is the higher of its investment value (its value as a fixed
income security) and its conversion value (the value of the underlying shares of
common stock if the security is converted). The investment value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise. The conversion value of a
convertible security is influenced by the value of the underlying common stock.
Small Company Stock Fund and Intermediate Bond Fund may invest only in
convertible debt in one of the three highest rating categories assigned by an
NRSRO. ValuGrowth Stock Fund may
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invest in convertible debt of any grade. The rating categories for convertible
debt range from Aaa to C, in the case of Moody's Investors Service ("Moody's"),
and from AAA to D, in the case of Standard & Poor's ("S&P"), and for preferred
stock range from aaa to c, in the case of Moody's, and from AAA to D, in the
case of S&P. Securities in the lowest rating categories are characterized by
Moody's as having extremely poor prospects of ever attaining any real investment
standing and by S&P as being in default, in the case of debt, and non-paying
with debt in default, in the case of preferred stock. Unrated securities may
not be as actively traded as rated securities. For a further description of the
ratings used by Moody's, S&P and certain other NRSROs, see Appendix A in
the SAI.
FOREIGN SECURITIES (ALL FUNDS). Investment in the securities of foreign issuers
may involve risks in addition to those normally associated with investments in
the securities of U.S. issuers. All foreign investments are subject to risks of
foreign political and economic instability, adverse movements in foreign
exchange rates, the imposition or tightening of exchange controls or other
limitations on repatriation of foreign capital and changes in foreign
governmental attitudes towards private investment possibly leading to
nationalization, increased taxation or confiscation of a Fund's assets.
Moreover, dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income available for distribution to a
Fund's shareholders; commission rates payable on foreign transactions are
generally higher than in the United States; foreign accounting, auditing and
financial reporting standards differ from those in the United States and,
accordingly less information about foreign companies may be available than is
generally available about issuers of comparable securities in the United States;
and foreign securities may trade less frequently and with lower volume and may
exhibit greater price volatility than United States securities.
Changes in foreign exchange rates will also affect the value in U.S. dollars of
all foreign currency-denominated securities held by a Fund. Exchange rates are
influenced generally by the forces of supply and demand in the foreign currency
markets and by numerous other political and economic events occurring outside
the United States, many of which may be difficult if not impossible to predict.
Income from foreign securities will be received and realized in foreign
currencies, and a Fund is required to compute and distribute income in U.S.
dollars. Accordingly, a decline in the value of a particular foreign currency
against the U.S. dollar occurring after a Fund's income has been earned and
computed in U.S. dollars may require the Fund to liquidate portfolio securities
to acquire sufficient U.S. dollars to make a distribution. Similarly, if the
exchange rate declines between the time a Fund incurs expenses in U.S. dollars
and the time such expenses are paid, the Fund may be required to liquidate
additional foreign securities to purchase the U.S. dollars required to meet such
expenses.
ADRS AND EDRS (INCOME EQUITY FUND, VALUGROWTH STOCK FUND AND SMALL COMPANY STOCK
FUND). A Fund may invest in sponsored and unsponsored American Depository
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing
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ownership of underlying securities issued by a foreign issuer. ADRs, in
registered form, are designed for use in U.S. securities markets. Unsponsored
ADRs may be created without the participation of the foreign issuer. Holders of
these ADRs generally bear all the costs of the ADR facility, whereas foreign
issuers typically bear certain costs in a sponsored ADR. The bank or trust
company depository of an unsponsored ADR may be under no obligation to
distribute shareholder communications received from the foreign issuer or to
pass through voting rights. Income Equity Fund also may invest in European
Depository Receipts ("EDRs"), receipts issued by a European financial
institution evidencing an arrangement similar to that of ADRs, and in other
similar instruments representing securities of foreign companies. EDRs, in
bearer form, are designed for use in European securities markets.
SHORT-TERM CORPORATE DEBT SECURITIES (ALL FUNDS). As described under "Temporary
Defensive Position" in the Prospectus, the Funds may invest in commercial paper,
which consists of unsecured promissory notes issued by corporations. The Funds
also may invest in commercial paper for other than temporary or defensive
purposes. Commercial paper is issued by companies to finance their affiliates'
current obligations. The corporate debt securities in which these Funds may
invest include short-term corporate bonds and notes. The Funds also may
purchase variable and floating rate demand notes of corporations, which are
unsecured obligations redeemable upon not more than 30 days' notice. These
obligations include master demand notes that permit investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangement with the
issuer of the instrument. Although a Fund generally would not be able to resell
a master demand note to a third party, a Fund is able to demand payment from the
issuer at any time. The Adviser continuously monitors the financial condition
of the issuer to determine the issuer's likely ability to make payment on
demand. The issuer of these obligations often has the right, after a given
period, to prepay the outstanding principal amount of the obligations upon a
specified number of days' notice. These obligations generally are not traded,
nor generally is there an established secondary market for these obligations.
To the extent a demand note does not have a seven day or shorter demand feature
and there is no readily available market for the obligation, it is treated as an
illiquid security.
FINANCIAL INSTITUTION OBLIGATIONS (ALL FUNDS). The Funds may invest in
obligations of financial institutions, including negotiable certificates of
deposit, bankers' acceptances and time deposits of U.S. banks (including savings
banks and savings associations), foreign branches of U.S. banks, foreign banks
and their non-U.S. branches (Eurodollars), U.S. branches and agencies of foreign
banks (Yankee dollars), and wholly-owned banking-related subsidiaries of foreign
banks.
U.S. GOVERNMENT SECURITIES (ALL FUNDS). As used in this Prospectus, the term
U.S. Government Securities means obligations issued or guaranteed as to
principal and interest by the United States Government, its agencies or
instrumentalities. The U.S. Government Securities in which a Fund may invest
include U.S. Treasury Securities and obligations issued or guaranteed by U.S.
Government agencies and instrumentalities and backed by the full faith and
credit of the U.S. Government, such as those guaranteed by the Small Business
Administration or issued by the Government National Mortgage Association. In
addition, the U.S. Government Securities in which the Funds may invest include
securities supported primarily or solely by the
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creditworthiness of the issuer, such as securities of the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation and the
Tennessee Valley Authority. There is no guarantee that the U.S. Government will
support securities not backed by its full faith and credit. Accordingly,
although these securities have historically involved little risk of loss of
principal if held to maturity, they may involve more risk than securities backed
by the U.S. Government's full faith and credit.
ZERO COUPON SECURITIES (INTERMEDIATE BOND FUND). Intermediate Bond Fund may
invest in separately traded principal and interest components of securities
issued or guaranteed by the U.S. Treasury. These components are traded
independently under the Treasury's Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program or as Coupons Under Book Entry
Safekeeping ("CUBES"). The Fund also may invest in other types of related zero
coupon securities. Zero coupon securities are sold at original issue discount
and pay no interest to holders prior to maturity, but a Fund holding a zero
coupon security must include a portion of the original issue discount of the
security as income. Because of this, zero coupon securities may be subject to
greater fluctuation of market value than the other securities in which the Fund
may invest. The Fund distributes all of its net investment income, and may have
to sell portfolio securities to distribute imputed income, which may occur at a
time when the Adviser would not have chosen to sell such securities and which
may result in a taxable gain or loss.
ILLIQUID SECURITIES AND RESTRICTED SECURITIES (ALL FUNDS). No Fund may invest
more than 15% of its net assets in illiquid securities. Illiquid securities are
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements not entitling
the holder to payment within seven days and restricted securities. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities, and, to the extent it may invest in restricted securities, a Fund
might also have to register those securities in order to dispose of them,
resulting in expense and delay. A Fund might not be able to dispose of
restricted or other securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions. There can be no assurance
that a liquid market will exist for any security at any particular time.
A domestic institutional market has developed for certain securities that are
not registered under the Securities Act of 1933 (the "1933 Act"), including
repurchase agreements and foreign securities. Institutional investors depend on
an efficient institutional market in which the unregistered security can be
readily resold or on the issuer's ability to honor a demand for repayment of the
unregistered security. A security's contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of the security. If such securities are eligible for purchase by
institutional buyers in accordance with Rule 144A under the 1933 Act, the
investment advisers may determine that such securities are not illiquid
securities under guidelines adopted by the Board. These guidelines take into
account trading activity in the securities and the availability of reliable
pricing information, among other factors. If there is a lack of trading
interest in a particular Rule 144A security, a Fund's holdings of that security
may be illiquid.
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BORROWING (ALL FUNDS). Each Fund may borrow money for temporary or emergency
purposes, including the meeting of redemption requests, in amounts up to 33 1/3%
of the Fund's net assets. Borrowing involves special risk considerations.
Interest costs on borrowings may fluctuate with changing market rates of
interest and may partially offset or exceed the return earned on borrowed funds
(or on the assets that were retained rather than sold to meet the needs for
which funds were borrowed). Under adverse market conditions, a Fund might have
to sell portfolio securities to meet interest or principal payments at a time
when investment considerations would not favor such sales. No Fund, other than
Intermediate Bond Fund, may purchase securities for investment while any
borrowing equaling 5% or more of the Fund's total assets is outstanding or
borrow for purposes other than meeting redemptions in an amount exceeding 5% of
the value of the Fund's total assets. A Fund's use of borrowed proceeds to make
investments would subject the Fund to the risks of leveraging. Reverse
repurchase agreements, short sales not against the box, and other similar
investments that involve a form of leverage have characteristics similar to
borrowings but are not considered borrowings if the Fund maintains a segregated
account, as described below; the use of these techniques in connection with a
segregated account may result in a Fund's assets being 100% leveraged. See
"Investments Involving Leverage" below.
INVESTMENTS INVOLVING LEVERAGE (ALL FUNDS). Utilization of leveraging involves
special risks and may involve speculative investment techniques. The Funds may
borrow for investment purposes, lend their securities, enter into reverse
repurchase agreements, and purchase securities on a when issued or forward
commitment basis. In addition, the Funds may may purchase securities on margin
and sell securities short (other than against the box) and Intermediate Bond
Fund may engage in dollar roll transactions. Each of these transactions
involves the use of "leverage" when cash made available to the Fund through the
investment technique is used to make additional portfolio investments. In
addition, the use of swap and related agreements may involve leverage. The
Funds use these investment techniques only when the Adviser believes that the
leveraging and the returns available to the Fund from investing the cash will
provide shareholders a potentially higher return.
Leverage exists when a Fund achieves the right to a return on a capital base
that exceeds the investment the Fund has made. Leverage creates the risk of
magnified capital losses which occur when losses affect an asset base, enlarged
by borrowings or the creation of liabilities, that exceeds the equity base of
the Fund. The risks of leverage include a higher volatility of the net asset
value of the Fund's shares and the relatively greater effect on the net asset
value of the shares caused by favorable or adverse market movements or changes
in the cost of cash obtained by leveraging and the yield obtained from investing
the cash.
REPURCHASE AGREEMENTS, SECURITIES LENDING, REVERSE REPURCHASE AGREEMENTS, WHEN-
ISSUED SECURITIES AND FORWARD COMMITMENTS (ALL FUNDS) AND DOLLAR ROLL
TRANSACTIONS (INTERMEDIATE BOND FUND). The Funds' use of repurchase agreements,
securities lending, reverse repurchase agreements and forward commitments
(including dollar roll transactions) entails certain risks not associated with
direct investments in securities. For instance, in the event that bankruptcy or
similar proceedings were commenced against a counterparty while these
transactions remained open or a counterparty
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defaulted on its obligations, the Fund might suffer a loss. Failure by the
other party to deliver a security purchased by the Fund may result in a missed
opportunity to make an alternative investment. The Adviser monitors the
creditworthiness of counterparties to these transactions and intends to enter
into these transactions only when it believes that the counterparties present
minimal credit risks and the income to be earned from the transaction justifies
the attendant risks. Counterparty insolvency risk with respect to repurchase
agreements is reduced by favorable insolvency laws that allow a Fund, among
other things, to liquidate the collateral held in the event of the bankruptcy of
the counterparty. Those laws do not apply to securities lending and,
accordingly, securities lending involves more risk than do repurchase
agreements. As a result of entering into forward commitments and reverse
repurchase agreements, as well as lending its securities, a Fund may be exposed
to greater potential fluctuations in the value of its assets and net asset value
per share.
SECURITIES LENDING. Each Fund may lend securities from its portfolio to
brokers, dealers and other financial institutions. Securities loans must be
callable at any time and will be continuously secured by cash or U.S.
Government Securities with a market value, determined daily, at least equal to
the value of the Fund's securities loaned, including accrued interest. A Fund
receives interest in respect of securities loans from the borrower or from
investing cash collateral. A Fund may pay fees to arrange the loans, as well as
administrative or custodial fees. Voting rights on the securities loaned may
pass with the lending. The Funds will call any security loans in order to vote
if a material issue affecting the investment is to be voted upon. No Fund will
lend portfolio securities in excess of 33 1/3% of the value of the Fund's total
assets.
REPURCHASE AGREEMENTS. Each Fund may from time to time enter into repurchase
agreements, transactions in which the Fund purchases a security and
simultaneously commits to resell that security to the seller at an agreed-upon
price on an agreed-upon future date, normally one to seven days later. The
resale price of a repurchase agreement reflects a market rate of interest that
is not related to the coupon rate or maturity of the purchased security. The
Trust's custodian maintains possession of the collateral underlying a repurchase
agreement, which has a market value, determined daily, at least equal to the
repurchase price, and which consists of the types of securities in which the
Fund may invest directly.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements, transactions in which the Fund sells a security and simultaneously
commits to repurchase that security from the buyer at an agreed upon price on an
agreed upon future date. The resale price in a reverse repurchase agreement
reflects a market rate of interest that is not related to the coupon rate or
maturity of the sold security. For certain demand agreements, there is no
agreed upon repurchase date and interest payments are calculated daily, often
based upon the prevailing overnight repurchase rate. Because certain of the
incidents of ownership of the security are retained by the Fund, reverse
repurchase agreements may be viewed as a form of borrowing by the Fund from the
buyer, collateralized by the security sold by the Fund. A Fund will use the
proceeds of reverse repurchase agreements to fund redemptions or to make
investments which in most cases either mature or have a demand feature to resell
to the issuer on a date not later than the expiration of the agreement.
Interest costs on the money received in a reverse repurchase agreement may
exceed the return received on the investments made by the Fund with those
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monies. Any significant commitment of a Fund's assets to the reverse repurchase
agreements will tend to increase the volatility of the Fund's net asset value
per share.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. Each Fund may purchase fixed
income securities on a "when-issued" or "forward commitment" basis. When these
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within three months after the transaction. During the period between a
commitment and settlement, no payment is made for the securities purchased and
no interest on the security accrues to the purchaser. At the time a Fund makes
a commitment to purchase securities in this manner, the Fund immediately assumes
the risk of ownership, including price fluctuation. Failure by the other party
to deliver a security purchased by a Fund may result in a loss or a missed
opportunity to make an alternative investment.
The use of when-issued transactions and forward commitments enables a Fund to
hedge against anticipated changes in interest rates and prices. If the Adviser
were to forecast incorrectly the direction of interest rate movements, however,
a Fund might be required to complete these transactions when the value of the
security is lower than the price paid by the Fund. Except for dollar roll
transactions, a Fund will not purchase securities on a when-issued or forward
commitment basis if, as a result, more than 15% of the value of the Fund's total
assets would be committed to such transactions.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Funds purchase securities on a when-issued and forward
commitment basis only with the intention of actually receiving the securities.
When-issued securities may include bonds purchased on a "when, as and if issued"
basis under which the issuance of the securities depends upon the occurrence of
a subsequent event. Commitment of a Fund's assets to the purchase of securities
on a when-issued or forward commitment basis will tend to increase the
volatility of the Fund's net asset value per share.
DOLLAR ROLL TRANSACTIONS. Intermediate Bond Fund may enter into dollar roll
transactions, which involve the sale by the Fund of U.S. Treasury securities,
GNMA certificates and other fixed income securities together with a commitment
to purchase similar, but not identical, securities at a later date from the same
party. During the roll period, no payment is made for the securities purchased
and no interest or principal payments on the security accrues to the purchaser,
but the Fund assumes the risk of ownership. The Fund is compensated for
entering into dollar roll transactions by the difference between the current
sales price and the forward price for the future purchase, as well as by the
interest earned on the cash proceeds of the initial sale. Like other when-
issued securities or firm commitment agreements, dollar roll transactions
involve the risk that the market value of the securities sold by the Fund may
decline below the price at which a Fund is committed to purchase similar
securities. In the event the buyer of securities under a dollar roll
transaction becomes insolvent, the Fund's use of the proceeds of the transaction
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
The Fund currently treats dollar roll transactions, whether or not "covered" by
a segregated account, as a borrowing, and
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therefore subject to the restriction that the Fund may not borrow in excess of
33 1/3% of the Fund's net assets. The Fund will engage in dollar roll
transactions only with the intent of acquiring securities for their portfolios.
SWAP AGREEMENTS (INTERMEDIATE BOND FUND). To manage its exposure to different
types of investments, Intermediate Bond Fund may enter into interest rate,
currency and mortgage (or other asset) swap agreements and may purchase and sell
interest rate "caps," "floors" and "collars." In a typical interest rate swap
agreement, one party agrees to make regular payments equal to a floating
interest rate on a specified amount (the "notional principal amount") in return
for payments equal to a fixed interest rate on the same amount for a specified
period. If a swap agreement provides for payment in different currencies, the
parties may also agree to exchange the notional principal amount. Mortgage swap
agreements are similar to interest rate swap agreements, except that the
notional principal amount is tied to a reference pool of mortgages.
In a cap or floor, one party agrees, usually in return for a fee, to make
payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
interest rate exceeds an agreed upon level; the purchaser of an interest rate
floor has the right to receive payments to the extent a specified interest rate
falls below an agreed upon level. A collar entitles the purchaser to receive
payments to the extent a specified interest rate falls outside an agreed upon
range.
Swap agreements may involve leverage and may be highly volatile; depending on
how they are used, they may have a considerable impact on a Fund's performance.
Swap agreements involve risks depending upon the counterparty's creditworthiness
and ability to perform as well as a Fund's ability to terminate its swap
agreements or reduce its exposure through offsetting transactions. The Adviser
monitors the creditworthiness of counterparties to these transactions and
intends to enter into these transactions only when they believe the
counterparties present minimal credit risks and the income expected to be earned
from the transaction justifies the attendant risks.
SHORT SALES (ALL FUNDS). The Funds may make short sales of securities they own
or have the right to acquire at no added cost through conversion or exchange of
other securities they own (referred to as short sales "against the box").
Intermediate Bond Fund may make short sales of securities which it does not own
or have the right to acquire. A short sale that is not made "against the box"
is a transaction in which a Fund sells a security it does not own in
anticipation of a decline in the market price for the security. When a Fund
makes a short sale, the proceeds it receives are retained by the broker until
the Fund replaces the borrowed security. In order to deliver the security to
the buyer, a Fund must arrange through a broker to borrow the security and, in
so doing, the Fund becomes obligated to replace the security borrowed at its
market price at the time of replacement, whatever that price may be.
MORTGAGE-BACKED SECURITIES (INTERMEDIATE BOND FUND). Mortgage-backed securities
represent an interest in a pool of mortgages originated by lenders such as
commercial banks, savings associations and mortgage bankers and brokers.
Mortgage-backed securities may be issued by governmental or government-related
entities or by non-governmental entities such
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as special purpose trusts created by banks, savings associations, private
mortgage insurance companies or mortgage bankers.
Interests in mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or on specified call dates. In
contrast, mortgage-backed securities provide monthly payments which consist of
interest and, in most cases, a partial payment of principal. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their mortgage loans, net of any fees paid to the issuer or
guarantor of the securities or a mortgage loan servicer. Additional payments to
holders of these securities are caused by prepayments resulting from the sale or
foreclosure of the underlying property or refinancing of the underlying loans.
UNDERLYING MORTGAGES. Pools of mortgages consist of whole mortgage loans or
participations in mortgage loans. The majority of these loans are made to
purchasers of 1-4 family homes, but may be made to purchasers of mobile homes or
other real estate interests. The terms and characteristics of the mortgage
instruments are generally uniform within a mortgage pool but may vary among
mortgage pools. For example, in addition to fixed-rate, fixed-term mortgages,
the Fund may purchase interests in pools of variable rate mortgages, growing
equity mortgages, graduated payment mortgages and other types of mortgages.
Mortgage servicers impose qualification standards for local lending institutions
which originate mortgages for the pools as well as credit standards and
underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
LIQUIDITY AND MARKETABILITY. The market for mortgage-backed securities has
expanded considerably in recent years. The size of the primary issuance market
and active participation in the secondary market by securities dealers and many
types of investors make government and government-related pass-through mortgage
pools highly liquid. The recently introduced private conventional pools of
mortgages (which are pooled by commercial banks, savings and loan institutions
and others, and have no relationship with government and government-related
entities) have also achieved broad market acceptance and consequently an active
secondary market has emerged. However, the market for private conventional
mortgage pools is smaller and less liquid than the market for government and
government-related mortgage pools.
AVERAGE LIFE AND PREPAYMENTS. The average life of pass-through pools varies
with the maturities of the underlying mortgage instruments. In addition, a
mortgage pool's terms may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. Prepayments with respect to
securities during times of declining interest rates will tend to lower the
return of a Fund and may even result in losses to a Fund if the securities were
acquired at a premium. The occurrence of mortgage prepayments is affected by
various factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
As prepayment rates of individual mortgage pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rate 30-year mortgages, common
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industry practice is to assume that prepayments will result in a 12-year average
life. Pools of mortgages with other maturities or different characteristics
will have varying assumptions for average life. The assumed average life of
pools of mortgages having terms of less than 30 years is less than 12 years, but
typically not less than 5 years.
YIELD CALCULATIONS. Yields on mortgage-backed securities are typically quoted
by dealers based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgages. Conversely, in periods of rising rates the rate of
prepayment tends to decrease, thereby lengthening the actual average life of the
mortgage pool. Actual prepayment experience may cause the yield to differ from
the assumed average life yield. Reinvestment of prepayments may occur at higher
or lower interest rates than the original investment, thus affecting the yield
of a Fund.
GOVERNMENT AND GOVERNMENT-RELATED GUARANTORS. The principal government
guarantor of mortgage-backed securities is the Government National Mortgage
Association ("GNMA"), a wholly-owned United States Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA and backed by pools of Federal Housing Administration-insured
or Veterans Administration-guaranteed mortgages.
The Federal National Mortgage Association ("FNMA") is a government-sponsored
corporation owned entirely by private stockholders that is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
and pools residential mortgages from a list of approved seller-servicers. The
Federal Home Loan Mortgage Corporation ("FHLMC") is a corporate instrumentality
of the United States Government that was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential
housing. Its stock is owned by the twelve Federal Home Loan Banks. FHLMC
issues Participation Certificates, which represent interests in mortgages from
FHLMC's portfolio. FNMA and FHLMC each guarantee the payment of principal and
interest on the securities they issue. Those securities, however, are not
backed by the full faith and credit of the United States Government.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. Mortgage-backed securities offered
by private issuers include pass-through securities comprised of pools of
conventional mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and which are
collateralized by mortgage loans; and privately-issued collateralized mortgage
obligations.
Mortgage-backed securities issued by non-governmental issuers may offer a higher
rate of interest than securities issued by government issuers because of the
absence of direct or indirect government guarantees of payment. Many non-
governmental issuers or servicers of mortgage-backed securities, however,
guarantee timely payment of interest and principal on such securities. Timely
payment of interest and principal may also be supported by various forms of
insurance, including individual loan, title, pool and hazard policies. There
can be no assurance that the
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private issuers or insurers will be able to meet their obligations under the
relevant guarantees and insurance policies.
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES. Adjustable rate mortgage-backed
securities ("ARMS") are securities that have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or market
interest rate. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because of the
resetting of interest rates, adjustable rate securities are less likely than
non-adjustable rate securities of comparable quality and maturity to increase
significantly in value when market interest rates fall. Also, most adjustable
rate securities (or the underlying mortgages) are subject to caps or floors.
"Caps" limit the maximum amount by which the interest rate paid by the borrower
may change at each reset date or over the life of the loan and, accordingly,
fluctuation in interest rates above these levels could cause such mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
securities.
ARMS may have less risk of a decline in value during periods of rapidly rising
rates, but they may also have less potential for capital appreciation than other
debt securities of comparable maturities due to the periodic adjustment of the
interest rate on the underlying mortgages and due to the likelihood of increased
prepayments of mortgages as interest rates decline. Furthermore, during periods
of declining interest rates, income to a Fund will decrease as the coupon rate
resets along with the decline in interest rates. During periods of rising
interest rates, changes in the coupon rates of the mortgages underlying a Fund's
ARMS may lag behind changes in market interest rates. This may result in a
slightly lower value until the interest rate resets to market rates. Thus,
investors could suffer some principal loss if they sold Fund shares before the
interest rates on the underlying mortgages are adjusted to reflect current
market rates. During periods of extreme fluctuations in interest rates, the
Fund's net asset value will fluctuate as well. In addition, since ARMS in the
Fund's portfolio will generally have "Caps" that limit the maximum amount by
which the interest rate paid by the borrower may change at each reset date or
over the life of the loan, fluctuation in interest rates above these levels
could cause such mortgage securities to "cap out" and to behave more like long-
term, fixed-rate debt securities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are multi-class bonds backed by a pool of mortgage pass-through
securities or mortgage loans. CMOs are sometimes known as real estate mortgage
investment conduits ("Remics"). CMOs are collateralized by mortgages or
mortgage pass-through securities issued by GNMA, FHLMC or FNMA or by pools of
conventional mortgages ("Mortgage Assets"). CMOs are debt obligations that are
collateralized by Mortgage Assets. CMOs may be privately issued or U.S.
Government Securities. Payments of principal and interest on the Mortgage
Assets are passed through to the holders of the CMOs on the same schedule as
they are received, although, certain classes (often referred to as tranches) of
CMOs have priority over other classes with respect to the receipt of principal
payments. "Multi-class mortgage pass-through securities" are interests in
trusts that hold Mortgage Assets and that have multiple classes similar to those
of CMOs. Unless the context indicates otherwise, references to CMOs include
multi-class mortgage pass-through securities. Payments of principal of and
interest on the underlying Mortgage Assets (and in the
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case of CMOs any reinvestment income thereon) provide the funds to pay debt
service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities. Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. Planned amortization class mortgage-based
securities ("PAC Bonds") are a form of parallel pay CMO. PAC Bonds are designed
to provide relatively predictable payments of principal provided that, among
other things, the actual prepayment experience on the underlying mortgage loans
falls within a contemplated range. If the actual prepayment experience on the
underlying mortgage loans is at a rate faster or slower than the contemplated
range, or if deviations from other assumptions occur, principal payments on a
PAC Bond may be greater or smaller than predicted. The magnitude of the
contemplated range varies from one PAC Bond to another; a narrower range
increases the risk that prepayments will be greater or smaller than
contemplated. CMOs may have complicated structures and generally involve more
risks than simpler forms of mortgage-backed securities.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a Z-tranche). Holders of accrual bonds receive no cash payments
for an extended period of time. During the time that earlier tranches are
outstanding, accrual bonds receive accrued interest which is a credit for
periodic interest payments that increase the face amount of the security at a
compounded rate, but are not actually paid to the bond holder. After all
previous tranches are retired, accrual bond holders start receiving cash
payments that include both principal and continuing interest. The market value
of accrual bonds can fluctuate widely and their average life depends on the
other aspects of the CMO offering. Interest on accrual bonds is taxable when
accrued even though the holders receive no accrual payment. The Funds
distribute all of their net investment income, and may have to sell portfolio
securities to distribute imputed income, which may occur at a time when the
Adviser would not have chosen to sell such securities and which may result in a
taxable gain or loss.
STRIPPED MORTGAGE-BACKED SECURITIES (INTERMEDIATE BOND FUND). Stripped
mortgage-backed securities ("SMBS") are classes of mortgage-backed securities
that receive different proportions of the interest and principal distributions
from the underlying Mortgage Assets. They may be may be privately issued or
U.S. Government Securities. In the most extreme case, one class will be
entitled to receive all or a portion of the interest but none of the principal
from the Mortgage Assets (the interest-only or "IO" class) and one class will be
entitled to receive all or a portion of the principal, but none of the interest
(the "PO" class). Currently, no Fund may purchase IOs or POs.
ASSET-BACKED SECURITIES (INTERMEDIATE BOND FUND). Asset-backed securities
represent direct or indirect participations in, or are secured by and payable
from, assets other than mortgage-backed assets such as motor vehicle installment
sales contracts, installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit (credit card)
agreements. Intermediate Bond Fund may not invest more than 10% of its net
assets in asset-backed securities that are backed by a particular type of
credit, for instance, credit
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card receivables. Asset-backed securities, including adjustable rate asset-
backed securities, have yield characteristics similar to those of mortgage-
backed securities and, accordingly, are subject to many of the same risks.
Assets are securitized through the use of trusts and special purpose
corporations that issue securities which are often backed by a pool of assets
representing the obligations of a number of different parties. Payments of
principal and interest may be guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution. Asset-
backed securities do not always have the benefit of a security interest in
collateral comparable to the security interests associated with mortgage-backed
securities. As a result, the risk that recovery on repossessed collateral might
be unavailable or inadequate to support payments on asset-backed securities is
greater for asset-backed securities than for mortgage-backed securities. In
addition, because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of an interest rate or economic cycle has not been
tested.
OPTIONS (ALL FUNDS), FUTURES CONTRACTS (INTERMEDIATE BOND FUND) AND OPTIONS ON
FUTURES CONTRACTS (INTERMEDIATE BOND FUND). The Funds may seek to enhance their
return through purchasing exchange-traded and over-the-counter options on equity
or fixed income securities or indices. Intermediate Bond Fund also may write
(sell) options that are covered. An option is covered if, so long as the Fund
is obligated under the option, it owns an offsetting position in the underlying
security or futures contract or maintains cash, U.S. Government Securities or
other liquid, high-grade debt securities in a segregated account with a value at
all times sufficient to cover the Fund's obligation under the option. In
addition, Intermediate Bond Fund may attempt to hedge against a decline in the
value of securities owned by it or an increase in the price of securities which
it plans to purchase through the use of those options and the purchase and sale
of interest rate futures contracts and options on those futures contracts.
RISK CONSIDERATIONS. A Fund's use of options and futures contracts would
subject the Fund to certain investment risks and transaction costs to which it
might not otherwise be subject. These risks include: (1) dependence on the
Adviser's ability to predict movements in the prices of individual securities
and fluctuations in the general securities markets; (2) imperfect correlations
between movements in the prices of options or futures contracts and movements in
the price of the securities hedged or used for cover which may cause a given
hedge not to achieve its objective; (3) the fact that the skills and techniques
needed to trade these instruments are different from those needed to select the
other securities in which the Fund invests; (4) lack of assurance that a liquid
secondary market will exist for any particular instrument at any particular
time, which, among other things, may limit a Fund's ability to control losses by
closing its positions; (5) the possible need to defer closing out of certain
options, futures contracts and related options to avoid adverse tax
consequences; and (6) the potential for unlimited loss when investing in futures
contracts or writing options for which an offsetting position is not held..
Other risks include the inability of Intermediate Bond Fund, as the writer of
covered call options, to benefit from any appreciation of the underlying
securities above the exercise price and the
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possible loss of the entire premium paid for options purchased by the Fund. In
addition, the futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The Fund may be
forced, therefore, to liquidate or close out a futures contract position at a
disadvantageous price.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures position or that a counterparty in an over-the-
counter option transaction will be able to perform its obligations.
Accordingly, Intermediate Bond Fund intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, but there is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In addition, the Fund intends
that substantially all of its options contracts will be exchange traded. There
are a limited number of options on interest rate futures contracts and exchange
traded options contracts on fixed income securities. Accordingly, hedging
transactions involving these instruments may entail "cross-hedging." As an
example, the Fund may wish to hedge existing holdings of mortgage-backed
securities, but no listed options may exist on those securities. In that event,
the Adviser may attempt to hedge the Fund's securities by the use of options
with respect to similar fixed income securities. The Fund may use various
futures contracts that are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active
secondary market in those contracts will develop or continue to exist.
LIMITATIONS. No Fund may purchase any call or put option thereon if the
premiums associated with all such options held by the Fund would exceed 5% of
the Fund's total assets as of the date the option is purchased. No Fund may
sell a put option if the exercise value of all put options written by the Fund
would exceed 50% of the Fund's total assets or sell a call option if the
exercise value of all call options written by the Fund would exceed the value of
the Fund's assets held by the Fund. In addition, the current market value of
all open futures positions held by a Fund will not exceed 50% of its total
assets.
OPTIONS ON SECURITIES. A call option is a contract pursuant to which the
purchaser of the call option, in return for a premium paid, has the right to buy
the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. A put option gives its purchaser, in return for a premium, the right to
sell the underlying security at a specified price during the term of the option.
The writer of the put, who receives the premium, has the obligation to buy the
underlying security, upon exercise at the exercise price during the option
period. The amount of premium received or paid is based upon certain factors,
including the market price of the underlying security or index, the relationship
of the exercise price to the market price, the historical price volatility of
the underlying security or index, the option period, supply and demand and
interest rates.
OPTIONS ON STOCK INDICES. A stock index assigns relative values to the stock
included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional stock options except
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that exercises of stock index options are effected with cash payments and do not
involve delivery of securities. Thus, upon exercise of a stock index options,
the purchaser will realize and the writer will pay an amount based on the
differences between the exercise price and the closing price of the stock index.
INDEX FUTURES CONTRACTS. Bond index futures contracts are bilateral agreements
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the bond
index value at the close of trading of the contract and the price at which the
futures contract is originally struck. No physical delivery of the securities
comprising the index is made. As is the case with other futures contracts,
index futures contracts usually are closed out prior to the expiration date of
the contract.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to stock
options except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell stock, at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future.
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