<PAGE>
As filed with the Securities and Exchange Commission
on February 16, 1996
File No. 33-74176
File No. 811-8202
________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 3
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
________________________________________________________________
NORWEST SELECT FUNDS
(Exact Name of Registrant as Specified in its Charter)
Two Portland Square, Portland, Maine 04101
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code:
(212) 363-3301
________________________________________________________________
David I. Goldstein, Esq.
Forum Financial Services, Inc.
Two Portland Square, Portland, Maine 04101
(Name and Address of Agent for Service)
Copies of Communications to:
William Goodwin, Esq.
Dechert, Price & Rhoads
477 Madison Avenue, New York, New York 10022-5891
_________________________________________________________________
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Rule 485, paragraph
(b)
_____ on [ ] pursuant to Rule 485, paragraph (b)
_____ 60 days after filing pursuant to Rule 485, paragraph
(a)(i)
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_____ on [ ] pursuant to Rule 485, paragraph (a)(i)
X 75 days after filing pursuant to Rule 485, paragraph
(a)(ii)
_____ on [ ] pursuant to Rule 485, paragraph (a)(ii)
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Registrant has registered an indefinite number of shares of
beneficial interest under the Securities Act of 1933 pursuant to
Rule 24f-2 under the Investment Company Act of 1940.
Accordingly, no fee is payable herewith. A Rule 24f-2 Notice for
the fiscal year ended December 31, 1995 of the Registrant's
various portfolios will be filed with the Commission on or before
February 29, 1996.
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CROSS REFERENCE SHEET
(as required by Rule 404(c))
PART A
Form N-1A
Item No. Location in
________ Prospectus (Caption)
____________________
Item 1. Cover Page Cover Page
Item 2. Synopsis The Trust
Item 3. Condensed Financial
Information Financial Highlights
Item 4. General Description
of Registrant: The Trust; Investment
Objectives, Policies, and
Risk Considerations; Other
Information
Item 5. Management of
the Fund The Trust; Management of
the Funds
Item 5A. Management's Discussion
of Fund Performance Not Applicable
Item 6. Capital Stock and
Other Securities Investment Objectives,
Policies, and Risk
Considerations; Dividends,
Distributions and Tax
Matters; Other Information
Item 7. Purchase of Securities
Being Offered Purchases and Redemptions
of Shares; Other
Information; Management of
the Funds
Item 8. Redemption or Repurchase
of Shares Purchases and Redemptions
of Shares
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Item 9. Pending Legal
Proceedings Not Applicable
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404(c))
PART B
Form N-1A Location in Statement
Item No. of Additional Information
_______ (Caption)
_________________________
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. General Information
and History Management; Other
Information
Item 13. Investment Objectives
and Policies Investment Policies;
Investment Limitations
Item 14. Management of the
Registrant Management
Item 15. Control Persons and
Principal Holders
of Securities Other Information
Item 16. Investment Advisory
and Other Services Management; Other
Information
Item 17. Brokerage Allocation
and Other Practices Portfolio Transactions
Item 18. Capital Stock and
Other Securities The Trust
Item 19. Purchase, Redemption
and Pricing of Securities
Being Offered Other Information -
Determination of Net Asset
Value; Additional Purchase
and Redemption Information
Item 20. Tax Status Other Information -
Taxation
Item 21. Underwriters Management
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Item 22. Calculation of
Performance Data Performance Data
Item 23. Financial Statements Not Applicable
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NORWEST SELECT FUNDS
Intermediate Bond Fund
Income Equity Fund
VALUGROWTHsm STOCK FUNDS
SMALL COMPANY STOCK FUND
Two Portland Square
Portland, Maine 04101
(207) 879-1900
Prospectus
May 1, 1996
________________________________________________________________
This Prospectus offers shares (the "Shares") of Intermediate Bond
Fund, Income Equity Fund, ValuGrowth Stock Fund and Small 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").
Intermediate Bond Fund seeks stable current income and
competitive total return over an interest rate cycle by investing
in a portfolio of investment grade, intermediate maturity fixed
income securities.
Income Equity Fund seeks capital appreciation consistent with
that of the overall equity securities markets and above-average
dividend income by investing primarily in the common stock of
large, high-quality domestic companies.
ValuGrowth Stock Fund seeks capital appreciation by investing 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.
Shares of the Trust currently are sold only to separate accounts
("Separate Accounts") of certain insurance companies (the
"Insurance Companies") to serve as the investment medium for
variable life insurance policies and variable annuity contracts
(collectively the "Contracts") issued by 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
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Prospectus for the Separate Account. It is possible that at some
later date 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.
This Prospectus sets forth concisely the information concerning
the Trust and each Fund that a prospective investor 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.
2
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TABLE OF CONTENTS
The Trust Dividends, Distributions,
and
Financial Highlights Tax Matters
Investment Objectives, Policies, Other Information
and Risk Considerations
Management of the Funds Appendix A: Investments,
Purchases and Redemptions Investment Strategies
of Shares and Risk Considerations
A-1
THE TRUST
The Trust is an open-end management investment company which 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." The Trust serves as the
investment medium for the Contracts offered 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 may be offered to qualified pension or
retirement plans. Shares are currently available for sale only
to Separate Accounts established by the Insurance Companies for
the purpose of issuing Contracts. See "Purchases and Redemption
of Shares." Consequently, the terms "shareholder" and
"shareholders" in this Prospectus refer to the Insurance
Companies.
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 _______________, 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.
[Financial Highlights table]
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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
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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 Code of 1986 (the "Code"). 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, Inc., Standard & Poor's Corporation or Fitch
Investors Services, Inc., 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
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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 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, high-quality
domestic companies that 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 purchase warrants and options with respect to equity
securities. The Fund also may invest in preferred stock and
securities convertible into common stock and may purchase
American Depository Receipts ("ADRs"), European Depository
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Receipts ("EDRs") and other similar securities of foreign
issuers. See "Convertible Securities," "Foreign Securities" and
"ADRs and EDRs" in the Appendix.
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 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
restructuring, 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"), and may purchase warrants and options with respect to
equity securities. See "Foreign Securities" and "ADRs and EDRs"
in the Appendix. Under normal circumstances, the Fund will
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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 which 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 which 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 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,
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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 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.
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, Inc., Standard &
Poor's Corporation or Fitch Investors Services, Inc., 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
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the Trust's Board of Trustees (the "Board") without shareholder
approval.
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.
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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, more than 15% of the Fund's net assets taken at current
value would be invested in securities which 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.
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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.
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, Inc. ("Moody's")
and AAA, AA, A and BBB in the case of Standard & Poor's
Corporation ("S&P") and Fitch Investors Services, Inc. ("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
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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 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.
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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
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under the laws of Delaware in 1929. As of December 31, 1995,
Norwest Corporation was the ____ largest bank holding company in
the United States in terms of assets. Norwest became a
subsidiary of Norwest Corporation in 1929 and, as of December 31,
1995, the Adviser managed or provided investment advice with
respect to assets totaling approximately $____ 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 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
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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.
ValuGrowth Stock Fund - Mr. David A. Beeck, CFA and Ms. Anne
C. Whitin, CFA. Mr. Beeck has been a Vice President of Norwest
since 1981. Ms. Whitin has been a Vice President of Norwest
since 1990. From 1987 to 1989, Ms. Whitin was a Vice President
and portfolio manager with Delafield, Harvey, Tabell, Inc.
Small Company Stock Fund - Mr. Kirk McCown, CFA. Mr. McCown
is the founder, President and a Director of Crestone, which was
incorporated in 1990. Prior to 1990, Mr. McCown was Senior Vice
President of Reich & Tang, L.P.
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 $____ 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.
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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 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.
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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 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
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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, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans' 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
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maturity, without regard to sale or bid prices, 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.
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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 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
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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 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
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occur if all of the securities in a Fund were replaced once in a
period of one year. With respect to Small Company Stock Fund and
ValuGrowth 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 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
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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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47180160.CQ3
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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,
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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
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 Services, Inc. ("Moody's"), and from AAA to D, in the
case of Standard & Poor's Corporation ("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
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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
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
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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 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
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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 (other than those determined to be
liquid pursuant to guidelines established by the Board or, in the
case of the Portfolio, Core Trust's board of trustees).
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
(or, in the case of the Portfolio, Core TrustOs board of
trustees). 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
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interest in a particular Rule 144A security, a Fund's holdings of
that security may be illiquid.
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
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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 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
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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 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.
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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. Dollar roll transactions involve the
sale by a 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. A 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. Each of the Funds currently treats dollar roll
transactions, whether or not "covered" by a segregated account,
as a borrowing, and therefore subject to the restriction that no
Fund may borrow in excess of 33 1/3% of the Fund's net assets.
The Funds 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
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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.
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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 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
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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 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.
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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
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
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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 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
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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
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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 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 the writing
(selling) and purchasing exchange-traded and over-the-counter
options on equity or fixed income securities or indices.
Intermediate Bond Fund may also to 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. The
Funds may only write 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.
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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 the Fund, as the writer of
covered call options, to benefit from any appreciation of the
underlying securities above the exercise price and the 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. A 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, the Funds intend
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
Funds intend that substantially all of their 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, a 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
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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 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
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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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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 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. Investment Policies
3. Investment Limitations
4. Performance Data
5. Management
6. Other Information
Appendix A - Description of Securities Ratings
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.
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"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, Inc., a
nationally recognized statistical rating organization.
"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 Corporation, 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.
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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
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
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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.
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").
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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.
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
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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
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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
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
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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
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
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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 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,
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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.
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
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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.
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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.
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:
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(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 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.
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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 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
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<PAGE>
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
engaging in dollar roll transactions involve the use of
"leverage" when cash made available to a Fund is used to make
portfolio investments. 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
15
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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.
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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.
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
17
<PAGE>
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.
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
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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.
(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.
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(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
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.
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(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 and
Adjustable U.S. Government Reserve 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., 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 indexes, 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
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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
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the discount to daily income. Capital gain and loss generally
are excluded from these calculations.
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.
Period total return is calculated according to the following
formula:
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PT = (ERV/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.
[Total Return Table]
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, 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.
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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.
Donald C. Willeke, Trustee
Principal of the law firm of Willeke & Daniels. His address
is 201 Ridgewood Avenue, Minneapolis, Minnesota 55403.
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.
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.
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
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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.
[5 year history]
Trustee Compensation
Each Trustee of the Trust is paid $1,000 for each Board meeting
attended (whether in person or by electronic communication) plus
$100 per active portfolio of the Trust and is paid $1,000 for
each Committee meeting attended on a date when a Board meeting is
not held. To the extent a meeting relates to only certain
portfolios of the Trust, Trustees are paid the $100 fee only with
respect to those portfolios. In addition, the Audit Committee
Chairman receives $250 from the Trust on a quarterly basis.
Trustees are reimbursed for travel and related expenses incurred
in attending meetings of the Board. No officer of the Trust is
compensated by the Trust.
The following table provides the aggregate compensation paid to
the Trustees of the Trust by the Trust and by the Trust and
Norwest Advantage Funds combined. Norwest Advantage Funds is a
separate investment company for which each Trustee serves as
Trustee. Information is presented for the year ended December
31, 1994, the fiscal year end of each Fund.
[Trustee Compensation Table]
Neither the Trust or Norwest Advantage Funds has adopted any form
of retirement plan covering Trustees or officers.
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.
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<PAGE>
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, 1994, Income
Equity Fund had not commenced operations.
[Fee Table]
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
28
<PAGE>
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.
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.
29
<PAGE>
[Fee Table]
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 "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
administration 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
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<PAGE>
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.
[Fee Table]
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.
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<PAGE>
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.
[Fee Table]
For the period ended December 31, 1994, the amount of fund
accounting fees payable to Norwest (all of which was waived) was
$20,742 and $19,161 for Intermediate Bond Fund and ValuGrowth
Stock Fund, respectively.
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
32
<PAGE>
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 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.
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<PAGE>
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.
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.
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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.
The following table shows the dollar amount of brokerage
commissions 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.
[Commission Table]
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
35
<PAGE>
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 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
36
<PAGE>
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 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
37
<PAGE>
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.
38
<PAGE>
AUDITORS
__________________, 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 Small Company Stock
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, 1995, the Trustees and officers
of the Trust in the aggregate owned less than 1% of the
outstanding Shares of each Fund.
The table below shows persons who owned of record 5% or more of
the outstanding Shares of each Fund as of April ___, 1996.
[5% Shareholder Table]
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 refuses to apply Delaware law, (2) no contractual
limitation of liability is in effect, and (3) the Trust itself is
39
<PAGE>
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.
[To be included in subsequent amendment to Trust's registration
statement, filed pursuant to Rule 485(b), to become effective on
the same day as this amendment]
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.
40
47180160.CQ3
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Municipal and Corporate Bonds
Moody's. The two highest ratings of Moody's Investors Service,
Inc. ("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.
A-1
<PAGE>
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.
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 Corporation ("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.
A-2
<PAGE>
Fitch. The two highest ratings of Fitch Investors Service, Inc.
("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.
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.
A-3
<PAGE>
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.
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.
A-4
<PAGE>
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 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".
A-5
<PAGE>
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.
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
A-6
<PAGE>
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
A-7
<PAGE>
plus (+) or minus (-) sign to show relative standing within the
major rating categories.
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.
A-8
<PAGE>
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.
A-9
47180160.CQ3
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements.
Included in the Prospectus (Part A):
None in this filing.
Included in the Statement of Additional Information (Part
B):
None in this filing.
(b) Exhibits.
Note: * Indicates that the exhibit is incorporated herein by
reference. All references to a Post-Effective Amendment ("PEA")
or Pre-Effective Amendment ("PreEA") are to PEAs and PreEAs to
Registrant's Registration Statement on Form N-1A, File No. 33-
74176 (the "Registration Statement").
(1)* Copy of Trust Instrument of the Registrant (filed as
Exhibit 1 to the Registration Statement filed on January
21, 1994).
(2)* Copy of By-Laws of the Registrant (filed as Exhibit 2 to
the Registration Statement filed on January 21, 1994).
(3) Not Applicable.
(4)* Form of Certificate for shares of beneficial interest of
the Registrant (filed as Exhibit 4 to the Registration
Statement filed on January 21, 1994).
(5) (a)* Form of Investment Advisory Agreement between
Registrant and Norwest Bank Minnesota, N.A. (filed as
Exhibit 5 to PreEA No. 1 on May 26, 1994).
(b) Form of Investment Subadvisory Agreement among
Registrant, Norwest Bank Minnesota, N.A. and Crestone
Capital Management, Inc. relating to Small Company
Stock Fund (filed as Exhibit 5(b) to PEA No. 2 on
May 1, 1995).
(6)* Form of Distribution Agreement between Registrant and Forum
Financial Services, Inc. (filed as Exhibit 6 to PreEA No. 1
on May 26, 1994).
C-10
<PAGE>
(7) Not Applicable.
(8)* Form of Custodian Agreement between Registrant and Norwest
Bank Minnesota, N.A. (filed as Exhibit 8 to PreEA No. 1 on
May 26, 1994).
(9) (a)* Form of Management Agreement between Registrant and
Forum Financial Services, Inc. (filed as Exhibit 9(a)
to PreEA No. 1 on May 26, 1994).
(b)* Form of Transfer Agency Agreement between Registrant
and Norwest Bank Minnesota, N.A. (filed as Exhibit
9(b) to PreEA on May 26, 1994).
(c)* Form of Fund Accounting Agreement between Registrant
and Norwest Bank Minnesota, N.A. (filed as Exhibit
9(c) to PreEA No. 1 on May 26, 1994).
(d)* Form of Fund Accounting Agreement between Registrant
and Forum Financial Corp. (filed as Exhibit 9(d) to
PEA No. 1 on February 15, 1995).
(10)* Opinion of Seward & Kissel (filed as Exhibit 10 to PreEA
No. 1 on May 26, 1994).
(11) Not applicable to this filing.
(12) Not applicable.
(13) Investment representation letter of initial purchaser of
shares of beneficial interest of the Registrant (filed as
Exhibit 13 to PreEA No. 1 on May 26, 1994).
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
Other Exhibits:
Power of Attorney, Donald H. Burkhardt, Trustee of the
Trust (filed as Other Exhibit to the Registration Statement
filed on January 21, 1994).
Power of Attorney, James C. Harris, Trustee of the Trust
(filed as Other Exhibit to the Registration Statement filed
on January 21, 1994).
C-11
<PAGE>
Power of Attorney, Richard M. Leach, Trustee of the Trust
(filed as Other Exhibit to the Registration Statement filed
on January 21, 1994).
Power of Attorney, Robert C. Brown, Trustee of the Trust
(filed as Other Exhibit to the Registration Statement filed
on January 21, 1994).
Power of Attorney, John Y. Keffer, Trustee of the Trust
(filed as Other Exhibit to the Registration Statement filed
on January 21, 1994).
Item 25. Persons Controlled by or Under Common Control with
the Registrant.
None.
Item 26. Number of Holders of Securities as of January 31,
1996.
Title or Class of Shares
of Beneficial Interest Number of Record Holders
_________________________ ________________________
Small Company Stock Fund 3
ValuGrowth Stock Fund 3
Intermediate Bond Fund 3
Income Equity Fund 0
Item 27. Indemnification.
The general effect of Section 10.02 of Registrant's Trust
Instrument is to indemnify existing or former trustees and
officers of the Trust to the fullest extent permitted by law
against liability and expenses. There is no indemnification if,
among other things, any such person is adjudicated liable to the
Registrant or its shareholders by reason of willful malfeasance,
bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. To the extent that the
description above is in any way inconsistent with the provisions
of Section 10.02 of Registrant's Trust Instrument, contained in
this registration statement as Exhibit 1, the provisions of
Section 10.2 shall govern.
The Registrant's Investment Advisory Agreement and Distribution
Agreement provide that Registrant's investment advisers and
principal underwriter are protected against liability to the
extent permitted by Section 17(i) of the Investment Company Act
of 1940. Similar provisions are contained in the Management
Agreement and Transfer Agency and Fund Accounting Agreement.
Registrants principal underwriter is also provided with
C-12
<PAGE>
indemnification against various liabilities and expenses under
Section 2(f) of the Distribution Agreement between the Registrant
and the principal underwriter; provided, however, that in no
event shall the indemnification provision be construed as to
protect the principal underwriter against any liability to
Registrant or its security holders to which the principal
underwriter would otherwise be subject by reason of willful
malfeasance, bad faith, or gross negligence in the performance of
its duties, or by reason of its reckless disregard of its
obligations and duties under Section 2 of the Distribution
Agreement. Registrant's Transfer Agent and certain related
individuals are also provided with indemnification against
various liabilities and expenses under Section 21 of the Transfer
Agency Agreement between the Registrant and the Transfer Agent;
provided, however, that in no event shall the transfer agent or
such persons be indemnified against any liability or expense that
is a direct result of willful malfeasance, bad faith, or gross
negligence by the Transfer Agent or such persons. Registrant's
Custodian and certain related individuals are also provided with
indemnification against various liabilities and expenses under
Section 18 of the Custodian Agreement between the Registrant and
the Custodian; provided, however, that in no event shall the
transfer agent or such persons be indemnified against any
liability or expense that is a direct result of willful
malfeasance, bad faith, or gross negligence by the transfer agent
or such persons. Registrant's Fund Accountant and certain
related individuals are also provided with indemnification
against various liabilities and expenses under Section 4 of the
Fund Accounting Agreement between the Registrant and the Fund
Accountant; provided, however, that in no event shall the
transfer agent or such persons be indemnified against any
liability or expense that is a direct result of willful
malfeasance, bad faith, or gross negligence by the Fund
Accountant or such persons.
To the extent that the description above is inconsistent with the
provisions of Section 9 of the Investment Advisory Agreement,
Section 2, of the Distribution Agreement, Section 8 of the
Management Agreement, Section 21 of the Transfer Agency
Agreement, Section 18 of the Custodian Agreement, and Section 4
of the Fund Accounting Agreement, the contractual provisions
shall govern.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
C-13
<PAGE>
by Registrant of expenses incurred or paid by a trustee, officer
or controlling person of Registrant in the successful defense of
any action, suit or proceeding) is asserted by such trustee,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Norwest Investment Management
The following are the directors and principal executive officers
of Norwest Bank Minnesota, N.A., including their business
connections which are of a substantial nature. The address of
Norwest Corporation, the parent of Norwest Bank Minnesota, N.A.,
is Norwest Center, Sixth Street and Marquette Avenue,
Minneapolis, MN 55479. Unless otherwise indicated below, the
principal business address of any company with which the
directors and principal executive officers are connected is also
Sixth Street and Marquette Avenue, Minneapolis, MN 55479.
A. Rodney Boren, Jr., Executive Vice President, has served
in various capacities as an employee of Norwest Bank
Minnesota, N.A. and/or its affiliates during the last two
years. Mr. Boren is also a Director of Norwest Trust
Company, New York, New York and Norwest Foundation.
James R. Campbell, Director, President and Chief Executive
Officer, has held this position for the last two years.
Mr. Campbell is also Executive Vice President of Norwest
Corporation, Director and Chairman of Norwest Investment
Advisors, Inc., and a Director of Flore Properties, Inc.,
Centennial Investment Corporation and Peregrine Capital
Management, Inc., which is located at LaSalle Plaza, 800
LaSalle Avenue, Suite 1850, Minneapolis, Minnesota 55402-
2056. Mr. Campbell is also a Director of a number of non-
profit organizations located in Minneapolis, Minnesota.
Within the last two years Mr. Campbell was a Director of
Norwest Insurance, Inc. and Norwest Equipment Finance, Inc.
Michael A. Graf, Controller and Cashier, also serves as
Senior Vice President and Controller of Norwest
Corporation.
P. Jay Kiedrowski, Executive Vice President, has served in
various capacities as an employee of Norwest Bank
Minnesota, N.A. and/or its affiliates since August 1987.
C-14
<PAGE>
Mr. Kiedrowski is also a Director and Chairman of the Board
of Norwest Investment Management, Inc. and President of
Norwest Investment Management, a part of Norwest.
Scott A. Kisting, Director and Executive Vice President, is
also a Director of Norwest Insurance, Inc., IntraWest
Insurance Company and Fidelity National Life Insurance
Company.
Edgar M. Morsman, Jr., Executive Vice President and Chief
Lending Officer, has served in various capacities as an
employee of Norwest Bank Minnesota, N.A. and/or its
affiliates during the last two years. Mr. Morsman is also
a Director of Centennial Investment Corporation, First
Interstate Equipment Finance, Inc., Flore Properties, Inc.,
Norwest Credit, Inc., Norwest Business Credit, Inc., R.D.
Leasing, Inc. and Norwest Equipment Finance, Inc., which is
located at 733 Marquette Avenue, Suite 300, Minneapolis, MN
55479-2048.
Dharani P. Narayana, Executive Vice President, has served
in various capacities as an employee of Norwest Bank
Minnesota, N.A. and/or its affiliates during the last two
years. Mr. Narayana is also a Director and Chairman of
Norwest Bank International, Director and Secretary of
Norwest Investments Limited, a Director of Norwest Bank
International, Colorado, a Director and Vice President of
Norwest Bank International, Iowa, and a Director of Norwest
Bank International, Wisconsin. Mr. Narayana is also a
Director and Secretary of Minnetonka Overseas Investments
Limited, and a Director of Minnetonka Representaocoes
Commerciais Ltda. and Nortico Investments Ltd. all of which
are located at Grand Cayman, Cayman Islands, British West
Indies.
William H. Queenan, Director, is also Executive Vice
President of Norwest Corporation.
John T. Thornton, Director, is also Executive Vice
President and Chief Financial Officer of Norwest
Corporation. Mr. Thornton is also a Director of Northern
Prairie Indemnity, Limited, Grand Cayman, Cayman Islands,
British West Indies, a Director of Norwest Capital Markets,
Inc. Mr. Thornton is also a Director of Norwest Growth
Fund, Inc., Norwest Venture Capital Management, Inc. and
Norwest Equity Capital, Inc., and Director, President and
Treasurer of Norwest Investors, Inc., and Director,
President and CEO of Norwest Limited, Inc., all located at
2800 Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, MN 54402. Mr. Thornton is also Director and
President of Superior Guaranty Insurance Company and
C-15
<PAGE>
Norwest Holding Company, and a Director of Bettendorf Asset
Management, Inc. Mr. Thornton is also a Director of Eau
Claire Asset Management, Inc., Green Bay Asset Management,
Inc., Iowa Asset Management, Inc., LaCrosse Asset
Management, Inc., South Bend Asset Management, Inc., South
Dakota Asset Management, Inc., Waupun Asset Management,
Inc., all located at 100 West Commons Blvd., Suite 303, New
Castle, DE 19720.
Richard C. Westergaard, Executive Vice President, has
served in various capacities as an employee of Norwest Bank
Minnesota, N.A. and/or its affiliates during the last two
years. Mr.Westergaard is also a Director of Norwest
Business Credit, Inc., Norwest Credit, Inc., First
Interstate Equipment Finance, Inc. and R.D. Leasing, Inc.
and a Director of Norwest Equipment Finance, Inc. and
Commonwealth Leasing Corporation, located at Investors
Building, 733 Marquette, Suite 300, Minneapolis, MN 55479-
2048.
Charles D. White, Senior Vice President, has served in
various capacities as an employee of Norwest Bank
Minnesota, N.A. and/or its affiliates during the last two
years. Mr. White is also Treasurer and Chief Financial
Officer of Norwest Limited, Inc. Mr. White is also a
Director of Bettendorf Asset Management, Inc., Eau Claire
Asset Management, Inc., Green Bay Asset Management, Inc.,
IntraWest Asset Management, Inc., Iowa Asset Management,
Inc., LaCrosse Asset Management, Inc., South Bend Asset
Management, Inc., South Dakota Asset Management, Inc., and
Waupun Asset Management, Inc., located at 100 West Commons
Boulevard, Suite 303, New Castle, DE 19720.
Crestone Capital Management, Inc.
The description of Crestone Capital Management, Inc. ("Crestone")
under the caption "Management - Investment Advisory Services -
Crestone Capital Management, Inc." in the Prospectus and
"Management - Investment Advisory Services - Subadviser - Small
Company Stock Fund" in the Statement of Additional Information
relating to the Small Company Stock Fund, constituting certain of
Parts A and B, respectively, of the Registration Statement, are
incorporated by reference herein.
The following are the directors and principal officers of
Crestone, including their business connections which are of a
substantial nature.
Kirk McCown, President and Director. His address is 7720
East Belleview Avenue, Suite 220, Englewood, Colorado
80111.
C-16
<PAGE>
Mark Steven Sunderhuse, Senior Vice President and Director.
His address is 7720 East Belleview Avenue, Suite 220,
Englewood, Colorado 80111.
P. Jay Kiedrowski, Director. Mr. Kiedrowski is an
Executive Vice President of Norwest and is also a Director
and Chairman of the Board of Norwest Investment Management,
Inc. His address is Sixth and Marquette Avenue,
Minneapolis, Minnesota 55479.
Steven P. Gianoli, Director. Mr. Gianoli is a Vice
President of Norwest. His address is Sixth and Marquette
Avenue, Minneapolis, Minnesota 55479.
Susan Koonsman, Director. Ms. Koonsman is President of
Norwest Investments & Trust. Her address is 1740 Broadway,
Denver, Colorado 80274.
Item 29. Principal Underwriters.
(a) Forum Financial Services, Inc., Registrant's underwriter,
serves as underwriter to Avalon Capital, Inc., Core Trust
(Delaware), The CRM Funds, The Cutler Trust, Forum Funds,
Inc., Monarch Funds, Norwest Advantage Funds, Norwest
Select Funds, Sound Shore Fund, Inc., Stone Bridge Funds,
Inc. and Trans Adviser Funds, Inc.
(b) John Y. Keffer, President and Secretary of Forum Financial
Services, Inc., is the Chairman and President of
Registrant. David R. Keffer, Vice President and Treasurer
of Forum Financial Services, Inc., is the Vice President,
Assistant Treasurer and Assistant Secretary of Registrant.
Their business address is Two Portland Square, Portland,
Maine
(c) Not Applicable.
Item 30. Location of Books and Records.
The majority of accounts, books and other documents required to
be maintained by 31(a) of the Investment Company Act of 1940 and
the Rules thereunder are maintained at the offices of Forum
Financial Services, Inc. at Two Portland Square, Portland, Maine
04101 and at Forum Financial Corp., Two Portland Square,
Portland, Maine 04101. The records required to be maintained
under Rule 31a-1(b)(1) with respect to journals of receipts and
deliveries of securities and receipts and disbursements of cash
are maintained at the offices of Registrant's custodian. The
records required to be maintained under Rule 31a-1(b)(5), (6) and
(9) are maintained at the offices of Registrant's investment
C-17
<PAGE>
advisers as indicated in the various prospectuses constituting
Part A of this Registration Statement.
Additional records are maintained at the offices of Norwest Bank
Minnesota, N.A., 733 Marquette Avenue, Minneapolis, MN 55479-
0040, Registrant's investment adviser, custodian and transfer
agent.
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
Registrant undertakes to:
(a) file a post-effective amendment with respect to
Income Equity Fund, using financial statements which
need not be certified, within four to six months from
the effective date of this amendment to registrant's
Securities Act of 1933 Registration Statement;
(b) contain in its Trust Instrument or Bylaws provisions
for assisting shareholder communications and for the
removal of trustees substantially similar to those
provided for in Section 16(c) of the Investment
Company Act of 1940, except to the extent that such
provisions are mandatory or prohibited under Delaware
law; and
(c) to the extent the information called for by Item 5A o
f Form N-1A under the Investment Company Act of 1940
is required to be contained in Registrant's
prospectuses or annual report and is not so contained
in a prospectus, to deliver a copy of Registrant's
annual report to shareholders upon request and
without charge.
C-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly
caused this amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the
City of Portland, and State of Maine on the 16th day of February,
1996.
NORWEST SELECT FUNDS
By: /s/ John Y. Keffer
__________________
John Y. Keffer
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement amendment has been signed below by the
following persons on the 16th day of February, 1996.
Signatures Title
__________ _____
(a) Principal Executive Officer
/s/ John Y. Keffer Chairman and President
___________________
John Y. Keffer
(b) Principal Financial and Accounting Officer
/s/ Michael D. Martins Treasurer
_______________________
Michael D. Martins
(c) A Majority of the Trustees
/s/ John Y. Keffer Chairman
___________________
John Y. Keffer
Robert C. Brown Trustee
Donald H. Burkhardt Trustee
James C. Harris Trustee
Richard M. Leach Trustee
C-19
<PAGE>
By: /s/ John Y. Keffer
______________________
John Y. Keffer
Attorney in Fact
-20
47180160.CQ3
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM NORWEST SELECT FUNDS SEMI-ANNUAL REPORT DATED JUNE 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000915985
<NAME> NORWEST SELECT SMALL COMPANY STOCK FUND
<SERIES>
<NUMBER> 4
<NAME> SELECT SMALL COMPANY STOCK FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> MAY-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 1116893
<INVESTMENTS-AT-VALUE> 1184665
<RECEIVABLES> 16069
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1200734
<PAYABLE-FOR-SECURITIES> 79532
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1399
<TOTAL-LIABILITIES> 80931
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1050942
<SHARES-COMMON-STOCK> 104972
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3386
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2297)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 67772
<NET-ASSETS> 1119803
<DIVIDEND-INCOME> 1113
<INTEREST-INCOME> 3672
<OTHER-INCOME> 0
<EXPENSES-NET> 1399
<NET-INVESTMENT-INCOME> 3386
<REALIZED-GAINS-CURRENT> (2297)
<APPREC-INCREASE-CURRENT> 67772
<NET-CHANGE-FROM-OPS> 68861
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105010
<NUMBER-OF-SHARES-REDEEMED> 38
<PAGE>
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1119803
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1399
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8235
<AVERAGE-NET-ASSETS> 1046531
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> .64
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.67
<EXPENSE-RATIO> .8
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
2
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM NORWEST SELECT FUNDS SEMI-ANNUAL REPORT DATED JUNE 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
[/LEGEND]
<CIK> 0000915985
<NAME> NORWEST SELECT VALUGROWTH STOCK FUND
<SERIES>
[NUMBER] 3
<NAME> SELECT VALUGROWTH
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
[INVESTMENTS-AT-COST] 2516343
[INVESTMENTS-AT-VALUE] 2801988
[RECEIVABLES] 4434
[ASSETS-OTHER] 38804
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2845226
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 3029
[TOTAL-LIABILITIES] 3029
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2578521
[SHARES-COMMON-STOCK] 253551
[SHARES-COMMON-PRIOR] 194722
[ACCUMULATED-NII-CURRENT] 29428
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (51397)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 285645
[NET-ASSETS] 2842197
[DIVIDEND-INCOME] 21657
[INTEREST-INCOME] 3517
[OTHER-INCOME] 0
[EXPENSES-NET] 8820
[NET-INVESTMENT-INCOME] 16354
[REALIZED-GAINS-CURRENT] (32268)
[APPREC-INCREASE-CURRENT] 316002
[NET-CHANGE-FROM-OPS] 300088
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 122621
[NUMBER-OF-SHARES-REDEEMED] 63792
3
<PAGE>
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 895681
[ACCUMULATED-NII-PRIOR] 13074
[ACCUMULATED-GAINS-PRIOR] (19129)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 8820
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 52364
[AVERAGE-NET-ASSETS] 2223223
[PER-SHARE-NAV-BEGIN] 9.81
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 1.35
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 11.21
[EXPENSE-RATIO] .80
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
4
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM NORWEST SELECT FUNDS SEMI-ANNUAL REPORT DATED JUNE 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
[/LEGEND]
<CIK> 0000915985
<NAME> NORWEST SELECT INTERMEDIATE BOND FUND
<SERIES>
[NUMBER] 2
<NAME> SELECT INTERMEDIATE BOND FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
[INVESTMENTS-AT-COST] 2000143
[INVESTMENTS-AT-VALUE] 2065827
[RECEIVABLES] 29421
[ASSETS-OTHER] 38804
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2134052
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 0
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1992264
[SHARES-COMMON-STOCK] 194594
[SHARES-COMMON-PRIOR] 126131
[ACCUMULATED-NII-CURRENT] 89413
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (13309)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 65684
[NET-ASSETS] 2134052
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 52665
[OTHER-INCOME] 0
[EXPENSES-NET] 4449
[NET-INVESTMENT-INCOME] 48216
[REALIZED-GAINS-CURRENT] (4794)
[APPREC-INCREASE-CURRENT] 103803
[NET-CHANGE-FROM-OPS] 147225
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 145733
[NUMBER-OF-SHARES-REDEEMED] 77270
5
<PAGE>
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 878881
[ACCUMULATED-NII-PRIOR] 41197
[ACCUMULATED-GAINS-PRIOR] (8515)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4449
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 43342
[AVERAGE-NET-ASSETS] 1495243
[PER-SHARE-NAV-BEGIN] 9.95
[PER-SHARE-NII] .13
[PER-SHARE-GAIN-APPREC] .89
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.97
[EXPENSE-RATIO] .6
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
6
47180160.CQ2
</TABLE>
