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NORWEST SELECT FUNDS
INTERMEDIATE BOND FUND
INCOME EQUITY FUND
VALUGROWTH-SM- STOCK FUND
SMALL COMPANY STOCK FUND
TWO PORTLAND SQUARE
PORTLAND, MAINE 04101
(207) 879-1900
PROSPECTUS
MAY 1, 1997
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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 series 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, income-producing 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.
This Prospectus sets forth concisely the information concerning the Trust and
the Funds that a prospective investor should know before investing. The Trust
has filed with the Securities and Exchange Commission ("SEC") a Statement of
Additional Information (the "SAI") with respect to each Fund dated May 1, 1997,
as may be further amended from time to time, which contains more detailed
information about the Trust and each of the
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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 MUTUAL FUNDS. THE SHARES OF MUTUAL FUNDS
ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL
RESERVE SYSTEM OR ANY OTHER GOVERNMENT AGENCY. THE SHARES ALSO ARE NOT
OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR GUARANTEED BY NORWEST BANK
MINNESOTA, N.A. OR ANY OTHER BANK OR BANK AFFILIATE.
AN INVESTMENT IN SHARES OF ANY MUTUAL FUND IS SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
The Trust. . . . . . . . . . . . 2 Dividends, Distributions, and
Financial Highlights . . . . . . 3 Tax Matters . . . . . . . . . . . .18
Investment Objectives, Other Information . . . . . . . . . .19
Policies, and
and Risk Considerations . . . . 5
Management of the Funds. . . . .13 Appendix A: Investments,
Purchases and Redemptions Investment Strategies, and
of Shares . . . . . . . . . . .16 Risk Considerations. . . . . . . . A-1
THE TRUST
The Trust is an open-end management investment company that was organized as a
Delaware business trust on December 7, 1993. This Prospectus relates to four
separate series of the Trust: Intermediate Bond Fund, Income Equity Fund,
ValuGrowth Stock Fund and Small Company Stock Fund. Each Fund has a distinct
investment objective and policies. See "Investment Objectives, Policies, and
Risk Considerations."
Shares of the Trust currently are sold only to separate accounts ("Separate
Accounts") of certain insurance companies (the "Insurance Companies") to serve
as the underlying investment vehicles for variable life insurance policies and
variable annuity contracts (collectively the "Contracts") issued by the
Insurance Companies. Consequently, the terms "shareholder" and "shareholders"
in this Prospectus refer to the Insurance Companies. Beneficial owners of the
Contracts are referred to as "Contract owners". 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. The Separate Accounts invest in Shares of one or more of the Funds in
accordance with allocation instructions received from Contract owners. These
allocations are described further in the Prospectus for the Separate Accounts.
The investment adviser to each Fund (the "Adviser") is Norwest Investment
Management, Inc. ("Norwest"), a subsidiary of Norwest Bank Minnesota, N.A.
("Norwest Bank"), and Crestone Capital Management, Inc. ("Crestone" and,
collectively at times with the Adviser, the "Advisers") serves as investment
subadviser to Small Company Stock Fund.
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The value of certain benefits under the Contracts 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 tables provide financial highlights for the Funds. This
information represents selected data for a single outstanding Share of each Fund
for the periods shown. Information shown was audited by KPMG Peat Marwick LLP,
independent auditors. Each Fund's financial statements for the fiscal year
ended December 31, 1996, and independent auditors' report thereon are contained
in the Fund's Annual Report and are incorporated by reference into the SAI.
Further information about each Fund's performance is contained in the Fund's
Annual Report, which may be obtained from the Trust without charge.
<TABLE>
<CAPTION>
INTERMEDIATE INCOME EQUITY
BOND FUND FUND
Year Ended Period Ended Period Ended
December 31, December 31, December 31,
------------ ------------ ------------
1996 1995 1994(a) 1996(a)
---- ---- ------- -------
<S> <C> <C> <C> <C>
Beginning Net Asset Value per Share $10.98 $9.95 $10.00 $10.00
Net Investment Income 0.50 0.33 0.33 0.08
Net Realized and Unrealized
Gain (Loss) on Securities (0.24) 1.36 (0.38) 0.92
Distributions From Net Investment
Income (0.50) (0.66) -- (0.08)
Distributions From Net Realized
Gains (0.02) -- -- (0.01)
------------ ------------ ------------ ------------
Ending Net Asset Value per Share $10.72 $10.98 $9.95 $10.91
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Ratios to Average Net Assets:
Expenses(b) 0.60% 0.60% 0.60%(c) 0.80%(c)
Net Investment Income 6.05% 6.33% 6.45%(c) 2.31%(c)
Total Return 2.37% 17.08% (0.50)% 9.95%
Portfolio Turnover Rate 125.23% 54.04% 52.61% 4.20%
Net Assets at the End of
Year/Period (000's Omitted) $5,959 $3,090 $1,255 $9,415
Average commission rate paid on
portfolio investment
transactions(d) N/A N/A N/A $0.0971
(a) Intermediate Bond Fund commenced operations on June 1, 1994. Income Equity Fund commenced operations on May 6, 1996.
(b) During the periods various fees and expenses were waived and reimbursed, respectively. Without the waivers and
reimbursements, the ratio of expenses to average net assets would have been:
2.52% 4.67% 9.31%(c) 2.51%(c)
(c) Annualized.
(d) Represents the average commission per share paid to brokers on the purchase or sale of equity securities.
</TABLE>
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<TABLE>
<CAPTION>
VALUGROWTH SMALL COMPANY
STOCK FUND STOCK FUND
Year Ended Period Ended Year Ended Period Ended
December 31, December 31,(a) December 31, December 31,(a)
------------ --------------- ------------ ---------------
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Beginning Net Asset Value per Share $12.04 $9.81 $10.00 $11.21 $10.00
Net Investment Income 0.11 0.07 0.07 0.02 0.06
Net Realized and Unrealized
Gain/(Loss) on Securities 2.32 2.30 (0.26) 3.51 1.54
Distributions From Net Investment
Income (0.11) (0.14) - (0.02) (0.06)
Distributions From Net Realized
Gains - - - (1.22) (0.33)
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Ending Net Asset Value per Share $14.36 $12.04 $9.81 $13.50 $11.21
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratios to Average Net Assets:
Expenses(b) 0.80% 8.00% 0.80%(c) 0.80% 0.80%(c)
Net Investment Income 1.08% 1.24% 1.67%(c) 0.16% 1.02%(c)
Total Return 20.21% 24.15% (1.09)% 31.47% 15.95%
Portfolio Turnover Rate 37.57% 25.44% 16.77% 194.87% 51.16%
Net Assets at the End of
Year/Period (000's Omitted) $10,583 $4,793 $1,910 $6,091 $2,027
Average commission rate paid on
portfolio investment
transaction(d) $0.0847 N/A N/A $0.0590 N/A
(a) ValuGrowth Stock Fund commenced operations on June 1, 1994. Small Company Stock Fund commenced operations on May 1, 1995.
(b) During the periods various fees and expenses were waived and reimbursed, respectively. Waivers and
reimbursements, the ratio of expenses to average net assets would have been:
2.02% 3.81% 8.00%(c) 2.82% 5.38%(c)
(c) Annualized.
(d) Represents the average commission per share paid to brokers on the purchase or sale of equity securities.
</TABLE>
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INVESTMENT OBJECTIVES, POLICIES, AND RISK CONSIDERATIONS
Each Fund has a stated investment objective that it pursues through its
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 related risk considerations,
see "Appendix A -- Investments, Investment Strategies, and Risk Considerations"
(the "Appendix") and the SAI.)
It is anticipated that, subject to shareholder approval at a Special Meeting of
Shareholders of the Trust scheduled to be held on May 23, 1997, the investment
objective of each of Income Equity Fund and ValuGrowth Stock Fund will be
amended to simplify them and/or to eliminate provisions that are investment
policies. The amendments to each of the investment objectives of Income Equity
Fund or ValuGrowth Stock Fund would not affect the manner in which the Fund's
assets currently are managed. Shareholders will be notified if the manner in
which either Fund's assets are managed changes materially.
If approved by shareholders, the investment objective of Income Equity Fund will
be to provide long-term capital appreciation consistent with above-average
dividend income.
If approved by shareholders, the investment objective of ValuGrowth Stock Fund
will be to provide long-term capital appreciation.
INVESTMENT OBJECTIVES
Each Fund's investment objective is fundamental and 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
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Intermediate Bond Fund seeks to achieve 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 invests at least 65%, and
generally expects to invest substantially all, 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 may invest
include, but are not limited to, U.S. Government Securities, corporate debt
securities, convertible debt securities, taxable municipal securities,
mortgage-backed and asset-backed securities, and short-term investments such as
certificates of deposit, commercial paper and money market funds.
Under normal circumstances, the Fund invests 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. (See "Additional Investment Policies - Investment
Limitations - Diversification.")
The Fund may 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
("NRSRO") such as Moody's Investors Service ("Moody's"), Standard & Poor's
("S&P") or Fitch Investors Service, L.P. ("Fitch"), or, if unrated, 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 have various maturities. The
Fund may 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 may invest include mortgage-backed and other
asset-backed securities, although the Fund limits its investment in these
securities to not more than 50% of its total assets. The Fund may enter into
"dollar roll" transactions and may purchase "zero-coupon" securities. The Fund
limits its investment in "zero coupon" securities, except those issued through
the U.S. Treasury's STRIPS program, to not more than 10% of its 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
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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, delayed-delivery or
forward-commitment basis.
The corporate debt securities in which the Fund may invests include U.S.
dollar-denominated debt of foreign corporate issuers. The Fund also from
time-to-time may purchase securities issued by the governments of foreign
countries or 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 also may 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 expects to invest 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
purchase. The Portfolio also may invest in preferred stock and securities
convertible into common stock and may purchase American Depository Receipts,
European Depository Receipts and other similar securities of foreign issuers.
See "Investment Objectives and Policies - International Fund - Foreign
Investment Considerations and Risk Factors." Under
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normal circumstances, Income Equity Fund will not invest more than 10% of its
total assets in the securities of a single issuer.
VALUGROWTH STOCK FUND
The Fund invests primarily in medium- and large-capitalization companies
(companies with a market capitalization of greater than $500 million) that, in
the view of the Adviser, possess above average growth characteristics and appear
to be undervalued.
The Fund seeks to identify and invest in companies whose earnings and dividends
the Adviser believes will grow both faster than inflation and faster than 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 on 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 shareholder's 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 those companies whose shares are most attractively priced.
The Fund also may invest in selected companies that the Adviser regards as
"special situations." Special situation companies often have the potential for
significant future earnings growth but have not performed well in the recent
past. These situations may include management turnarounds, corporate or asset
restructurings, or significantly undervalued assets. These investments are the
exception, not the rule, and must satisfy the Adviser's valuation parameters.
In addition, the Fund may invest up to 20% of its assets in American Depository
Receipts, European Depository Receipts and other similar securities of foreign
issuers. See "Investment Objectives and Policies - International Fund - Foreign
Investment Considerations and Risk Factors."
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SMALL COMPANY STOCK FUND
Small Company Stock Fund invests primarily in the common stock of small- and
medium-size domestic companies that have a market capitalization well below that
of the average company in the Standard & Poor's 500 Composite Stock Price Index.
Small and medium companies are those whose market capitalization is less than $1
billion at the time of purchase, although it is anticipated that investments
primarily will be in companies with capitalization of less than $750 million.
In selecting securities for the Fund, the Advisers seek securities with
significant price appreciation potential, and attempts to identify companies
that show above-average growth, as compared to long-term overall market growth.
The companies in which the Fund invests may be in a relatively early stage of
development or may produce goods and services that have favorable prospects for
growth due to increasing demand or developing markets. Frequently, such
companies have a small management group and single product or product line
expertise, which, in the view of the Advisers, may result in an enhanced
entrepreneurial spirit and greater focus, thereby allowing such companies 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 the prospects for immediate dividend income are limited.
The securities in which the Fund invests may be listed on a securities exchange,
included in the National Association of Securities Dealers Automated Quotation
(NASDAQ) National Market System, or traded in the over-the-counter securities
market. Equity securities owned by the Fund that are traded in the
over-the-counter market or on a regional securities exchange may not be traded
every day or in the volume typical of securities trading on a national
securities exchange. As a result, disposition by the Fund of a portfolio
security, to meet redemption requests by shareholders or otherwise, may require
the Fund to sell these securities at a discount from market prices, to sell
during periods when disposition is not desirable, or to make many small sales
over a lengthy period of time.
The Fund also may invest up to 20% of its assets in American Depository
Receipts, European Depository Receipts and other similar securities of foreign
issuers. See "Foreign Securities" and "ADRs and EDRs" in the Appendix.
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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 more
limited product lines, less access to financial markets and less management
depth. In addition, many of the securities of these companies trade less
frequently and in lower volumes than securities issued by larger companies. The
result is that the short-term price volatility of many small company securities
may be greater than the price volatility of the securities of larger, more
established companies that are widely held. The securities of small companies
also may be more sensitive to market changes generally than the securities of
large companies.
Investments in foreign securities 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.
ADDITIONAL INVESTMENT POLICIES
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All investment policies of a Fund that are designated as fundamental may not be
changed without the approval of the holders of a majority of that Fund's
outstanding voting securities. A majority of a Fund's outstanding voting
securities means the lesser of 67% of the shares of the Fund present or
represented at a shareholders meeting at which the holders of more than 50% of
the shares are present or represented, or more than 50% of the outstanding
shares of a Fund. Except as otherwise indicated, investment policies of the
Funds are not fundamental and may be changed by the Trust's Board of Trustees
(the "Board") without shareholder approval.
INVESTMENT LIMITATIONS
The Funds have adopted the investment limitations listed below, each of which is
a nonfundamental policy of the Funds. 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 or the Securities of investment companies) 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.
As a non-fundamental policy, purchases of securities for each of the Funds also
are limited in accordance with the diversification requirements established by
section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code").
To comply with the Code's regulations, 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, as
applicable.
Compliance with the applicable Code diversification rules under generally limits
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.
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Government. Failure to comply with these diversification requirements may
result in immediate taxation to the Contract owners of all returns credited to
the 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. 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 include, 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). Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and a Fund
might also have to register restricted 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.
An institutional market has developed for certain securities that are not
registered under the Securities Act of 1933 (the "1933 Act"), including
repurchase agreements and foreign securities. Institutional investors depend on
an efficient institutional market in which the unregistered security can be
readily resold or on the issuer's ability to honor a demand for repayment of the
unregistered security. A security's contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of the security. If such securities are eligible for purchase by
institutional buyers in accordance with Rule 144A under the 1933 Act, the
investment advisers may determine that such securities are not illiquid
securities under guidelines adopted by the Board. These guidelines take into
account trading activity in the securities and the availability of reliable
pricing information, among other factors.
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If there is a lack of trading interest in a particular Rule 144A security, a
Fund's holdings of that security may be illiquid.
INVESTMENT IN OTHER INVESTMENT COMPANIES. Notwithstanding anything to the
contrary, each of the Funds may invest, to the extent permitted by the 1940 Act,
all or a portion of their assets in one or more open-end management investment
companies.
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, including reverse purchase agreements, the Fund does not treat those
techniques as involving borrowings. See "Investments Involving Leverage" in the
Appendix. As a fundamental policy, no Fund may make any loans except for loans
of portfolio securities, through the use of repurchase agreements, and through
the purchase of debt securities that are otherwise permitted investments for the
Fund. No Fund will lend portfolio securities in excess of 33 1/3% of the value
of the Fund's total assets.
MARGIN AND SHORT SALES. Each Fund may purchase securities on margin and make
short sales of securities. As a borrowing, the Fund's purchase of securities on
margin is subject to the limitations on and risks involved with borrowing.
Although permitted to do so, the Funds have no current intention of employing
either of these investment techniques in any material amount. The Funds may,
however, enter into short sales against the box. (See "Short Sales" in the
Appendix.)
FIXED-INCOME SECURITIES AND THEIR CHARACTERISTICS
Although Intermediate Bond Fund may invest only in investment-grade fixed-income
securities and Small Company Stock Fund , 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 is
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 is 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 also affects the market value of the debt
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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 may only purchase securities that are rated in the four
highest long-term rating categories assigned by a NRSRO. For example, the four
highest rating categories for corporate bonds are "Aaa", "Aa", "A" and "Baa" in
the case of Moody's and "AAA", "AA", "A" and "BBB" in the case of S&P and Fitch.
Fixed-income securities rated in these categories are generally considered to be
investment-grade securities, although Moody's indicates that securities rated
"Baa" have speculative characteristics. Short-term debt, including commercial
paper, rated in the two highest categories of an NRSRO - "Prime-1" and "Prime-2"
in the case of Moody's, "A" and "B" in the case of S&P and "F-1+" and "F-1" in
the case of Fitch -- have the strongest ability for timely debt repayment. A
description of the rating categories of various NRSROs is contained in the SAI.
The Funds also may purchase unrated securities if the Advisers determine 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 an
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 Funds may invest (including mortgage-related securities) in securities that
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
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changes in the issuer's creditworthiness. The rate of interest on securities
purchased by a Fund may be tied to U.S. Treasury or other U.S. Government
Securities or indices based 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 with prevailing
short-term interest rates (sometimes referred to as inverse floaters). For
instance, upon reset, the interest rate payable on a security may decline 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 may be a form of leverage that could have the effect
of increasing the volatility of the security's market value while increasing the
security's, and thus the Fund's, yield.
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) that it may have. A Fund could, for this or other
reasons, suffer a loss with respect to an instrument. An 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. When 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 Fund's investment results, 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.
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INVESTMENT ADVISORY SERVICES
NORWEST INVESTMENT MANAGEMENT, INC.
Subject to the general supervision of the Board, Norwest makes investment
decisions for the Funds and continuously reviews, supervises and administers
each Fund's investment program or oversees the investment decisions of the
investment subadviser, as applicable. Norwest, which is located at Norwest
Center, Sixth Street and Marquette, Minneapolis, Minnesota 55479, is an indirect
subsidiary of Norwest Corporation, a multi-bank holding company incorporated
under the laws of Delaware in 1929. As of December 31, 1996, Norwest
Corporation was one of the largest bank holding companies in the United States
in terms of assets. As of that date, Norwest and its affiliates managed or
provided investment advice with respect to assets totaling approximately $22
billion.
For its services under the investment advisory agreements, the Adviser is
entitled to receive from the Trust 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%.
CRESTONE CAPITAL MANAGEMENT, INC.
To assist the Adviser 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, the Adviser and
Crestone. Crestone, which is located at 7720 East Belleview Avenue, Suite 220,
Englewood Colorado 80111, is a subsidiary of Norwest Bank. Crestone provides
investment advice regarding companies with small capitalization to various
clients, including institutional investors. As of December 31, 1996, Crestone
managed assets with a value of approximately $465 million.
Under 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 the Adviser believes should be invested using
Crestone as investment subadviser. Currently, Crestone has managed the entire
portfolio of the Fund since inception. The Adviser supervises the performance
of Crestone, including its adherence to the Fund's investment objective and
policies, and pays Crestone a fee for the investment subadvisory services
provided.
PORTFOLIO MANAGERS
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Many persons on the advisory staff of the Adviser and Crestone contribute to the
investment advisory services provided to each Fund, as applicable. The
following persons, however, have been primarily responsible for the day to day
management of the Funds' investment portfolios since inception:
INTERMEDIATE BOND FUND - Ms. Marjorie H. Grace. Ms. Grace is an
officer of Norwest and has been a Vice President of Norwest Bank since
1992; she has served as a portfolio manager for the Fund since January
1996; a portfolio manager for other funds at Norwest Bank since 1992;
an Institutional Salesperson with Norwest Investment Services, Inc.
from 1991-1992.
INCOME EQUITY FUND - Mr. David L. Roberts. Mr. Roberts is an officer
of Norwest and has been a Senior Vice President of Norwest Bank since
1991; he has been associated with Norwest Bank for 22 years in various
investment related capacities.
VALUGROWTH STOCK FUND - Mr. David S. Lunt, CFA. Mr. Lunt is an
officer of Norwest and has been a Vice President of Norwest Bank or
its affiliates since 1992. Prior thereto, Mr. Lunt served as a
security analyst and portfolio manager for First Tier Bank.
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. -Registered Trademark- ("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 acts as manager and distributor
of registered investment companies and collective investment funds with assets
of approximately $19 billion. Forum, whose principal business address is Two
Portland Square, Portland, Maine, is a registered broker-dealer and is a member
of the National Association of Securities Dealers, Inc.
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For its management services and facilities, Forum is entitled to receive a
monthly fee at an annual rate of 0.20% of the average daily net assets of each
Fund. 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 under the distribution
agreement. In addition, none of the Funds has adopted a distribution plan and,
accordingly, no Fund currently incurs Rule 12b-1 fees.
SHAREHOLDER SERVICES AND CUSTODY
Norwest Bank serves as transfer agent and dividend disbursing agent for the
Trust (the "Transfer Agent"). Norwest Bank also serves as the Trust's custodian
and may appoint certain subcustodians to provide custodial services for any
foreign securities and other assets held in foreign countries for a of Fund For
these services, Norwest is entitled to compensation at an aggregate annual rate
of up to 0.10% of each Fund's average daily net assets.
EXPENSES OF THE FUNDS
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Subject to the obligation of Norwest to reimburse the Trust for certain expenses
of the Funds, the Trust has confirmed its obligation to pay all the Trust's
expenses. The Funds' expenses include Trust expenses attributable to the Funds,
which are allocated to each Fund, and expenses not specifically attributable to
the Funds, which are allocated among the Funds and all other funds of the Trust
in proportion to their average net assets. Each service provider to a Fund may
elect to waive (or continue to waive) all or a portion of their fees, which are
accrued daily and paid monthly. Any such waivers will have the effect of
increasing a Fund's performance for the period during which the waiver is in
effect. Fee waivers are voluntary and may be reduced or eliminated at any time.
Each service provider to the Trust or their agents and affiliates also may act
in various capacities for, and receive compensation from, their customers who
are shareholders of a Fund. Under agreements with those customers, these
entities may elect to credit against the fees payable to them by their customers
or to rebate to customers all or a portion of any fee received from the Trust
with respect to assets of those customers invested in a Fund.
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
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example: (i) changes in state insurance laws, (ii) changes in federal income
and other tax laws, (iii) changes in the investment management of any of the
Funds, or (iv) 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.
Fund Shares may be purchased or redeemed on each day when the Trust values its
assets. Fund Shares are sold and redeemed at their respective net asset values
(without a sales charge) next computed after instructions from a Contract owner
are received by an Insurance Company whose Separate Account invests in the
Trust. Other procedures concerning the purchase and redemption of shares are
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 not 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. Contract owners 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.
Fund shares are continuously sold on every weekday except customary national
business holidays and Good Friday ("Fund Business Day"). The purchase price for
Fund shares equals their net asset value next-determined after acceptance of an
order without charge.
The Trust determines the net asset value per share of each Fund as of 4:00 p.m.,
Eastern Time, on each Fund Business Day by dividing the
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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 owned by a Fund for which market quotations are readily available
are valued at current market value or, in their absence, at fair value as
determined by the Board or pursuant to procedures approved by the Board, as
applicable. The Trust does not determine net asset value on the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Current market value of securities may be provided by independent pricing
services of the type commonly used in the investment company industry. Debt
securities may be valued at prices supplied by pricing services based on
broker- or dealer-supplied valuations or matrix pricing, a method of valuing
securities by reference to the value of other securities with similar
characteristics, such as rating, interest rate and maturity, without regard to
sale or bid prices, 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.
Dividends and distributions are automatically reinvested in additional Fund
Shares at the its net asset value next determined unless the shareholder has
elected 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. In addition, each Fund intends to distribute all of its net
investment income and any net 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 net 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.
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In the event that rules or regulations are adopted, there can be no assurance
that the Funds will be able to operate as currently described herein, or that
the Trust will not have to change any Fund's investment objective or investment
policies. While each Fund's investment objective is fundamental and may be
changed only by a vote of a majority of the Fund's outstanding shares, the Board
has reserved the right in its sole discretion to modify the investment policies
and investment limitations of each Fund that are not fundamental policies as
they deem necessary or appropriate to minimize the risk of any such prospective
rules and regulations from causing the Contract owners to be considered the
owners of the shares of the Funds.
OTHER INFORMATION
PERFORMANCE INFORMATION
A Fund's performance may be quoted in advertising in terms of yield or total
return. All performance information is based on historical results and is not
intended to indicate future performance. A Fund's yield is a way of showing the
rate of income the Fund earns on its investments as a percentage of the Fund's
share price. To calculate standardized yield, a Fund takes the interest income
it earned from its investments for a 30-day period (net of expenses), divides it
by the average number of shares entitled to receive dividends, and expresses the
result as an annualized percentage rate based on the Fund's share price at the
end of the 30-day period. A Fund's total return shows its overall change in
value, including changes in share price and assuming all the Fund's dividends
and distributions are reinvested. A cumulative total return reflects a Fund's
performance over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Fund's performance had been constant
over the entire period. Because average annual returns tend to smooth out
variations in the Funds' returns, shareholders should recognize that they are
not the same as actual year-by-year results. To illustrate the components of
overall performance, a Fund may separate its cumulative and average annual
returns into income results and capital gain or loss. Published yield
quotations are, and total return figures may be, based on amounts actually
invested in a Fund net of sales loads that may be paid by an investor. A
computation of yield or total return that does not take into account the sales
load paid by an investor will be higher than a computation based on the public
offering price of shares purchased that take into account payment of the sales
load.
The Funds' advertisements may reference ratings and rankings among similar
mutual funds by independent evaluators such as Morningstar, Inc., Lipper
Analytical Services, Inc. and IBC/Donoghue, Inc. 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. All performance information
for a Fund is calculated on a class basis. In addition, a Fund may use a
benchmark securities index as a measure of the Fund's performance. These
indices are not used in the management of
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the Fund but rather are standards by which the Adviser and shareholders may
compare the performance of a Fund to an unmanaged composite of securities with
similar, but not identical, characteristics as the Fund. The Funds may from time
to time advertise a comparison of their performance against any of these or
other indices.
VARIABLE CONTRACT CHARGES. Performance figures of the Funds are calculated in
accordance with SEC requirements and do not include charges by Separate Accounts
that invest in the Fund's Shares such as recurring fees charged to all contract
holders accounts. Fund performance information must be presented in conjunction
with performance information relating to the Contracts. Purchasers of Contracts
issued by Insurance Companies should therefore recognize that the yield and
total return on the Separate Account assets relating to their Contract which is
invested in Shares of any of the Funds would be lower than the yield and total
return of the Fund for the same period.
BANKING LAW MATTERS
Federal banking laws and regulations generally permit a bank or bank affiliate
to act as investment adviser, transfer agent, or custodian to an investment
company. Forum believes that the Adviser and any other bank or bank affiliate
may perform the services described in this Prospectus or similar services
without violating applicable federal banking laws or regulations.
Federal or state statutes or regulations and judicial or administrative
decisions or interpretations relating to the activities of banks and their
affiliates, however, could prevent a bank or bank
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affiliate from continuing to perform all or a part of the activities
contemplated by this Prospectus. In this event, changes in the operation of the
Trust might occur. It is not expected that shareholders would suffer any
material adverse financial consequences as a result of any of these occurrences.
PORTFOLIO TRANSACTIONS
Each Adviser places orders for the purchase and sale of assets it manages with
brokers and dealers selected in its discretion. 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. Payment of commissions to an Affiliated Broker is subject to procedures
adopted by the Board to ensure that the commissions do not exceed the usual and
customary broker's commissions charged by unaffiliated brokers. No specific
portion of a Fund's brokerage is directed to Affiliated Brokers and in no event
may a broker affiliated with the Adviser receive brokerage transactions in
recognition of research services provided to the Adviser.
With respect to Income Equity Fund, ValuGrowth Stock Fund and Small Company
Stock Fund, a higher portfolio turnover rate may result in increased brokerage
costs to the Fund.
SHAREHOLDER VOTING AND OTHER RIGHTS
Each Fund Share 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 Fund Share is
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. Fund shareholders 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
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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, 1997, Fund Shares were sold only to Separate Accounts of Fortis.
As of that date, Fortis owned substantially all of the outstanding shares of
each Fund.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION AND THE FUNDS' OFFICIAL SALES LITERATURE IN CONNECTION
WITH THE OFFERING OF THE FUNDS' SHARES, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR
TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
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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 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 or, 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 generally 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
that 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 subordinated to
non-convertible debt securities. In general, the value of a convertible
security is the higher of its investment value (its value as a fixed-income
security) and its conversion value (the value of the underlying shares of common
stock if the security is converted). The investment value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise. The conversion value of a convertible security is
influenced by the value of the underlying common stock.
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Intermediate Bond Fund and Small Company Stock Fund only invest in convertible
securities that are investment grade. 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 and from "AAA" to "D", in the case of
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). 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 U.S. securities.
Changes in foreign exchange rates also may affect the value in U.S. dollars of
all foreign currency-denominated securities held by a Fund. Exchange rates are
influenced generally by the forces of supply and demand in the foreign currency
markets and by numerous other political and economic events occurring outside
the United States, many of which may be difficult if not impossible to predict.
Income from foreign securities is 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). The Funds may invest in sponsored and unsponsored ADR which are receipts
issued by an American bank or trust company evidencing ownership of
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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 EDRs, which are receipts
issued by a European financial institution evidencing an arrangement similar to
that of ADRs, and in other similar instruments representing securities of
foreign companies. EDRs, in bearer form, are designed for use in European
securities markets.
SHORT-TERM CORPORATE DEBT SECURITIES (ALL FUNDS). As described under "Temporary
Defensive Position" in the Prospectus, the Funds may invest in commercial paper,
which consists of unsecured promissory notes issued by corporations. The Funds
also may invest in commercial paper for other than temporary or defensive
purposes. Commercial paper is issued by companies to finance their affiliates'
current obligations. The corporate debt securities in which these Funds may
invest include short-term corporate bonds and notes. The Funds also may
purchase variable-and floating-rate demand notes of corporations, which are
unsecured obligations redeemable upon not more than 30 days' notice. These
obligations include master demand notes that permit investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangement with the
issuer of the instrument. These obligations generally are not traded, nor
generally is there an established secondary market for these obligations.
Although a Fund generally would not be able to resell a master demand note to a
third party, a Fund would be 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. 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 U.S. 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, instrumentalities and government-sponsored enterprises,
some of which are 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
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Mortgage Association. In addition, the U.S. Government Securities also may
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 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 for zero-coupon security
held, the Fund 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 may
result in a taxable gain or loss.
ILLIQUID AND RESTRICTED SECURITIES (ALL FUNDS). No Fund may invest more than
15% of its net assets in illiquid securities. Illiquid securities are
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements not entitling
the holder to payment within seven days and restricted securities. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities, and, to the extent it may invest in restricted securities, a Fund
might also have to register those securities in order to dispose of them,
resulting in expense and delay. A Fund might not be able to dispose of
restricted or other securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions. There can be no assurance
that a liquid market will exist for any security at any particular time.
An 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
International Portfolio, Core Trust's 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
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trading 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 may have characteristics similar to
borrowings but are not considered borrowings if the Fund properly 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 delayed-delivery
or forward-commitment (generally referred to as "forward commitments") basis.
In addition, the Funds 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 that occur when losses affect an asset base, enlarged
by borrowings or the creation of liabilities, that exceeds the equity base of
the Fund. The risks of leverage include a higher volatility of the net asset
value of the Fund's shares and the relatively greater effect on the net asset
value of the shares caused by favorable or adverse market movements or changes
in the cost of cash obtained by leveraging and the yield obtained from investing
the cash.
REPURCHASE AGREEMENTS; SECURITIES LENDING; REVERSE REPURCHASE
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AGREEMENTS; WHEN-ISSUED, DELAYED-DELIVERY TRANSACTIONS AND FORWARD-COMMITMENT
TRANSACTIONS; (ALL FUNDS) AND DOLLAR-ROLL TRANSACTIONS (INTERMEDIATE BOND FUND).
The Funds' use of repurchase agreements, securities lending, reverse repurchase
agreements and forward commitments and 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, dollar-roll
transactions, 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 continuously secured by cash, U.S. Government
Securities or other high-quality liquid debt or equity securities with a market
value, determined daily, at least equal to the value of the Fund's securities
loaned, including accrued interest. A Fund receives interest in respect of
securities loans from the borrower or from investing cash collateral. A Fund
may pay fees to arrange the loans, as well as administrative or custodial fees.
Voting rights on the securities loaned may pass with the lending. The Funds
will call any security loans in order to vote if a material issue affecting the
investment is to be voted upon. No Fund will lend portfolio securities in
excess of 33 1/3% of the value of the Fund's total assets.
REPURCHASE AGREEMENTS. Each Fund may from time to time enter into repurchase
agreements, transactions in which the Fund purchases a security and
simultaneously commits to resell that security to the seller at an agreed-upon
price on an agreed-upon future date, normally one to seven days later. The
resale price of a repurchase agreement reflects a market rate of interest and 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 and is not related to the coupon rate or
maturity of the sold security. For certain demand agreements, there is no
agreed
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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 uses 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, DELAYED-DELIVERY AND TRANSACTIONS FORWARD-COMMITMENT. Each Fund
may purchase fixed-income securities on a "when-issued", "delayed-delivery" 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, while delivery and payment for the securities take place at a later
date. Normally, the settlement date occurs within three months after the
transaction. During the period between a commitment and settlement, no payment
is made for the securities purchased and no interest on the security accrues to
the purchaser. At the time a Fund makes a commitment to purchase securities in
this manner, the Fund immediately assumes the risk of ownership, including price
fluctuation. Failure by the other party to deliver a security purchased by a
Fund may result in a loss or a missed opportunity to make an alternative
investment.
The use of these transactions 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, delayed-delivery 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.
Securities issued on a when-issued, delayed-delivery and forward-commitment
basis may be sold prior to the settlement date, but the Funds purchase
securities on a these bases 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, delayed delivery or forward-commitment basis
tends to increase the volatility of the Fund's net asset value per share.
DOLLAR-ROLL TRANSACTIONS. Intermediate Bond Fund may enter into dollar-roll
transactions, which involve the sale by the Fund of U.S. Treasury securities,
GNMA certificates and other fixed-income securities together with a commitment
to purchase similar, but not identical, securities at a later date from the same
party. During the roll
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period, no payment is made for the securities purchased and no interest or
principal payments on the security accrues to the purchaser, although the Fund
assumes the risk of ownership. The Fund is compensated for entering into
dollar-roll transactions by the difference between the current sales price and
the forward price for the future purchase, as well as by the interest earned on
the cash proceeds of the initial sale. Like other securities purchased in
when-issued, delayed-delivery, or firm-commitment transactions, dollar-roll
transactions involve the risk that the market value of the securities sold by
the Fund may decline below the price at which a Fund is committed to purchase
similar securities. In the event the buyer of securities under a dollar roll
transaction becomes insolvent, the Fund's use of the proceeds of the transaction
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
The Fund currently treats dollar-roll transactions, whether or not "covered" by
a segregated account, as a borrowing, and, therefore, subject to the restriction
that the Fund may not borrow in excess of 33 1/3% of the Fund's net assets. The
Fund engages in dollar roll transactions only with the intent of acquiring
securities for its portfolios.
SWAP AGREEMENTS (INTERMEDIATE BOND FUND). To manage its exposure to different
types of investments, Intermediate Bond Fund may enter into interest-rate,
currency and mortgage (or other asset) swap agreements and may purchase and sell
interest-rate "caps," "floors" and "collars." In a typical interest-rate swap
agreement, one party agrees to make regular payments equal to a floating
interest rate on a specified amount (the "notional principal amount") in return
for payments equal to a fixed interest rate on the same amount for a specified
period. If a swap agreement provides for payment in different currencies, the
parties may also agree to exchange the notional principal amount. Mortgage swap
agreements are similar to interest-rate swap agreement, 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.
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SHORT SALES (ALL FUNDS). The Funds may make short sales of securities they own
or have the right to acquire at no added cost through conversion or exchange of
other securities they own (referred to as short sales "against the box").
Intermediate Bond Fund may make short sales of securities which it does not own
or have the right to acquire. A short sale that is not made "against the box"
is a transaction in which a Fund sells a security it does not own in
anticipation of a decline in the market price for the security. When a Fund
makes a short sale, the proceeds it receives are retained by the broker until
the Fund replaces the borrowed security. In order to deliver the security to
the buyer, a Fund must arrange through a broker to borrow the security and, in
so doing, the Fund becomes obligated to replace the security borrowed at its
market price at the time of replacement, whatever that price may be.
MORTGAGE-BACKED SECURITIES (INTERMEDIATE BOND FUND). Mortgage-backed securities
represent an interest in a pool of mortgages originated by lenders such as
commercial banks, savings associations and mortgage bankers and brokers.
Mortgage-backed securities may be issued by governmental or government-related
entities or by non-governmental entities such 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
that 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 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
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and government entities) have also achieved broad market acceptance and,
consequently, an active secondary market has emerged. However, the market for
private conventional mortgage pools is smaller and less liquid than the market
for government and government-related mortgage pools.
AVERAGE LIFE AND PREPAYMENTS. The average life of pass-through pools varies
with the maturities of the underlying mortgage instruments. In addition, a
mortgage pool's terms may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. Prepayments with respect to
securities during times of declining interest rates tends 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 may be affected by various
factors including 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 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 typically are 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-SPONSORED ENTERPRISE GUARANTORS. The principal
government guarantor of mortgage-backed securities is the Government National
Mortgage Association ("GNMA"), a wholly owned U.S. Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA and backed by pools of Federal Housing Administration-insured or
Veterans Administration-guaranteed mortgages.
The Federal National Mortgage Association ("FNMA") is a government-sponsored
corporation owned entirely by private stockholders and 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
government-sponsored 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.
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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 that 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 which 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 still are subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because of the
resetting of interest rates, adjustable-rate securities are less likely than
non-adjustable-rate securities of comparable quality and maturity to increase
significantly in value when market interest rates fall. Also, most
adjustable-rate securities (or the underlying mortgages) are subject to caps or
floors. "Caps" limit the maximum amount by which the interest rate paid by the
borrower may change at each reset date or over the life of the loan, and,
accordingly, fluctuation in interest rates above these levels could cause such
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
ARMS may have less risk of a decline in value during periods of rapidly rising
rates, but they may also have less potential for capital appreciation than other
debt securities of comparable maturities due to the periodic adjustment of the
interest rate on the underlying mortgages and the likelihood of increased
prepayments of mortgages as interest rates decline. Furthermore, during periods
of declining interest rates, income generally 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 current 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 fluctuates to a similar degree as well. In addition,
since ARMS in the Fund's portfolio
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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 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 monies to pay debt service on the CMOs
or to make scheduled distributions on the multi-class mortgage pass-through
securities. Parallel-pay CMOs are structured to provide payments of principal
on each payment date to more than one class. These simultaneous payments are
taken into account in calculating the stated maturity date or final distribution
date of each class, which, as with other CMO structures, must be retired by its
stated maturity date or final distribution date but may be retired earlier.
Planned amortization class mortgage-based securities ("PAC Bonds") are a form of
parallel-pay CMO. PAC Bonds are designed to provide relatively predictable
payments of principal provided that, among other things, the actual prepayment
experience on the underlying mortgage loans falls within a contemplated range.
If the actual prepayment experience on the underlying mortgage loans is at a
rate faster or slower than the contemplated range, or if deviations from other
assumptions occur, principal payments on a PAC Bond may be greater or smaller
than predicted. The magnitude of the contemplated range varies from one PAC
Bond to another; a narrower range increases the risk that prepayments will be
greater or smaller than contemplated. CMOs may have complicated structures and
generally involve more risks than simpler forms of mortgage-backed securities.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a Z-tranche). Holders of accrual bonds receive no cash payments
for an extended period of time. During the time that earlier tranches are
outstanding, accrual bonds receive accrued interest, which is a credit for
periodic interest payments that increase the face amount of the security at a
compounded rate but 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
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may occur at a time when the Adviser would not have chosen to sell such
securities and 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 is 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 another class is entitled
to receive all or a portion of the principal but none of the interest (the "PO"
class). Currently, no Fund may purchase IOs or Pos except Zero-coupon bonds
(which are 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 which issue securities that 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 may 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 may be greater for asset-backed securities than for
mortgage-backed securities. In addition, because asset-backed securities are
relatively new, the market experience in these securities is limited, and the
market's ability to sustain liquidity through all phases of an interest rate or
economic cycle has not been tested.
OPTIONS (ALL FUNDS), FUTURES CONTRACTS (INTERMEDIATE BOND FUND) AND OPTIONS ON
FUTURES CONTRACTS (INTERMEDIATE BOND FUND). The Funds may seek to enhance their
return through purchasing exchange-traded and over-the-counter options on equity
or fixed-income securities or indices. Intermediate Bond Fund also may write
(sell) options that are covered. An option is covered if, so long as the Fund
is obligated under the option, it owns an offsetting position in the underlying
security or futures contract or maintains cash, U.S. Government Securities or
other liquid, high-
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grade debt and equity securities in a segregated account with a value at all
times sufficient to cover the Fund's obligation under the option. In addition,
Intermediate Bond Fund may attempt to hedge against a decline in the value of
securities owned by it or an increase in the price of securities which it plans
to purchase through the use of those options and the purchase and sale of
interest rate futures contracts and options on those futures contracts.
RISK CONSIDERATIONS. A Fund's use of options and futures contracts would
subject the Fund to certain investment risks and transaction costs to which it
might not otherwise be subject. These risks include: (i) dependence on the
Adviser's ability to predict movements in the prices of individual securities
and fluctuations in the general securities markets; (ii) 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; (iii) 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; (iv) 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; (v) the possible need to defer closing
out of certain options, futures contracts and related options to avoid adverse
tax consequences; and (vi) the potential for unlimited loss when investing in
futures contracts or writing options for which an offsetting position is not
held.
Other risks include the inability of Intermediate Bond Fund, as the writer of
covered call options, to benefit from any appreciation of the underlying
securities above the exercise price and the possible loss of the entire premium
paid for options purchased by the Fund. In addition, a futures exchange may
limit the amount of fluctuation permitted in certain futures contract prices
during a single trading day. The Fund may be forced, therefore, to liquidate or
close out a futures contract position at a disadvantageous price.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures position or that a counterparty in an
over-the-counter option transaction will be able to perform its obligations.
Accordingly, Intermediate Bond Fund intends to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, but there is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In addition, a Fund intends
that substantially all of its options contracts will be exchange traded. There
are a limited number of options on interest-rate futures contracts and
exchange-traded options contracts on fixed-income securities. Accordingly,
hedging transactions involving these instruments may entail "cross-hedging". As
an example, the Fund may wish to hedge existing holdings of mortgage-backed
securities, but no listed options may exist on those securities. In that event,
the Adviser may attempt to hedge the Fund's securities by the use of options
with respect to similar fixed-income securities. The Fund may use various
futures contracts that are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active
secondary market in those contracts will develop or continue to exist.
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LIMITATIONS. No Fund may purchase any call or related put option if the
premiums associated with all the 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 payment of 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 option, the purchaser
realizes and the writer pays 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
under to which two parties agree to take or make delivery of an amount of cash
equal to a specified dollar amount times the difference between the bond-index
value at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the securities
comprising the index is made. As is the case with other futures contracts,
index futures contracts usually are closed out prior to the expiration date of
the contract.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to stock
options except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
rather than to purchase or sell stock at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position to the holder of the option is 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, 1997
This Statement of Additional Information ("SAI") supplements the Prospectus
dated May 1, 1997 offering shares (the "Shares") of Intermediate Bond Fund,
Income Equity Fund, ValuGrowthsm Stock Fund and Small Company Stock Fund (each,
a "Fund" and, collectively, the "Funds"). Each Fund is a series portfolio of
Norwest Select Funds, a registered open-end, management investment company (the
"Trust").
TABLE OF CONTENTS
PAGE
----
1. The Trust . . . . . . . . . . . . . . . . . . 2
2. Investment Policies . . . . . . . . . . . . . 2
3. Investment Limitations. . . . . . . . . . . . 16
4. Performance Data. . . . . . . . . . . . . . . 18
5. Management. . . . . . . . . . . . . . . . . . 21
6. Other Information . . . . . . . . . . . . . . 31
Appendix - Description of Securities Ratings . . . A-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY AN INVESTOR WITHOUT CHARGE BY
CONTACTING THE COMPANY'S DISTRIBUTOR, FORUM FINANCIAL SERVICES, INC., TWO
PORTLAND SQUARE, PORTLAND, MAINE 04101.
<PAGE>
1. THE TRUST
The Trust was organized as a Delaware business trust on December 7, 1993. The
Trust currently consists of four separate series.
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 are owners of the Shares, 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 affects 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 supplements 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, Inc., a subsidiary of
Norwest Bank Minnesota, N.A., and investment adviser to each Fund.
"Advisers" shall mean, together, the Adviser and Crestone
"Board" shall mean the Board of Trustees of the Trust.
"Crestone" shall mean Crestone Capital Management, Inc.
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"Forum" shall mean Forum Financial Services, Inc.-Registered Trademark-
"Fitch" shall mean Fitch Investors Service, L.P., a nationally recognized
statistical rating organization.
"Moody's" shall mean Moody's Investors Service, a nationally recognized
statistical rating organization.
"Norwest" shall mean Norwest Investment Management, Inc.
"Norwest Bank" shall mean Norwest Bank Minnesota, N.A.
"NRSRO" shall mean a nationally recognized statistical rating organization.
"SEC" shall mean the United States Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's, a nationally recognized statistical
rating organization.
"U.S. Government Securities" shall mean obligations issued or guaranteed by
the U.S. Government, its agencies, instrumentalities or
government-sponsored enterprises.
"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 the Appendix to this SAI. The Funds
may use these ratings when determining 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 but do not evaluate the
risks of fluctuations in market value. Also, NRSROs may fail to make timely
changes in credit ratings. An issuer's current financial condition may be
better or worse than a rating indicates.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different
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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: (i) have higher yields than common
stocks, but lower yields than comparable non-convertible securities; (ii) are
less subject to fluctuation in value than the underlying stocks since they have
fixed income characteristics; and (iii) 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 is increasingly influenced by its conversion value. In addition, a
convertible security generally sells at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by a Fund is called for redemption, the Fund is
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
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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).
ZERO COUPON U.S. GOVERNMENT SECURITIES
In addition to the investments in Zero Coupon U.S. Government securities
described in the Prospectus, the Funds may invest in other types of related zero
coupon securities. For instance, a number of banks and brokerage firms separate
the principal and interest portions of U.S. Treasury securities and sell them
separately in the form of receipts or certificates representing undivided
interests in these instruments. These instruments are generally held by a bank
in a custodial or trust account on behalf of the owners of the securities and
are known by various names, including Treasury Receipts ("TRs"), Treasury
Investment Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury
Securities ("CATS").
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on mortgage assets to make
payments, mortgage-backed securities may contain elements of credit enhancement.
Credit enhancement falls into two categories: (i) liquidity protection; and
(ii) 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
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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 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
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are generally unsecured, and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Automobile receivables generally are secured by
automobiles. Most issuers of automobile receivables permit the loan servicers
to retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the asset-backed
securities. In addition, because of the large number of vehicles involved in a
typical issuance and the technical requirements under state laws, the trustee
for the holders of the automobile receivables may not have a proper security
interest in the underlying automobiles. Therefore, there is the possibility
that recoveries on repossessed 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
usually enters into interest rate swaps on a net basis, that is, 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 are established with respect to such
transactions, the Funds believe such obligations do not constitute senior
securities. The net amount of the excess, if any, of a Fund's obligations over
its entitlements with respect to each interest-rate swap is 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
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satisfies the requirements of the 1940 Act. Each Fund also establishes and
maintains 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 a
Fund.
A Fund enters 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 generally by the SEC, the several
options and futures exchanges upon which options and futures are traded, or the
Commodities Futures Trading Commission ("CFTC").
The various strategies referred to in the SAI 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 do not use leverage in their option income and hedging strategies. In
the case of transactions entered into as a hedge, a Fund holds securities,
currencies or other options or futures positions whose values are expected to
offset ("cover") its obligations thereunder. A Fund does not enter into a
hedging strategy that exposes the Fund to an obligation to another party unless
it owns either: (i) an offsetting ("covered") position; or (ii) 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, a 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.
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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 purchases or writes 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,
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 is 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 is by the premium paid for the put option less any amount for which the
put may be sold.
The Advisers 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
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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 depends 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 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 that 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.
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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 called for in the contract at a specified future date
and specified price. For futures contracts with respect to an interest-rate or
securities index, delivery is of an amount of cash equal to a specified dollar
amount times the difference between the index value at the time of the contract
and the close of trading of the contract.
A Fund may sell interest-rate futures contracts in order to continue to receive
the income from a fixed-income security, while endeavoring to avoid part of or
all of a decline in the market value of that security that 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
depends 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 that 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 that 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 continues 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 Advisers' 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 related transaction costs are all
that is at risk. Sellers of options on futures contracts, however, must
post an initial margin and are subject to additional margin calls which
could be substantial in the event of adverse price movements.
(6) A Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions.
REVERSE REPURCHASE AGREEMENTS
Generally, a reverse repurchase agreement enables a Fund to recover for the term
of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by a Fund
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with those monies. The use of reverse repurchase agreement proceeds to make
investments may be considered to be a speculative investment technique.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD-COMMITMENT TRANSACTIONS SECURITIES
The Funds may purchase securities on a when-issued, delayed-delivery or
forward-commitment 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,
delayed delivery or forward-commitment basis, the Fund records the transaction
as a purchase and thereafter reflects the value each day of such securities in
determining the Fund's net asset value.
A Fund will make commitments for such transactions only when it has the
intention of actually acquiring the securities. In connection with these
transactions, the Fund maintains 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 meets 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 also
may make short sales of securities that it does not own or have the right to
acquire. A short sale that is not made "against the box" is a transaction in
which a Fund sells a security it does not own in anticipation of a decline in
the market price for the security. Short sales that are not made "against the
box" create opportunities to increase the Fund's return but, at the same time,
involve special risk considerations and may be considered speculative. 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 tends 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.
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If a Fund makes a short sale "against the box," the Fund does not immediately
deliver the securities sold and does 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. A Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Advisers believe 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 a Fund's long position would be reduced by an
offsetting future gain in the short position.
A Fund enters into short sales "against the box" only 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, delayed-delivery and
forward-commitment 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 any
interest expense incurred, leverage results in higher current net investment
income being realized by the Fund than if the Fund were not leveraged. On the
other hand, interest rates change from time to time, as does their relationship
to each other, depending upon such factors as supply and demand, monetary and
tax policies and investor expectations. Changes in such factors may 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 sets 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, must
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, delay-delivery 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
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the value of the securities at the time of the short sale (reduced by any
margin deposit). The net amount of any excess of a Fund's obligations over its
entitlements with respect to each interest-rate swap is calculated on a daily
basis, and an amount at least equal to the accrued excess is maintained in the
segregated account. If the Fund enters into an interest-rate swap on other than
a net basis, the Fund maintains 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, bear a fixed rate of interest, and
generally may be withdrawn on demand by the Fund. Withdrawals may be subject to
early withdrawal penalties that may vary depending upon market conditions and
the remaining maturity of the obligation and could reduce the Fund's yield.
Although fixed-time deposits do not in all cases have a secondary market, there
are no contractual restrictions on the Fund's right to transfer a beneficial
interest in the deposits to third parties. Deposits subject to early withdrawal
penalties or that mature in more than seven days are treated as illiquid
securities if there is no readily available market for the securities.
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 that the
Advisers believe 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.
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<PAGE>
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, under guidelines
approved by the Board. The Advisers take into account a number of factors in
reaching liquidity decisions, including but not limited to: (i) the frequency
of trades and quotations for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (iii)
the willingness of dealers to undertake to make a market in the security; and
(iv) the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer. The Advisers monitor the liquidity of the securities in each Fund's
portfolio and report 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. In addition to the Fund's expenses
(including the various fees), as a shareholder in another investment company, a
Fund bears 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 or shares of
investment companies) if, as
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a result, more than 5% of the Fund's total assets would be invested in the
securities of a single issuer or the Fund would own more than 10% of the
outstanding voting securities of any single issuer; provided, however, that
each Fund may invest all or a portion of its assets in another diversified,
open-end management investment company with substantially the same
investment objective, policies and restrictions as the Fund.
(2) CONCENTRATION: The Fund may not purchase securities if, immediately
after the purchase, more than 25% of the value of the Fund's total assets
would be invested in the securities of issuers conducting their principal
business activities in the same industry; provided, however that there is
no limit on investments in U.S. Government Securities, repurchase
agreements covering U.S. Government Securities, foreign government
securities, mortgage-backed or housing-related securities, municipal
securities, and issuers domiciled in a single country; that financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance and diversified
finance); that utility companies are classified according to their services
(for example, gas, gas transmission, electric and gas, electric and
telephone); and that each Fund may invest all of a portion of its assets in
another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
(3) BORROWING: Each Fund may borrow money for temporary or emergency
purposes, including the meeting of redemption requests; but not in excess
of 33 1/3% of the value of the Fund's total assets (as computed immediately
after the borrowing).
(4) ISSUANCE OF SENIOR SECURITIES: The Fund may not issue senior
securities except to the extent permitted by the 1940 Act.
(5) UNDERWRITING ACTIVITIES: The Fund may not underwrite securities of
other issuers, except to the extent that the Fund may be considered to be
acting as an underwriter in connection with the disposition of portfolio
securities.
(6) MAKING LOANS: The Fund may not make loans, except the Fund may enter
into repurchase agreements, purchase debt securities that are otherwise
permitted investments and lend portfolio securities.
(7) PURCHASES AND SALES OF COMMODITIES: The Fund may not purchase or sell
physical commodities or contracts, options or options on contracts to
purchase or sell physical commodities, provided that currencies and
currency-related contracts and contracts on indices are not deemed to be
physical commodities.
(8) PURCHASES AND SALES OF REAL ESTATE: The Fund may not purchase or sell
real estate or any interest therein, except that the Fund may invest in
debt obligations secured by real estate or interests therein or securities
issued by companies that invest in real estate or interests therein.
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<PAGE>
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 without
shareholder approval.
(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.
(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.
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<PAGE>
(8) OIL, GAS, AND MINERAL INVESTMENTS AND REAL ESTATE: The Fund may not
invest in interests in oil, gas, or other mineral leases of interests in
other mineral exploration or development programs, and the Fund may not
invest in real estate limited partnerships.
(9) SECURITIES WITH VOTING RIGHTS: Intermediate Bond Fund may not purchase
securities having voting rights at the time of purchase, except securities
of other investment companies.
4. PERFORMANCE DATA
The Funds may quote performance in various ways. These quotations may from time
to time be used in advertisements, shareholder reports or other communications
to shareholders. All performance information supplied by the Funds in
advertising is historical and is not intended to indicate future returns. Each
Fund's net asset value fluctuates in response to market conditions and other
factors, and the value of the Fund's Shares when redeemed may be worth more or
less than their original cost. Each Fund's yield and total return (as well as
any other performance measurement) fluctuates in response to market conditions
and other factors.
In performance advertising, each Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Inc., Lipper Analytical Services, Inc., IBC/Donoghue, Inc. or other companies
that track the investment performance of investment companies ("Fund Tracking
Companies"). Each Fund may also compare any of its performance information with
the performance of recognized stock, bond and other indices, including but not
limited to, Standard & Poor's 500 Composite Stock Index, Russell 2000 Index,
Morgan Stanley - Europe, Australian and Far East Index, Lehman Brothers
Intermediate Government Index, Lehman Brothers Intermediate Government/Corporate
Index, Salomon Brothers Bond Index, Shearson Lehman Bond Index, the Dow Jones
Industrial Average, U.S. Treasury bonds, bills or notes, on changes in the
Consumer Price Index as published by the U.S. Department of Commerce. The Funds
may refer to general market performances over past time periods such as those
published by Ibbotson Associates (for instance, its "Stocks, Bonds, Bills and
Inflation Yearbook"). In addition, the Funds may refer in such materials to
mutual fund performance rankings and other data published by Fund Tracking
Companies. Performance advertising may also refer to discussions of the Funds
and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
Performance figures for a Fund do not include fees and charges of the Separate
Accounts or Contracts. A Fund will not advertise its performance unless such
advertisement is accompanied by information reflecting the performance of the
applicable Separate Account.
YIELD CALCULATIONS
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may
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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 that, 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,
divided by the Fund's net asset value per share at the end of the period, and
annualizing the result (assuming compounding of income) in order to arrive at an
annual percentage rate. In general, interest income is reduced with respect to
bonds purchased at a premium over their par value by subtracting a portion of
the premium from income on a daily basis and is increased with respect to bonds
purchased at a discount by adding a portion of the discount to daily income.
Capital gain and loss generally are excluded from these calculations.
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 total 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 total 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:
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
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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 cumulative total
returns reflecting the simple change in value of an investment over a stated
period. Cumulative 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:
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, 1996 was as follows. The actual dates of the commencement of each
Fund's operations is listed in the Fund's financial statements.
One Year Five Years Ten Years Since Inception
-------- ---------- --------- ---------------
Intermediate Bond Fund 2.37% N/A N/A 7.05%
Income Equity Fund N/A N/A N/A 15.18%
ValuGrowth Stock Fund 20.21% N/A N/A 15.88%
Small Company Stock Fund 31.47% N/A N/A 28.72%
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5. MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and their principal occupations during
the past five years and age as of December 31, 1996 are set forth below. Each
Trustee who is an "interested person" (as defined by the 1940 Act) of the Trust
is indicated by an asterisk.
John Y. Keffer, Chairman and President,* Age 54.
President and Owner, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, Limited Liability Company (a
mutual fund administrator), Forum Financial Corp. (a registered transfer
agent), and other companies within the Forum Financial Group of companies.
Mr. Keffer is a Director, Trustee and/or officer of various registered
investment companies for which Forum Financial Services, Inc. or its
affiliates serves as manager, administrator or distributor. His address is
Two Portland Square, Portland, Maine 04101.
Robert C. Brown, Trustee,* Age 65.
Director, Federal Farm Credit Banks Funding Corporation and Farm Credit
System Financial Assistance Corporation since February 1993. Prior
thereto, he was Manager of 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, Age 70.
Principal of The Burkhardt Law Firm. His address is 777 South Steele
Street, Denver, Colorado 80209.
James C. Harris, Trustee, Age 76.
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, Age 63.
President of Richard M. Leach Associates (a financial consulting firm)
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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 of Digital Techniques,
Inc. (an interactive video design and manufacturing company). His address
is P.O. Box 1888, New London, New Hampshire 03257.
Timothy J. Penny, Trustee, Age 45.
Senior Counselor to the public relations firm of Himle-Horner since January
1995 and Senior Fellow at the Humphrey Institute, Minneapolis, Minnesota (a
public policy organization) since January 1995. Prior thereto Mr. Penny
was the Representative to the United States Congress from Minnesota's First
Congressional District. His address is 500 North State Street, Waseca,
Minnesota 56095.
Donald C. Willeke, Trustee, Age 56.
Principal of the law firm of Willeke & Daniels. His address is 201
Ridgewood Avenue, Minneapolis, Minnesota 55403.
Robert Campbell, Treasurer, Age 35.
Director of Fund Accounting, Forum Financial Services, Inc., with which he
has been associated since April 1997. Prior thereto, from February 1994 -
April 1996 Mr. Campbell was Vice President-Business Unit Head, Domestic
Fund Services at State Street Fund Services, Inc. Prior thereto, from
September 1992 - January 1994 Mr. Campbell was Assistant Vice
President-Fund Manager at State Street Bank & Trust Company, and prior
thereto First Line Manager. His address is Two Portland Square, Portland,
Maine 04101.
David I. Goldstein, Vice President and Secretary, Age 35.
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also an officer of various
registered investment companies for which Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
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Sara M. Clark, Vice President and Assistant Treasurer, Age 33.
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, Age 42.
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.
Catherine S. Wooledge, Assistant Secretary, Age 54.
Counsel, Forum Financial Services, Inc. Prior thereto, associate at
Morrison & Foerster since September 1994, prior thereto associate corporate
counsel at Franklin Resources, Inc. since September 1993, and prior thereto
associate at Drinker Biddle & Reath, Washington, D.C. Her address is Two
Portland Square, Portland, Maine 04101.
Don L. Evans, Assistant Secretary, Age 48.
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since 1995. Prior thereto, Mr. Evans was associated with the
law firm of Bisk & Lutz and prior thereto was associated with the law firm
of Weiner & Strother. Mr. Evans is also Assistant Secretary 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.
Renee A. Walker, Assistant Secretary, Age 26.
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
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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.
TRUSTEE COMPENSATION
Each trustee of the Trust is paid a quarterly retainer fee of $5,000 for the
Trustee's service to the Trust and to Norwest Funds, a separate registered
open-end management investment company in the same "complex" for which each
trustee serves as trustee. In addition, each trustee is paid $3,000 for each in
person Board meeting attended (whether in person or by electronic communication)
and is paid $1,000 for each Committee meeting attended on a date when a Board
meeting is not held. Trustees are also reimbursed for travel and related
expenses incurred in attending meetings of the Board, except that Messrs. Keffer
and McCune receive no compensation for their services as trustee, and no officer
of the Trust is compensated by the Trust.
Mr. Burkhardt, Chairman of the Trust's and Norwest Funds' audit committees,
receives additional compensation of $6,000 from the Trust and Norwest Funds,
allocated pro rata between the Trust and Norwest Funds based upon relative net
assets, for his services as Chairman.
The following table provides the aggregate compensation paid to the trustees of
the Trust by the Trust and Norwest Funds combined. Information is presented for
the year ended December 31, 1996, the fiscal year end of portfolios of Norwest
Select Funds.
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Total Compensation
Total Compensation From the Trust
from the Trust and Norwest Funds
------------------ ------------------
Mr. Brown $46 $34,000
Mr. Burkhardt $56 $41,500
Mr. Harris $46 $34,000
Mr. Leach $51 $39,000
Mr. Penny $48 $36,000
Mr. Willeke $49 $36,000
Neither the Trust or Norwest Funds has adopted any from of retirement plan
covering trustees or officers.
INVESTMENT ADVISORY SERVICES
NORWEST INVESTMENT MANAGEMENT, INC.
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,
the Adviser 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 the Adviser continues in
effect only if such continuance is specifically approved at least annually by
the Board or by vote of the shareholders of the Fund, and in either case by a
majority of the trustees who are not parties to the investment advisory
agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the investment advisory agreement.
The investment advisory agreement is terminable without penalty with respect to
a 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. The Adviser, 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
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agreements between the Adviser 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 the Adviser. The data is for the past three fiscal years or shorter
period if the Fund has been in operation for a shorter period.
Advisory Advisory Advisory
Fee Fee Fee
Payable Waived Retained
-------- -------- --------
Intermediate Bond Fund
Year Ended December 31, 1996 $25,920 $25,920 $0
Year Ended December 31, 1995 $12,501 $12,501 $0
Period Ended December 31, 1994 $3,852 $3,852 $0
Income Equity Fund
Period Ended December 31, 1996 $23,198 $23,198 $0
ValuGrowth Stock Fund
Year Ended December 31, 1996 $61,011 $61,011 $0
Year Ended December 31, 1995 $24,138 $24,138 $0
Period Ended December 31, 1994 $6,307 $6,307 $0
Small Company Stock Fund
Year Ended December 31, 1996 $31,252 $31,252 $0
Period Ended December 31, 1995 $7,663 $7,663 $0
SUBADVISER - SMALL COMPANY STOCK FUND
To assist the Adviser in carrying out its obligations under the investment
advisory agreement with respect to the Small Company Stock Fund, the Adviser has
entered into an investment subadvisory agreement with Crestone, 7720 East
Belleview Avenue, Suite 220, Englewood, Colorado 80111. Crestone is registered
with the SEC as an investment adviser and is a non-wholly owned subsidiary of
Norwest Bank. Pursuant to the investment subadvisory agreement, Crestone makes
investment decisions for the Fund and continuously reviews, supervises and
administers the Fund's investment program with respect to that portion, if any,
of the Fund's portfolio that the Adviser believes should be invested using
Crestone as a subadviser. Currently, Crestone manages the entire portfolio of
the Fund and has since the Fund's inception. The Adviser supervises the
performance of Crestone, including its adherence to the Portfolio's investment
objective and policies and pays Crestone a fee for its investment management
services. For its services under the, the Adviser pays Crestone a fee based on
the Fund's average daily net assets at an annual rate of 0.40% on the first $30
million; 0.30% on the next $30 million; 0.20% on the next $40 million and 0.15%
on all sums in excess of $100 million.
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Crestone has conducted investment management services since its organization in
1990. As of December 31, 1996, Crestone provided investment management services
to over 40 clients and managed approximately $465 million in assets.
ADMINISTRATION AND DISTRIBUTION
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 are for the past three fiscal years or shorter period if the
Fund has been in operation for a shorter period.
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Management Management Management
Fee Payable Fee Waived Fee Retained
----------- ---------- ------------
Intermediate Bond Fund
Year Ended December 31, 1996 $8,640 $8,640 $0
Year Ended December 31, 1995 $4,167 $4,167 $0
Period Ended December 31, 1994 $1,284 $1,284 $0
Income Equity Fund
Period Ended December 31, 1996 $5,799 $5,799 $0
ValuGrowth Stock Fund
Year Ended December 31, 1996 $15,253 $15,253 $0
Year Ended December 31, 1995 $6,035 $6,035 $0
Period Ended December 31, 1994 $1,577 $1,577 $0
Small Company Stock Fund
Year Ended December 31, 1996 $7,813 $7,813 $0
Period Ended December 31, 1995 $1,916 $1,916 $0
TRANSFER AGENT AND CUSTODIAN
Norwest Bank 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 Bank 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 Bank is compensated at an annual
rate of 0.05% of each Fund's average daily net assets. For its services as
Custodian, Norwest Bank is paid an
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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 Bank 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 Bank, 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 Bank, the amount of the fee that was waived by
Norwest Bank, if any, and the actual fee received by Norwest Bank. The data is
for the past three fiscal years or shorter period if the Fund has been in
operation for a shorter period.
Transfer Transfer Transfer
Agent Agent Agent
Fee Payable Fee Waived Fee Retained
----------- ---------- ------------
Intermediate Bond Fund
Year Ended December 31, 1996 $3,456 $3,456 $0
Year Ended December 31, 1995 $1,667 $1,667 $0
Period Ended December 31, 1994 $514 $514 $0
Income Equity Fund
Year Ended December 31, 1996 $2,320 $2,320 $0
ValuGrowth Stock Fund
Year Ended December 31, 1996 $6,101 $6,101 $0
Year Ended December 31, 1995 $2,414 $2,414 $0
Period Ended December 31, 1994 $631 $631 $0
Small Company Stock Fund
Year Ended December 31, 1996 $3,125 $3,125 $0
Period Ended December 31, 1995 $766 $766 $0
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 continues 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.
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Under its agreement, FFC prepares and maintains books and records of each Fund
on behalf of the Trust that are required to be maintained under the 1940 Act,
calculates the net asset value per share of each Fund and dividends and capital
gain distributions and prepares periodic reports to shareholders and the SEC.
For its services, FFC receives from the Trust with respect to each Fund a fee of
$36,000 per year. In addition, FFC is paid an additional $12,000 per year with
respect to Funds with more than 25% of their total assets invested in
asset-backed securities, that have more than 100 security positions or that have
a monthly portfolio turnover rate of 10% or greater.
FFC is required to use its best judgment and efforts in rendering fund
accounting services and is not liable to the Trust for any action or inaction in
the absence of bad faith, willful misconduct or gross negligence. FFC is not
responsible or liable for any failure or delay in performance of its fund
accounting obligations arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control and the Trust has agreed to
indemnify and hold harmless FFC, its employees, agents, officers and directors
against and from any and all claims, demands, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character arising out of or in any way related to FFC's actions
taken or failures to act with respect to a Fund or based, if applicable, upon
information, instructions or requests with respect to a Fund given or made to
FFC by a duly authorized officer of the Trust. This indemnification does not
apply to FFC's actions or failures to act in cases of FFC's own bad faith,
willful misconduct or gross negligence.
The 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.
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Accounting Accounting Accounting
Fee Payable Fee Waived Fee Retained
------------ ---------- ------------
Intermediate Bond Fund
Year Ended December 31, 1996 $38,000 $8,000 $30,000
Year Ended December 31, 1995 $38,000 $8,000 $30,000
Period Ended December 31, 1994 $22,000 $22,000 $0
Income Equity Fund
Year Ended December 31, 1996 $23,516 $3,919 $19,597
ValuGrowth Stock Fund
Year Ended December 31, 1996 $37,000 $7,000 $30,000
Year Ended December 31, 1995 $38,000 $8,000 $30,000
Period Ended December 31, 1994 $21,000 $21,000 $0
Small Company Stock Fund
Year Ended December 31, 1996 $46,000 $16,000 $30,000
Period Ended December 31, 1995 $25,000 $5,000 $20,000
6. OTHER INFORMATION
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis.
The Trust may redeem Shares involuntarily, from time to time, to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for Shares purchased by the shareholder or to collect any charge
relating to transactions effected for the benefit of a shareholder which is
applicable to the Shares as provided in the Prospectus.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partially in portfolio securities if the Board determines that
payment in cash would be detrimental to the best interests of the Fund and its
shareholders. If payment for Shares redeemed is made wholly or partially in
portfolio securities, brokerage costs may be incurred by the shareholder in
converting securities to cash.
DETERMINATION OF NET ASSET VALUE
Securities owned by a Fund for which market quotations are readily available are
valued at current market value. The Funds value their securities as follows. A
security listed or traded on an exchange is valued at its last sale price (prior
to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the
security is valued at the mean of the last bid and asked prices. All other
securities for which
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OTC market quotations are readily available generally are valued at the mean of
the current bid and asked prices. When market quotations are not readily
available, securities are valued at fair value as determined in good faith by
the Board. Debt securities may be valued on the basis of valuations furnished
by pricing services which utilize electronic data processing techniques to
determine valuations for normal institutional-size trading units of debt
securities, without regard to sale or bid prices, when such valuations are
believed to more accurately reflect the fair market value of such securities.
All assets and liabilities of a Fund denominated in foreign currencies are
converted into United States dollars at the mean of the bid and asked prices of
such currencies against the United States dollar last quoted by a major bank.
Under procedures adopted by the Board, a net asset value for a Fund later
determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at a net asset value determined to have been
inaccurate will be adjusted, although in certain circumstances, such as where
the difference between the original net asset value and the recalculated net
asset value divided by the recalculated net asset value is 0.005 (1/2 of 1%) or
less or shareholder transactions are otherwise insubstantially affected, further
action is not required.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds will be made independently from those for any
other client account or investment company that is or may in the future become
managed by an Adviser or its affiliates. Investment decisions are the product
of many factors including basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may
sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as is possible,
averaged as to price and allocated between such clients in a manner which, in
the respective Adviser's opinion, is equitable to each and in accordance with
the amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients. In addition, when purchases or sales of the
same security for a Fund and other client accounts managed by an Adviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
Purchases and sales of fixed income portfolio securities are generally effected
as principal transactions. These securities are normally purchased directly
from the issuer or from an underwriter or market maker for the securities.
There usually are no brokerage commissions paid for such purchases. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers include the spread between the bid and ask prices. In the case of
securities traded in the foreign and domestic OTC markets, there is generally no
stated commission, but the price
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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.
Consistent with the Conduct Rules 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 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
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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.
For the fiscal year ended December 31, 1996, ValuGrowth Stock Fund paid to its
affiliate Norwest Investment Services aggregate brokerage commissions of less
than 1% of the Trust's aggregate brokerage commissions.
Brokerage
Commissions
-----------
Intermediate Bond Fund
Year Ended December 31, 1996 $0
Year Ended December 31, 1995 $0
Period Ended December 31, 1994 $0
Income Equity Fund
Period Ended December 31, 1996 $15,664
ValuGrowth Stock Fund
Year Ended December 31, 1996 $21,307
Year Ended December 31, 1995 $8,751
Period Ended December 31, 1994 $8,004
Small Company Stock Fund
Year Ended December 31, 1996 $12,579
Period Ended December 31, 1995 $2,115
TAXATION
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code").
To qualify as a regulated investment company, each Fund generally must, among
other things: (i) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income derived with respect to its business of investing in such stock,
securities or currencies; (ii) derive in each taxable year less than 30% of its
gross income from the sale or other disposition of certain assets held less than
three months including stocks, securities, and certain foreign currencies,
futures, options, forward and similar contracts; (iii)
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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 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
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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
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.
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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.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, MA 02110, independent auditors,
acts as auditors for the Trust and has since the Trust commenced operations.
OWNERSHIP OF FUND SHARES
Prior to the public issuance of Shares of Income Equity Fund, due to its initial
investment, Forum will own all outstanding Shares of the Fund and, accordingly,
may be deemed to be a controlling person of the Fund. Upon investment in that
Fund by public shareholders, Forum will not be a controlling person of the Fund.
As of May 1, 1997, the Trustees and officers of the Trust in the aggregate owned
less than 1% of the outstanding Shares of each Fund. The Trust has been advised
that no Account Owner owns beneficially in excess of 5% of any Fund.
As of March 31, 1997, Fortis Benefits Insurance Co., P.O. Box 64271, St. Paul,
MN 55164 ("Fortis") owned of record Shares of the Funds in the amounts and
percentages listed:
FUND SHARE BALANCE % OF FUND
Intermediate Bond Fund 614,179.35 99.40%
Income Equity Fund 1,150,766.61 100%
ValuGrowth Stock Fund 828,485.54 99.59%
Small Company Stock Fund 507,997.93 100.00%
As of March 31, 1997, Fortis owned in excess of 99% of the outstanding Shares of
each Fund.
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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: (i) a court refuses to apply Delaware law; (ii) no contractual
limitation of liability is in effect; and (iii) the Trust itself is unable to
meet its obligations. In light of Delaware law, the nature of the Trust's
business, and the nature of its assets, the Board believes that the risk of
personal liability to a Trust shareholder is extremely remote.
FINANCIAL STATEMENTS
The financial statements of each Fund as of and for the period ended December
31, 1996 (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
independent auditors' report thereon) are included in the Annual Report to
Shareholders of the Trust and are incorporated herein by reference.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the Securities Act of
1933 and the 1940 Act with respect to the securities offered hereby, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The registration statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract of other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
MUNICIPAL AND CORPORATE BONDS
MOODY'S. The two highest ratings of 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, that is,
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics.
Bonds which are rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
-A-1-
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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 S&P for municipal and corporate
bonds are "AAA" and "AA". Bonds rated "AAA" have the highest rating assigned by
S&P to a debt obligation. Capacity to pay interest and repay principal is
extremely strong. Bonds rated "AA" have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only in small
degree. The "AA" through "CCC" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within that rating
category.
Bonds rated "A" have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher-rated
categories.
Bonds rated "BBB" are regarded as having an adequate capacity to pay interest
and repay principal. They normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Bonds are rated "D" when the issue is in
payment default or the obligor has filed for bankruptcy.
FITCH. The two highest ratings of Fitch 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.
-A-2-
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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.
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
-A-3-
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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" that are determined to possess overwhelming safety characteristics are
given a plus (+) designation. Issues rated "SP-2" have satisfactory capacity to
pay principal and interest. Issues rated "SP-3" have speculative capacity to
pay principal and interest.
FITCH. Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
Short-term issues rated "F-1+" are regarded as having the strongest degree of
assurance for timely payment. Issues assigned a rating of "F-1" reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+". Issues assigned a rating of "F-2" have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned "F-1"+ or "F-1".
OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S. Moody's two highest ratings for short-term debt, including commercial
paper, are "Prime-1" and "Prime-2", both are judged investment grade, to
indicate the relative repayment ability of rated issuers.
Issuers rated "Prime-1" have a superior ability for repayment of senior
short-term debt obligations. "Prime-1" repayment ability will often be
evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated "Prime-2" by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated "Prime-1" but to a lesser degree. Earnings
trends and coverage ratios, while sound,
-A-4-
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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".
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.
-A-5-
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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" 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 are likely to 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-6-
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A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in default on
debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
To provide more detailed indications of preferred stock quality, the ratings
from "AA" to "CCC" may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
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.
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An issue is assigned a "D" rating if the issuer is in default on its debt
obligations and has filed for reorganization or liquidation under the bankruptcy
law.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA", "CCC", "CC", "C", and "D" categories.
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