NORWEST SELECT FUNDS
PROSPECTUS
MAY 1, 1999
-INCOME FUND
-INCOME EQUITY FUND
-VALUGROWTH (SM) STOCK FUND
-SMALL COMPANY STOCK FUND
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
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TABLE OF CONTENTS
RISK/RETURN SUMMARY............................................................3
DESCRIPTION OF THE FUNDS.......................................................7
MANAGEMENT OF THE FUNDS.......................................................10
PURCHASE AND SALE OF SHARES...................................................11
DIVIDENDS AND DISTRIBUTIONS...................................................12
OTHER INFORMATION.............................................................12
FINANCIAL HIGHLIGHTS..........................................................13
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RISK/RETURN SUMMARY
The following is a summary of certain key information about the Funds. You will
find additional information about the Funds, including a detailed description of
the risks of an investment in a Fund, after this summary.
In this summary, we will describe certain kinds of risks that apply to one or
more of the Funds. These risks are:
o MARKET RISk This is the risk that the market value of a Fund's
investments will fluctuate as the stock or bond markets fluctuate and
that prices overall will decline over longer or shorter periods.
o INTEREST RATE RISk This is the risk that changes in interest rates may
affect the value of a Fund's investments in income-producing
securities or fixed-income debt securities. Increases in interest
rates may cause the value of a Fund's investments in these securities
to fall.
o CREDIT RISK This is the risk that the issuer of a security, or the
counterparty to a contract, will default or otherwise be unable to
honor a financial obligation.
The Risk/Return Summary includes a bar chart for each Fund showing its annual
returns and a table showing its average annual returns. The bar chart and the
table provide an indication of the historical risk of an investment in each Fund
by showing:
o changes in the Fund's performance from year to year over 10 years, or,
if less, the life of the Fund; and
o how the Fund's average annual returns for one, five, and 10 years, or,
if less, the life of the Fund, compare to those of a broad based
securities market index.
If the Funds' returns reflected fees charged by your variable life insurance
contract/annuity certificate or contract, the returns shown in the bar chart and
table for each Fund would be lower.
A Fund's past performance, of course, does not necessarily indicate how it will
perform in the future.
Other important things for you to note:
o You may lose money by investing in the Funds.
o An investment in the Fund is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
INCOME FUND
o Objective: The Fund's investment objective is stable current income
and competitive total return over an interest-rate cycle.
o Principal Investment Strategies: The Fund primarily invests in a
portfolio of investment-grade, intermediate-maturity debt securities.
o Principal Risks: The principal risks of investing in the Fund are
market risk, interest rate risk and credit risk.
3
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BAR CHART AND PERFORMANCE INFORMATION
The bar chart and table provide an indication of the historical risk of an
investment in the Fund.
[EDGAR Representation of bar graph]
1995 1996 1997 1998
- ---- ---- ---- ----
17.08% 2.37% 9.08% 9.12%
During the period shown in the bar chart, the Fund's:
BEST QUARTER was 5.99%, second quarter, 1995; and
WORST QUARTER was -2.19%, first quarter, 1996.
PERFORMANCE TABLE
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SINCE INCEPTION
YEAR(S) 1 YEAR 5 YEARS 10 YEARS (6/1/94)
- -----------------------------------------------------------------------------------------------------------
INCOME FUND 9.12% N/A N/A 7.94%
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LEHMAN INTERMEDIATE 8.42% N/A N/A 7.83%
GOVERNMENT/CORPORATE INDEX
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</TABLE>
INCOME EQUITY FUND
o Objective: The Fund's investment objective is long-term capital
appreciation, consistent with that of the overall equity securities
markets, and above-average dividend income.
o Principal Investment Strategies: The Fund primarily invests in the
common stock of large, income-producing domestic companies.
o Principal Risks: The principal risks of investing in the Fund are
market risk, interest rate risk and credit risk.
4
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The bar chart and table provide an indication of the historical risk of an
investment in the Fund.
[EDGAR Representation of bar graph]
1997 1997
- ---- ----
26.90% 18.42%
During the period shown in the bar chart, the Fund's:
BEST QUARTER was 15.63%, fourth quarter, 1998; and
WORST QUARTER was -9.73%, third quarter, 1998.
PERFORMANCE TABLE
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SINCE INCEPTION
YEAR(S) 1 YEAR 5 YEARS 10 YEARS (5/6/96)
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INCOME EQUITY FUND 18.42% N/A N/A 20.71%
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S&P 500 INDEX 28.58% N/A N/A 28.94%
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</TABLE>
VALUGROWTH STOCK FUND
o Objective: The Fund's investment objective is long-term capital
appreciation.
o Principal Investment Strategies: The Fund primarily invests in a
diversified portfolio of common stock and convertible securities.
o Principal Risks: The principal risk of investing in the Fund is market
risk.
5
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BAR CHART AND PERFORMANCE INFORMATION
The bar chart and table provide an indication of the historical risk of an
investment in the Fund.
[EDGAR representation of bar graph]
1995 1996 1997 1998
- ---- ---- ---- ----
24.15% 20.21% 23.56% 16.18%
During the period shown in the bar chart, the Fund's:
BEST QUARTER was 19.08%, fourth quarter, 1998; and
WORST QUARTER was -14.04%, third quarter, 1998.
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PERFORMANCE TABLE
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SINCE INCEPTION
YEAR(S) 1 YEAR 5 YEARS 10 YEARS (6/1/94)
- -----------------------------------------------------------------------------------------------------------
VALUGROWTH STOCK FUND 16.18% N/A N/A 17.57%
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S&P 500 INDEX 28.58% N/A N/A 26.73%
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</TABLE>
SMALL COMPANY STOCK FUND
o Objective: The Fund's investment objective is capital appreciation.
o Principal Investment Strategies: The Fund primarily invests 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 S
& P 500 Index.
o Principal Risks: The principal risk of investing in the Fund is market
risk. The Fund's investments in small or medium size companies may be
more volatile, and differ, sometimes significantly, from the overall
U.S. market. The Fund's investments in smaller capitalization stocks
may have additional risks because these companies often have limited
product lines, markets, or financial resources.
6
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BAR CHART AND PERFORMANCE INFORMATION
The bar chart and table provide an indication of the historical risk of an
investment in the Fund.
[EDGAR representation of bar graph]
1996 1997 1998
- ---- ---- ----
31.47% 9.87% -14.47%
During the period shown in the bar chart, the Fund's:
BEST QUARTER was 18.76%, second quarter, 1997; and
WORST QUARTER was -27.93%, third quarter, 1998.
PERFORMANCE TABLE
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SINCE INCEPTION
YEAR(S) 1 YEAR 5 YEARS 10 YEARS (5/17/95)
- -----------------------------------------------------------------------------------------------------------
SMALL COMPANY STOCK FUND -14.47% N/A N/A 10.26%
- -----------------------------------------------------------------------------------------------------------
RUSSELL 2000 INDEX -2.24% N/A N/A 14.96%
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</TABLE>
DESCRIPTION OF THE FUNDS
This section of the Prospectus provides a more complete description of the
Funds' investment objectives and principal strategies and risks. There can be,
of course, no assurance that any Fund will achieve its investment objective.
INCOME FUND
The Fund's investment objective is to provide stable current income and
competitive total return over an interest rate cycle. The Fund invests in a
diversified portfolio of fixed and variable rate U.S. Dollar denominated debt
securities. These securities cover a broad spectrum of U.S. issuers, including
U.S. Government securities, mortgage- and asset-backed securities and the debt
securities of financial institutions, corporations, and others.
The Adviser attempts to increase the Fund's performance by applying various
fixed income management techniques combined with fundamental economic, credit
and market analysis while at the same time controlling total return volatility
by targeting the Fund's duration within a narrow band around the Lipper
Corporate A-Rated Debt Average. Duration is a measure of a debt security's
average life that reflects the present value of the security's cash flow and
generally is less than the security's maturity date. The Fund expects to
maintain an average dollar-weighted maturity (or average life in the case of
mortgage-backed and similar securities) of between 3 and 15 years. Normally, the
Fund's investments will have a duration of between 70% and 130% of the duration
of the Lipper Corporate A-Rated Debt Average.
The Fund normally invests:
o at least 80% of its assets in investment-grade debt securities, which
are those securities rated within four highest rating categories, or,
if unrated, of comparable quality;
o up to 50% of its total assets in corporate securities, bonds, notes,
and convertible securities; and
o at least 30% of its total assets in U.S. Government securities.
7
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The Fund limits its investments in mortgage-backed securities to 50% of its
total assets and in other asset-backed securities to 25% of its total assets.
RISK CONSIDERATIONS
The principal risks of the Fund are:
o Market Risk - the risk that the value of the Fund's investments will
change, and possibly decrease, in response to fluctuations in the stock
markets generally;
o Interest Rate Risk - the risk that changes in interest rates will affect
the value of the Fund's investments, in particular, that an increase in
interest rates could cause the Fund's net asset value to decline;
o Credit Risk - the risk that the issuer of a security will be unable to pay
principal or interest; and
o Management Risk - the risk that the Fund's manager may make poor choices in
selecting securities and that the Fund will not perform as well as other
bond funds.
The Income Fund invests a significant portion of its assets in mortgage-related
securities, which tend to be more volatile than other types of debt securities.
The value of these securities is affected more by changes in interest rates
because when interest rates rise, the maturities of these types of securities
tend to lengthen and the value of the securities decreases more significantly.
In addition, these types of securities are subject to prepayment when interest
rates fall, which generally results in lower returns because the Fund must
reinvest its assets in debt securities with lower interest rates.
The Fund may invest up to 20% of its assets in debt securities rated in the
fifth highest rating category, which are considered below investment grade
securities (commonly known as "junk bonds"). The Fund's investments in
lower-rated debt securities have more interest rate risk and credit risk than
investments in higher-rated debt securities.
INCOME EQUITY FUND
The Fund's investment objective is long-term capital appreciation consistent
with above-average dividend income. The Fund primarily invests in the common
stock of large, high-quality domestic companies that have above-average return
potential based on current market valuations. 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 Adviser considers large companies to be those whose
market capitalization is greater than the median of the Russell 1000 Index or
approximately $3.7 billion. The Fund normally limits its investments in a single
company to less than 10% of its total assets.
RISK CONSIDERATIONS
The principal risks of the Fund are:
o Market Risk - the risk that the value of the Fund's investments will
change, and possibly decrease, in response to fluctuations in the stock
markets generally;
o Credit Risk - the risk that the issue of a security will be unable to pay
dividends;
o Interest Rate Risk - the risk that changes in interest rates will affect
the value of the Fund's investments, in particular, that an increase in
interest rates could cause the Fund's net asset value to decline; and
o Management Risk - the risk that the Fund's manager may make poor choices in
selecting securities and that the Fund will not perform as well as other
equity funds.
8
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VALUGROWTH STOCK FUND
The Fund's investment objective is long-term capital appreciation. The Fund
primarily invests 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 identifies and invests in companies with earnings and dividends growth
that is faster than inflation and faster than the economy in general. The Fund
invests in companies with growth potential that, in the opinion of the Adviser,
has not yet been fully reflected in the market price of the companies' shares.
In seeking these investments, the Adviser primarily relies on a company by
company analysis (rather than on a broader analysis of industry or economic
sector trends). The Adviser 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 the Adviser identifies companies as possible
investments, it 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 may invest in companies that the Adviser considers to be "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 form a
comparatively small portion of the Fund's portfolio.
RISK CONSIDERATIONS
The principal risks of the Fund are:
o Market Risk - the risk that the value of the Fund's investments will
change, and possibly decrease, in response as to fluctuations in the stock
or bond markets generally;
o Capitalization Risk - the risk of investments in mid-capitalization
companies, which tend to be more volatile than investments in large-cap
companies; and
o Management Risk - the risk that the Fund's manager may make poor choices in
selecting securities and that the Fund will not perform as well as other
equity funds.
SMALL COMPANY STOCK FUND
The Fund's investment objective is capital appreciation. The Fund primarily
invests 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 S&P
500 Index. The Adviser considers small- and medium-size companies to have a
market capitalization of less than $8 billion.
In selecting securities for the Fund, the Adviser seeks 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
Fund invests in companies that 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, these companies have a
small management group and single product or product-line expertise that the
Adviser believes may result in an enhanced entrepreneurial spirit and greater
focus. The Adviser believes that these companies may develop into significant
business enterprises and that an investment in these companies offers a greater
opportunity for capital appreciation than an investment in larger, more
established companies.
9
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RISK CONSIDERATIONS
The principal risks of the Fund are:
o Market Risk - the risk that the value of the Fund's investments will
change, and possibly decrease, in response as to fluctuations in the stock
or bond markets generally;
o Capitalization Risk - the risk of investments in small- to
mid-capitalization companies, which tend to be more volatile than
investments in large-cap companies, and also the additional risks of
small-cap companies, which often have limited product lines, markets, or
financial resources; and
o Management Risk - the risk that the Fund's manager may make poor choices in
selecting securities and that the Fund will not perform as well as other
equity funds.
Other Investment Information
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. When a Fund has assumed a temporary defensive position, it may
not achieve its investment objective.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is included in the "Financial
Highlights" section of this prospectus. The Funds are actively managed and in
some cases, in response to market conditions, a Fund's portfolio turnover rate
may exceed 100%. A higher rate of portfolio turnover increases brokerage and
other expenses, which must be borne by the Fund and its shareholders. High
portfolio turnover also may result in the realization of substantial net
short-term capital gains, which, when distributed, are taxable to shareholders.
YEAR 2000
Certain computer systems may not process date-related information properly on
and after January 1, 2000. The Funds' Adviser and manager are addressing this
matter for their systems. The Funds' other service providers have informed the
Funds that they are taking similar measures. This matter, if not corrected,
could adversely affect the services provided to the Funds or the companies in
which the Funds invest and, therefore, could lower the value of your shares.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
The Funds' investment adviser is Norwest Investment Management, Inc.
("Norwest"), a subsidiary of Norwest Bank Minnesota, N.A., located at Norwest
Center, Sixth Street and Marquette, Minneapolis, Minnesota 55479. As of March
31, 1999, Norwest managed over $25.6 billion in assets.
Norwest provides investment advisory services and order placement facilities for
the Funds. For its services under the investment advisory agreement, for the
fiscal year ended December 31, 1998, the Funds paid Norwest the following fees:
FEE AS A PERCENTAGE
OF AVERAGE
FUND DAILY NET ASSETS
- -------------------------------------------------------------------------------
INCOME FUND 0.60%
INCOME EQUITY FUND 0.80%
VALUGROWTH STOCK FUND 0.80%
SMALL COMPANY STOCK FUND 0.80%
PORTFOLIO MANAGERS
10
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The following individuals serve as portfolio managers for the Funds and are
primarily responsible for the day-to-day management of the Funds' portfolios:
o INCOME FUND - Ms. Marjorie H. Grace, CFA. Ms. Grace has been a Vice
President of Norwest since 1997 and a Vice President of Norwest Bank since
1992. She has served as a portfolio manager for the Fund since January 1996
and has been a portfolio manager for other funds at Norwest Bank since
1992.
o INCOME EQUITY FUND - Mr. David L. Roberts, CFA. Mr. Roberts has been a
Senior Vice President of Norwest Bank since 1991 and has served as the
portfolio manager for the Fund since its inception. He has been associated
with Norwest and its affiliates for more than 20 years in various
investment-related capacities.
o VALUGROWTH STOCK FUND - Charles J. Meyer, CFA. Mr. Meyer has been
associated with Norwest or its affiliates since 1998. Mr. Meyer is a
Director - Institutional Portfolio Management. From 1992 to 1998, Mr. Meyer
was a portfolio manager for Montana Board of Investments.
o SMALL COMPANY STOCK FUND - Mr. Kenneth Lee and Mr. Thomas Zeifang. Mr. Lee
has been associated with Norwest or its affiliates since 1999. Mr. Lee also
provides fundamental security analysis and portfolio management at Wells
Capital Management Incorporated. Mr. Zeifang has been associated with
Norwest or its affiliates since 1999. Mr. Zeifang is also a portfolio
manager at Wells Capital Management Incorporated with whom he has been
associated since 1995. Prior to 1995, he served as an analyst at Fleet
Investment Advisors.
OTHER SERVICE PROVIDERS
The Forum Financial Group of companies provides various services to the Funds.
As of December 31, 1998, Forum provided administrative and distribution services
to investment companies and collective investment funds with assets of
approximately $66.2 billion.
PURCHASE AND SALE OF SHARES
HOW THE FUNDS VALUE THEIR SHARES
The Funds' net asset value or NAV is calculated at 4:00 p.m. Eastern time each
day the New York Stock Exchange is open for business. To calculate the NAV, a
Fund's assets are valued and totaled, liabilities are subtracted, and the
balance, called net assets, is divided by the number of shares outstanding. The
Funds' value their securities at their current market value determined on the
basis of market quotations or, if quotations are not readily available, such
other methods as the Fund's Trustees believe accurately reflect fair market
value.
Your order for purchase or sale of shares is priced at the next NAV calculated
after your order is received by the Fund.
HOW TO PURCHASE AND SELL SHARES
The Funds offer their shares through the separate accounts of life insurance
companies. You may only purchase and sell shares through these separate
accounts. See the Prospectus of the separate account of the participating
insurance company for information on the purchase and sale of the Funds' shares.
11
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DIVIDENDS AND DISTRIBUTIONS
The Funds distribute net investment income annually. Each Fund distributes its
net capital gain, if any, at least annually. Distributions are automatically
reinvested in additional Fund shares at the net asset value next determined
unless you elect to have all distributions paid in cash.
OTHER INFORMATION
FUND REORGANIZATIONS
On March 25, 1999, the Board of Trustees of Norwest Select Funds approved the
reorganization of each Norwest Select Fund into a new portfolio of Wells Fargo
Variable Trust. The reorganizations are part of a plan to consolidate the
Stagecoach and Norwest fund families following last November's merger of Wells
Fargo & Company and Norwest Corporation. Norwest Select Funds will present each
proposed fund reorganization to the fund's shareholders for their approval at a
special meeting that is planned for August 1999.
If shareholders approve the reorganizations, each Norwest Select Fund will
reorganize into a corresponding Wells Fargo Variable Trust portfolio that has
substantially similar investment objectives. The Wells Fargo Variable Trust
portfolios, with the exception of the portfolio combining with Income Equity
Fund, may have somewhat different investment policies and may combine with other
Stagecoach or Norwest Select funds.
You may not purchase contracts with respect to the Wells Fargo Variable Trust
portfolios until after the reorganizations occur, which is anticipated to be in
September 1999.
You need not act with respect to the reorganizations at this time. Norwest
Select Funds and Wells Fargo Variable Trust will mail proxy materials to you in
June if you are a shareholder as of May 6, 1999. These materials will describe
the reorganizations in detail, including any effect on expense ratios. If you
become a shareholder with respect to fund shares after that date, you will not
be entitled to vote those shares on the fund's reorganization, but you may
request a copy of the proxy materials.
You should be aware that, for certain Funds, expense ratio increases of up to
0.40% are contemplated. THE REORGANIZATIONS ARE EXPECTED TO BE TAX-FREE
TRANSACTIONS. THE REORGANIZATIONS WILL NOT TRIGGER ANY SALES CHARGES.
If you have any questions or, after early June, if you want to request a copy of
the proxy materials, you should call 1-800-394-0736.
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FINANCIAL HIGHLIGHTS
The Financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represents the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of dividends and distributions). This information
has been audited by KPMG Peat Marwick LLP, whose report, along with the Fund's
financial statements, is included in the annual report, which is available upon
request.
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NET REALIZED DISTRIBUTIONS
NET AND DISTRIBUTIONS FROM NET
NORWEST SELECT FUNDS BEGINNING INVESTMENT UNREALIZED FROM NET REALIZED ENDING
NET INCOME GAIN (LOSS) INVESTMENT GAIN NET ASSET RETURN OF
ASSET VALUE (LOSS) ON INCOME ON VALUE CAPITAL
INVESTMENTS INVESTMENTS
INCOME FUND
January 1, 1998 to December 31, 1998 $11.06 $0.48 $0.53 ($0.47) ($0.13) $11.47 --
January 1, 1997 to December 31, 1997 $10.72 $0.56 $0.41 ($0.56) ($0.07) $11.06 --
January 1, 1996 to December 31, 1996 $10.98 $0.50 ($0.24) ($0.50) ($0.02) $10.72 --
January 1, 1995 to December 31, 1995 $9.95 $0.33 $1.36 ($0.66) -- $10.98 --
June 1, 1994 to December 31, 1994 $10.00 $0.33 ($0.38) -- -- $9.95 --
INCOME EQUITY FUND
January 1, 1998 to December 31, 1998 $13.68 $0.18 $2.34 ($0.18) ($0.02) $16.00 --
January 1, 1997 to December 31, 1997 $10.91 $0.14 $2.79 ($0.14) ($0.02) $13.68 --
May 6, 1996 to December 31, 1996 $10.00 $0.08 $0.92 ($0.08) ($0.01) $10.91 --
VALUGROWTH STOCK FUND
January 1, 1998 to December 31, 1998 $17.26 $0.13 $2.66 ($0.13) -- $19.92 --
January 1, 1997 to December 31, 1997 $14.36 $0.11 $3.26 ($0.11) ($0.32) $17.26 ($0.04)
January 1, 1996 to December 31, 1996 $12.04 $0.11 $2.32 ($0.11) -- $14.36 --
January 1, 1995 to December 31, 1995 $9.81 $0.07 $2.30 ($0.14) -- $12.04 --
June 1, 1994 to December 31, 1994 $10.00 $0.07 ($0.26) -- -- $9.81 --
SMALL COMPANY STOCK FUND
January 1, 1998 to December 31, 1998 $12.77 $0.03 ($1.89) ($0.03) -- $10.88 --
January 1, 1997 to December 31, 1997 $13.50 $0.01 $1.24 ($0.01) ($1.59) $12.77 ($0.38)
January 1, 1996 to December 31, 1996 $11.21 $0.02 $3.51 ($0.02) ($1.22) $13.50 --
May 1, 1995 to December 31, 1995 $10.00 $0.06 $1.54 ($0.06) ($0.33) $11.21 --
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(a) The ratio of Gross Expenses to Average Net Assets does not reflect fee
waivers or expense reimbursements.
(b) Total Return does not reflect any separate account charges under variable
annuity contracts or life policies.
(c) Annualized.
RATIO TO AVERAGE NET ASSETS
------------------------------------
NET Portfolio Net Assets at
INVESTMENT NET GROSS TOTAL Turnover End of Period
INCOME EXPENSES EXPENSES(A) RETURN(B) Rate (000's
Omitted)
5.83% 0.60% 1.33% 9.12% 122.86% $22,199
6.00% 0.60% 1.97% 9.08% 179.37% $9,229
6.05% 0.60% 2.52% 2.37% 125.23% $5,959
6.33% 0.60% 4.67% 17.08% 54.04% $3,090
6.45%(c) 0.60%(c) 9.31%(c) (0.50%) 52.61% $1,255
1.47% 0.80% 1.10% 18.42% 1.58% $86,069
1.85% 0.80% 1.34% 26.90% 2.85% $39,888
2.31%(c) 0.80%(c) 2.51%(c) 9.95% 4.20% $9,415
0.81% 0.80% 1.25% 16.18% 16.94% $35,816
0.87% 0.80% 1.50% 23.56% 34.58% $21,764
1.08% 0.80% 2.02% 20.21% 37.57% $10,583
1.24% 0.80% 3.81% 24.15% 25.44% $4,793
1.67%(c) 0.80%(c) 8.00%(c) (1.09%) 16.77% $1,910
0.31% 0.80% 1.51% (14.47%) 135.30% $13,295
0.07% 0.80% 1.88% 9.87% 208.95% $11,482
0.16% 0.80% 2.82% 31.47% 194.87% $6,091
1.02%(c) 0.80%(c) 5.38%(c) 15.95% 51.16% $2,027
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You may request the following documents for more information about the Funds:
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS
The Funds' annual and semi-annual reports to shareholders contain additional
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected a Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Each Fund has an SAI, which contains more detailed information about the Fund,
including its operations and investment policies. The Funds' SAIs are
incorporated by reference into (and is legally part of) this prospectus.
You may request a free copy of the current annual/semi-annual report or the SAI,
by contacting your broker or other financial intermediary, or by contacting
1-207-879-1900.
BY PHONE: For Information: 1-800-338-1348
For Literature: 1-800-338-1348
Or you may view or obtain these documents from the SEC:
IN PERSON: at the SEC's Public Reference Room in Washington, D.C.
BY PHONE: 1-800-SEC-0330
BY MAIL: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
ON THE INTERNET: www.sec.gov
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NORWEST SELECT FUNDS
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
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ACCOUNT INFORMATION AND SHAREHOLDER SERVICING: DISTRIBUTION:
Norwest Bank Minnesota, N.A.
Transfer Agent Forum Financial Services, Inc.
733 Marquette Avenue Manager and Distributor
Minneapolis, MN 55479-0040 Two Portland Square
(612) 667-8833/(800) 338-1348 Portland, Maine 04101
(207) 879-1900
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Norwest Select Funds is registered with the Securities and Exchange Commission
as an open-end management investment company under the Investment Company Act of
1940, as amended.
This Statement of Additional Information supplements the Prospectuses dated May
1, 1999 as may be amended from time to time, offering the shares of Income Fund,
Income Equity Fund, ValuGrowthsm Stock Fund, and Small Company Stock Fund.
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
A CORRESPONDING PROSPECTUS, COPIES OF WHICH MAY BE OBTAINED BY AN INVESTOR
WITHOUT CHARGE BY CONTACTING THE DISTRIBUTOR AT THE ADDRESS LISTED ABOVE.
Each Fund is a series portfolio of Norwest Select Funds, a registered open-end,
management investment company (the "Trust").
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TABLE OF CONTENTS
INTRODUCTION...................................................................3
GLOSSARY.......................................................................4
INVESTMENT POLICIES............................................................5
RISK CONSIDERATIONS...........................................................19
INVESTMENT LIMITATIONS........................................................24
PERFORMANCE AND ADVERTISING DATA..............................................26
MANAGEMENT....................................................................28
OTHER INFORMATION.............................................................35
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS...............................A-1
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INTRODUCTION
BACKGROUND INFORMATION
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 is 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.
The Fund's investment adviser is Norwest Investment Management, Inc.
("Norwest"), a subsidiary of Norwest Bank Minnesota, N.A. ("Norwest Bank").
Norwest Bank, a subsidiary of Wells Fargo & Company, serves as the Trust's
transfer agent, dividend disbursing agent, and custodian.
Forum Financial Services, Inc. ("Forum"), a registered broker-dealer, serves as
the Trust's manager and distributor of the Trust's shares.
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GLOSSARY
ADVISER means Norwest Investment Management, Inc., a subsidiary of Norwest Bank
Minnesota, N.A., and the investment adviser to each Fund.
BOARD means the Board of Trustees of the Trust.
FADS means Forum Administrative Services, LLC the Trust's administrator.
FITCH means Fitch IBCA, Inc.
FORUM means Forum Financial Services, Inc., a registered broker-dealer that is
the Trust's manager and the distributor of the Trust's shares.
MOODY'S means Moody's Investors Service.
NORWEST means Norwest Investment Management, Inc., the investment adviser to
each Fund.
NORWEST BANK means Norwest Bank Minnesota, N.A.
NRSRO means a nationally recognized statistical rating organization.
SEC means the U.S. Securities and Exchange Commission.
S&P means Standard & Poor's Ratings Group.
U.S. GOVERNMENT SECURITIES means obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
1933 ACT means the Securities Act of 1933, as amended.
1940 ACT means the Investment Company Act of 1940, as amended.
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INVESTMENT POLICIES
The following discussion supplements the disclosure in the Prospectus concerning
the Funds' investments, principal investment strategies and risks. Unless
specifically stated otherwise, 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.
RATINGS AS INVESTMENT CRITERIA
Moody's, S&P and other NRSROs are private services that provide ratings of the
credit quality of debt obligations, including convertible securities. A
description of the range of ratings assigned to various types of bonds and other
securities by several NRSROs is included in Appendix A to this SAI. The Funds
may use these ratings 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
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.
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible securities,
warrants, depositary receipts, shares of closed-end investment companies and
equity-related securities. The market value of all securities, particularly
equity securities, is based upon the market's perception of value and not
necessarily the book value of an issuer or other objective measure of a
company's worth. Overall economic and market conditions also impact an equity
security's price. The market value of an equity security also may fluctuate
based on changes in a company's financial condition. It is possible that a Fund
may experience a substantial or complete loss on an individual equity
investment.
Equity securities owned by a Fund may be traded on a securities exchange or in
the over-the-counter market and may not be traded every day or in the volume
typical of securities traded on a major national securities exchange. As a
result, disposition by a Fund of equity securities to meet redemptions by
investors 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 an extended period of time.
o COMMON STOCK. Common stock represents an equity (ownership) interest in a
company, and usually possesses voting rights and earns dividends. Common
stockholders 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 and, if applicable, preferred stockholders are paid.
Dividends on common stock are not fixed but are declared at the discretion
of the issuer. Common stock generally represents the riskiest investment in
a company. In addition, common stock generally has the greatest
appreciation and depreciation potential because increases and decreases in
earnings are usually reflected in a company's stock price.
o PREFERRED STOCK. Preferred stock is a class of stock having a preference
over common stock as to the payment of dividends and the recovery of
investment should a company be liquidated. Preferred stock, however, is
usually junior to the debt securities of the issuer. Preferred stock
typically does not possess voting rights and its market value may change
based on changes in interest rates.
o CONVERTIBLE SECURITIES. Convertible securities are fixed income securities,
preferred stock or other securities that may be converted into or exchanged
for a given amount of common stock of the same or a different issuer during
a specified period of time at a specified price or formula. A convertible
security entitles the holder to receive interest on debt or the dividend on
preferred stock until the convertible security matures or is redeemed,
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converted or exchanged. Before conversion, convertible securities
ordinarily provide a stream of income with generally higher yields than
those of common stock of the same or similar issuers, but lower than the
yield of nonconvertible debt. Convertible securities rank senior to common
stock in a company's capital structure but are usually subordinated to
comparable nonconvertible securities. By investing in convertible
securities, a Fund obtains the right to benefit from the capital
appreciation potential in the underlying common stock upon the exercise of
the conversion right, while earning higher current income than could be
available if the stock was purchased directly.
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). As a
fixed income security, the value of a convertible security generally increases
when interest rates decline and generally decreases when interest rates rise.
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. Generally, a convertible security's conversion value decreases as the
convertible security approaches maturity. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price of
the convertible security will be increasingly influenced by its conversion
value. In addition, a convertible security generally will sell at a premium over
its conversion value determined by the extent to which investors place value on
the right to acquire the underlying common stock while holding a fixed income
security.
Because convertible securities are typically issued by smaller capitalized
companies whose stock price may be volatile, the price of a convertible security
may reflect variations in the price of the underlying common stock in a way that
nonconvertible debt does not. Also, while convertible securities generally have
higher yields than common stock, they have lower yields than comparable
nonconvertible securities and are subject to less fluctuations in value than
underlying stock since they have fixed income characteristics. 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 is called for redemption, the Fund will be required to permit the
issuer to redeem the security, convert it into the underlying common stock or
sell it to a third party.
o WARRANTS. Warrants are securities, typically issued with preferred stock
or bonds, that give the holder the right to purchase a given number of
shares of common stock at a specified price, usually during a specified
period of time. The price usually represents a premium over the
applicable market value of the common stock at the time of the warrant's
issuance. Warrants have no voting rights with respect to the common
stock, receive no dividends and have no rights with respect to the
assets of the issuer. Warrants do not pay a fixed dividend. Investments
in warrants involve certain risks, including the possible lack of a
liquid market for the resale of the warrants, potential price
fluctuations as a result of speculation or other factors and failure of
the price of the common stock to rise. A warrant becomes worthless if it
is not exercised within the specified time period.
o EQUITY-RELATED SECURITIES. Equity-related securities are securities
whose interest and/or principal payment obligations are linked to a
specified index of equity securities, or determined pursuant to specific
formulas. A Fund may invest in these instruments when the securities
provide a higher amount of dividend income than is available from a
company's common stock. The amount received by an investor at maturity
of these securities is not fixed but is based on the price of the
underlying common stock, which may rise or fall. Adverse changes in the
securities markets may reduce interest payments made under, and/or the
principal of, equity-linked securities held by a Fund. In addition, it
is not possible to predict how equity-related securities will trade in
the secondary market or whether the market for the securities will be
liquid.
o DEPOSITARY RECEIPTS. A depositary receipt is a receipt for shares of a
foreign-based company that entitles the holder to distributions on the
underlying security. Depositary receipts include sponsored and
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unsponsored American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and other similar global instruments. ADRs typically
are issued by a U.S. bank or trust company, evidence ownership of
underlying securities issued by a foreign company, and are designed for
use in U.S. securities markets. EDRs (sometimes called Continental
Depositary Receipts) are receipts issued by a European financial
institution evidencing an arrangement similar to that of ADRs, and are
designed for use in European securities markets. The Funds invest in
depositary receipts in order to obtain exposure to foreign securities
markets.
Unsponsored depositary receipts may be created without the
participation of the foreign issuer. Holders of these receipts generally
bear all the costs of the depositary receipt facility, whereas foreign
issuers typically bear certain costs in a sponsored depositary receipt.
The bank or trust company depositary of an unsponsored depositary
receipt may be under no obligation to distribute shareholder
communications received from the foreign issuer or to pass through
voting rights. Accordingly, available information concerning the issuer
may not be current and the prices of unsponsored depositary receipts may
be more volatile than the prices of sponsored depositary receipts.
FIXED INCOME SECURITIES
Fixed income securities include corporate debt obligations, U.S. Government
securities, municipal securities, mortgage-related securities, asset-backed
securities, guaranteed investment contracts, zero coupon securities, variable
and floating rate securities, financial institution obligations, commercial
paper, and participation interests.
o CORPORATE DEBT OBLIGATIONS. The Funds may invest in corporate bonds,
debentures, notes, commercial paper and other similar corporate debt
instruments. Companies use these instruments to borrow money from
investors. The issuer pays the investor a fixed or variable rate of
interest and must repay the amount borrowed at maturity. Companies
issue commercial paper (short-term unsecured promissory notes) to
finance their current obligations. Commercial paper normally has a
maturity of less than 9 months.
o U.S. GOVERNMENT SECURITIES. U.S. Government securities include
securities issued by the U.S. Treasury and by U.S. Government agencies
and instrumentalities. U.S. Government securities may be supported by
the full faith and credit of the United States (e.g., mortgage-related
securities and certificates of the Government National Mortgage
Association and securities of the Small Business Administration); by
the right of the issuer to borrow from the U.S. Treasury (e.g.,
Federal Home Loan Bank securities); by the discretionary authority of
the U.S. Treasury to lend to the issuer (e.g., Fannie Mae (formerly
the Federal National Mortgage Association) securities); or solely by
the creditworthiness of the issuer (e.g., Federal Home Loan Mortgage
Corporation securities).
Holders of U.S. Government securities not backed by the full faith and
credit of the United States must look principally to the agency or
instrumentality issuing the obligation for repayment and may not be
able to assert a claim against the United States in the event that the
agency or instrumentality does not meet its commitment. There is no
assurance that the U.S. Government will support securities not backed
by its full faith and credit. Neither the U.S. Government nor any of
its agencies or instrumentalities guarantees the market value of the
securities they issue.
o MUNICIPAL SECURITIES. The states, territories and possessions of the
United States, their political subdivisions (such as cities, counties
and towns) and various authorities (such as public housing or
redevelopment authorities), instrumentalities, public corporations and
special districts (such as water, sewer or sanitation districts) issue
municipal securities. In addition, municipal securities include
securities issued by or on behalf of public authorities to finance
various privately operated facilities, such as industrial development
bonds, that are backed only by the assets and revenues of the
non-governmental user (such as hospitals and airports). Municipal
securities are issued to obtain funds for a variety of public
purposes, including general financing for state and local governments,
or financing for specific projects or public facilities. Municipal
securities generally are classified as bonds, notes and leases.
Municipal securities may be zero-coupon securities.
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General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable from revenue derived from
a particular facility, class of facilities or the proceeds of a
special excise tax or other specific revenue source but not from the
issuer's general taxing power. Many of these bonds are additionally
secured by a debt service reserve fund which can be used to make a
limited number of principal and interest payments should the pledged
revenues be insufficient. Various forms of credit enhancement, such as
a bank letter of credit or municipal bond insurance, may also be
employed in revenue bond issues. Private activity bonds and industrial
revenue bonds do not carry the pledge of the credit of the issuing
municipality, but generally are guaranteed by the corporate entity on
whose behalf they are issued. Municipal bonds may also be moral
obligation bonds, which are normally issued by special purpose public
authorities. If the issuer is unable to meet its obligations under the
bonds from current revenues, it may draw on a reserve fund that is
backed by the moral commitment (but not the legal obligation) of the
state or municipality that created the issuer.
Municipal bonds meet longer term capital needs of a municipal issuer
and generally have maturities of more than one year when issued.
Municipal notes are intended to fulfill the short-term capital needs
of the issuer and generally have maturities not exceeding one year.
They include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, construction loan notes and tax-exempt commercial
paper. Municipal notes also include longer-term issues that are
remarketed to investors periodically, usually at one year intervals or
less. Municipal leases generally take the form of a lease or an
installment purchase or conditional sale contract. Municipal leases
are entered into by state and local governments and authorities to
acquire equipment and facilities such as fire and sanitation vehicles,
telecommunications equipment and other capital assets. Leases and
installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass eventually to the
government issuer) have evolved as a means for governmental issuers to
acquire property and equipment without being required to meet the
constitutional and statutory requirements for the issuance of debt.
The debt-issuance limitations of many state constitutions and statutes
are deemed to be inapplicable because of the inclusion in many leases
or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by
the appropriate legislative body on a yearly or other periodic basis.
Generally, the Funds will invest in municipal lease obligations
through certificates of participation.
o STAND-BY COMMITMENTS. The Funds may purchase municipal securities
together with the right to resell them to the seller or a third party
at an agreed-upon price or yield within specified periods prior to
their maturity dates. Such a right to resell is commonly known as a
stand-by commitment, and the aggregate price which a Fund pays for
securities with a stand-by commitment may be higher than the price
which otherwise would be paid. The primary purpose of this practice is
to permit a Fund to be as fully invested as practicable in municipal
securities while preserving the necessary flexibility and liquidity to
meet unanticipated redemptions. In this regard, a Fund acquires
stand-by commitments solely to facilitate portfolio liquidity and does
not exercise its rights thereunder for trading purposes. Stand-by
commitments involve certain expenses and risks, including the
inability of the issuer of the commitment to pay for the securities at
the time the commitment is exercised, non-marketability of the
commitment, and differences between the maturity of the underlying
security and the maturity of the commitment.
The acquisition of a stand-by commitment does not affect the valuation
or maturity of the underlying municipal securities. A Fund values
stand-by commitments at zero in determining net asset value. When a
Fund pays directly or indirectly for a stand-by commitment, its cost
is reflected as unrealized depreciation for the period during which
the commitment is held. Stand-by commitments do not affect the average
weighted maturity of the Fund's portfolio of securities.
o PUTS. The Funds may acquire "puts" with respect to municipal securities.
A put gives the Fund the right to sell the municipal security at a
specified price at any time on or before a specified date. The Funds may
sell, transfer or assign puts only in conjunction with the sale,
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transfer or assignment of the underlying securities. The amount payable
to a Fund upon its exercise of a "put" is normally: (1) the Fund's
acquisition cost of the municipal securities (excluding any accrued
interest which the Fund paid on their acquisition), less any amortized
market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (2) all interest
accrued on the securities since the last interest payment date during
that period.
The Funds may acquire puts to facilitate the liquidity of portfolio
assets. The Funds may use puts to facilitate the reinvestment of assets
at a rate of return more favorable than that of the underlying security.
The Funds expect that they will generally acquire puts only where the
puts are available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Funds may pay for
a put either separately in cash or by paying a higher price for
portfolio securities, which are acquired subject to the puts (thus
reducing the yield to maturity otherwise available for the same
securities).
o MORTGAGE-RELATED SECURITIEs. Mortgage-related securities represent
interests in a pool of mortgage loans originated by lenders such as
commercial banks, savings associations and mortgage bankers and brokers.
Mortgage-related securities may be issued by governmental or
government-related entities or by non-governmental entities such as
special purpose trusts created by commercial lenders.
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. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among
pools. For example, in addition to fixed-rate, fixed-term mortgages, the
Funds may purchase pools of adjustable-rate mortgages, growing equity
mortgages, graduated payment mortgages and other types. Mortgage poolers
apply qualification standards to lending institutions which originate
mortgages for the pools as well as credit standards and underwriting
criteria for individual mortgages included in the pools. In addition,
many mortgages included in pools are insured through private mortgage
insurance companies.
Mortgage-related 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. Most
mortgage-related securities, however, are pass-through securities, which
means that investors receive payments consisting of a pro-rata share of
both principal and interest (less servicing and other fees), as well as
unscheduled prepayments, as loans in the underlying mortgage pool are
paid off by the borrowers. Additional prepayments 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. As prepayment rates of individual pools of mortgage loans vary
widely, it is not possible to predict accurately the average life of a
particular mortgage-related security. Although mortgage-related
securities are issued with stated maturities of up to forty years,
unscheduled or early payments of principal and interest on the mortgages
may shorten considerably the securities' effective maturities. See "Risk
Considerations."
o GOVERNMENT AND AGENCY MORTGAGE-RELATED SECURITIES. The principal issuers
or guarantors of mortgage-related securities are the Government National
Mortgage Association ("GNMA"), Fannie Mae ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC"). GNMA, a wholly-owned U.S.
Government corporation within the Department of Housing and Urban
Development ("HUD"), creates pass-through securities from pools of
government guaranteed (Federal Housing Authority or Veterans
Administration) mortgages. The principal and interest on GNMA
pass-through securities are backed by the full faith and credit of the
U.S. Government.
FNMA, which is a U.S. Government-sponsored corporation owned entirely
by private stockholders that is subject to regulation by the Secretary
of HUD, and FHLMC, a corporate instrumentality of the U.S. Government,
issue pass-through securities from pools of conventional and federally
insured and/or guaranteed residential mortgages. FNMA guarantees full
and timely payment of all interest and principal, and FHMLC guarantees
timely payment of interest and ultimate collection of principal of its
pass-through securities. Mortgage-related securities from FNMA and FHLMC
are not backed by the full faith and credit of the U.S. Government.
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o PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related securities
offered by private issuers include pass-through securities comprised of
pools of conventional residential mortgage loans; mortgage-backed bonds,
which are considered to be debt obligations of the institution issuing the
bonds and are collateralized by mortgage loans; and bonds and
collateralized mortgage obligations that are collateralized by
mortgage-related securities issued by GNMA, FNMA or FHLMC or by pools of
conventional mortgages of multi-family or of commercial mortgage loans.
Privately-issued mortgage-related securities generally offer a higher rate
of interest (but greater credit and interest rate risk) than securities
issued by U.S. Government issuers because there are no direct or indirect
governmental guarantees of payment. Many non-governmental issuers or
servicers of mortgage-related securities guarantee or provide insurance for
timely payment of interest and principal on the securities. The market for
privately-issued mortgage-related securities is smaller and less liquid
than the market for mortgage-related securities issued by U.S. government
issuers.
o STRIPPED MORTGAGE-RELATED SECURITIES. Stripped mortgage-related securities
are multi-class mortgage-related securities that are created by separating
the securities into their principal and interest components and selling
each piece separately. Stripped mortgage-related securities are usually
structured with two classes that receive different proportions of the
interest and principal distributions in a pool of mortgage assets. The
market values of these securities are extremely sensitive to prepayment
rates.
o ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMs") are pass-through securities representing interests in pools of
mortgage loans with adjustable interest rates that are reset at periodic
intervals, usually by reference to some interest rate index or market
interest rate, and that may be subject to certain limits. Although the rate
adjustment feature may reduce sharp changes in the value of adjustable rate
securities, these securities can change in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Changes in the
interest rates on ARMs may lag behind changes in prevailing market interest
rates. 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. A Fund could suffer some principal loss if the
Fund sold the securities before the interest rates on the underlying
mortgages were adjusted to reflect current market rates. Some adjustable
rate securities (or the underlying mortgages) are subject to caps or
floors, that limit the maximum change in interest rates during a specified
period or over the life of the security.
o COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are multiple-class debt obligations that are fully collateralized
by mortgage-related pass-through securities or by pools of mortgages
("Mortgage Assets"). Payments of principal and interest on the Mortgage
Assets are passed through to the holders of the CMOs 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 mortgage
prepayments.
Multi-class mortgage pass-through securities are interests in trusts that
hold Mortgage Assets and that have multiple classes similar to those of
CMOs. Payments of principal of and interest on the underlying Mortgage
Assets (and in the case of CMOs, any reinvestment income thereon) provide
funds to pay debt service on the CMOs or to make scheduled distributions on
the multi-class mortgage pass-through securities. Parallel pay CMOs are
structured to provide payments of principal on each payment date to more
than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each
class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
Planned amortization class mortgage-related 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. CMOs may have complicated structures and generally
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involve more risks than simpler forms of mortgage-related securities.
Delinquency or loss in excess of that covered by credit enhancement
protection could adversely affect the return on an investment in such a
security.
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 increases the face amount of the
security at a compounded rate, but is not paid to the bond holder. After
all previous tranches are retired; accrual bond holders start receiving
cash payments that include both principal and continuing interest. The
market value of accrual bonds can fluctuate widely and their average life
depends on the other aspects of the CMO offering. Interest on accrual bonds
is taxable when accrued even though the holders receive no accrual payment.
The Funds distribute all of their net investment income, and may have to
sell portfolio securities to distribute imputed income, which may occur at
a time when the Adviser would not have chosen to sell such securities and
which may result in a taxable gain or loss.
o CREDIT ENHANCEMENTS. To lessen the effect of the failures by obligors on
Mortgage Assets to make payments, CMOs and other mortgage-related
securities may contain elements of credit enhancement, consisting of either
(1) liquidity protection or (2) protection against losses resulting after
default by an obligor on the underlying assets and allocation of all
amounts recoverable directly from the obligor and through liquidation of
the collateral. This 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 these methods. The Funds will not pay any
additional fees for credit enhancements for mortgage-related securities,
although the credit enhancement may increase the costs of the
mortgage-related securities. Delinquency or loss in excess of that covered
by credit enhancement protection could adversely affect the return on an
investment in such a security.
o ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-related securities but have underlying
assets that are not mortgage loans or interests in mortgage loans.
Asset-backed securities represent fractional interests in, or are secured
by and payable from, pools of 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 (e.g.,
credit card) agreements. Assets are securitized through the use of trusts
and special purpose corporations that issue securities that are often
backed by a pool of assets representing the obligations of a number of
different parties. Asset-backed securities have structures and
characteristics similar to those of mortgage-related securities and,
accordingly, are subject to many of the same risks, although often to a
greater extent. See "Risk Considerations." No Fund may invest more than 10%
of its net assets in asset-backed securities that are backed by a
particular type of credit, (e.g., credit card receivables).
o FOREIGN GOVERNMENT AND SUPRANATIONAL ORGANIZATIONS DEBT SECURITIES. A Fund
may invest in fixed income securities issued by the governments of foreign
countries or by those countries' political subdivisions, agencies or
instrumentalities as well as by supranational organizations such as the
International Bank for Reconstruction and Development and the
Inter-American Development Bank if the Adviser believes that the securities
do not present risks inconsistent with the Fund's investment objective.
o GUARANTEED INVESTMENT CONTRACTS. Guaranteed investment contracts ("GICs")
are issued by insurance companies. In purchasing a GIC, a Fund contributes
cash to the insurance company's general account and the insurance company
then credits to the Fund's deposit fund on a monthly basis guaranteed
interest at a specified rate. The GIC provides that this guaranteed
interest will not be less than a certain minimum rate. The insurance
company may assess periodic charges against a GIC for expense and service
costs allocable to it. There is no secondary market for GICs and,
accordingly, GICs are generally treated as illiquid investments. GICs are
typically unrated.
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o ZERO-COUPON SECURITIES. Zero-coupon securities are debt obligations that
are issued or sold at a significant discount from their face value and do
not pay current interest to holders prior to maturity, a specified
redemption date or cash payment date. The discount approximates the total
interest the securities will accrue and compound over the period to
maturity or the first interest payment date at a rate of interest
reflecting the market rate of interest at the time of issuance. The
original issue discount on the zero-coupon securities must be included
ratably in the income of a Fund (and thus an investor's) as the income
accrues, even though payment has not been received. The Funds distribute
all of their net investment income, and may have to sell portfolio
securities to distribute imputed income, which may occur at a time when an
Adviser would not have chosen to sell such securities and which may result
in a taxable gain or loss. Because interest on zero-coupon securities is
not paid on a current basis but is in effect compounded, the value of these
securities is subject to greater fluctuations in response to changing
interest rates, and may involve greater credit risks, than the value of
debt obligations which distribute income regularly.
Zero-coupon securities may be securities that have been stripped of their
unmatured interest stream. Zero-coupon securities may be custodial receipts
or certificates, underwritten by securities dealers or banks, that evidence
ownership of future interest payments, principal payments or both on
certain U.S. Government securities. The underwriters of these certificates
or receipts generally purchase a U.S. Government security and deposit the
security in an irrevocable trust or custodial account with a custodian
bank, which then issues receipts or certificates that evidence ownership of
the purchased unmatured coupon payments and the final principal payment of
the U.S. Government security. These certificates or receipts have the same
general attributes as zero-coupon stripped U.S. Treasury securities but are
not supported by the issuer of the U.S. Government security. The risks
associated with stripped securities are similar to those of other
zero-coupon securities, although stripped securities may be more volatile,
and the value of certain types of stripped securities may move in the same
direction as interest rates.
o VARIABLE AND FLOATING RATE SECURITIES. Certain debt securities have
variable or floating rates of interest and, under certain limited
circumstances, may have varying principal amounts. These securities pay
interest at rates that are adjusted periodically according to a specified
formula, usually with reference to one or more interest rate indices or
market interest rates (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. These adjustments minimize changes in
the market value of the obligation. Similar to fixed rate debt instruments,
variable and floating rate instruments are subject to changes in value
based on changes in market interest rates or changes in the issuer's
creditworthiness. The rate of interest on securities purchased by a Fund
may be tied to U.S. Government Securities or indices on those securities as
well as any other rate of interest or index. Certain variable rate
securities pay interest at a rate that varies inversely to prevailing
short-term interest rates (sometimes referred to as "inverse floaters").
Certain inverse floaters may have an interest rate reset mechanism that
multiplies the effects of changes in the underlying index. This mechanism
may increase the volatility of the security's market value while increasing
the security's yield.
Many variable rate instruments include the right of the holder to demand
prepayment of the principal amount of the obligation prior to its stated
maturity and the right of the issuer to prepay the principal amount prior
to maturity.
Variable and floating rate demand notes of corporations include master
demand notes that permit investment of fluctuating amounts at varying
interest rates under direct arrangements with the issuer of the instrument.
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. Because master demand notes are direct
lending arrangements between a Fund and the issuer, they are not normally
traded. Although there is no secondary market in the notes, the Fund may
demand payment of principal and accrued interest at any time upon a
specified period of notice.
Certain securities may have an initial principal amount that varies over
time based on an interest rate index, and, accordingly, a Fund might be
entitled to less than the initial principal amount of the security upon the
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security's maturity. A Fund will purchase these securities only when the
Adviser believes the interest income from the instrument justifies any
principal risks associated with the instrument. The Adviser may attempt to
limit any potential loss of principal by purchasing similar instruments
that are intended to provide an offsetting increase in principal. There can
be no assurance that the Adviser will be able to limit the effects of
principal fluctuations and, accordingly, a Fund may incur losses on those
securities even if held to maturity without issuer default.
There may not be an active secondary market for any particular floating or
variable rate 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 it may have. A Fund could, for this or other
reasons, suffer a loss with respect to those instruments. The Adviser
monitors the liquidity of each Fund's investment in variable and floating
rate instruments, but there can be no guarantee that an active secondary
market will exist.
o FINANCIAL INSTITUTION OBLIGATIONS. A Fund may invest in obligations of
financial institutions, including certificates of deposit, bankers'
acceptances, time deposits and other short-term debt obligations.
Certificates of deposit represent an institution's obligation to repay
funds deposited with it that earn a specified interest rate over a given
period. 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. Time deposits are non-negotiable deposits with a
banking institution that earn a specified interest rate over a given
period. Certificates of deposit and fixed time deposits, which are payable
at the stated maturity date and bear a fixed rate of interest, generally
may be withdrawn on demand by a Fund but may be subject to early withdrawal
penalties which could reduce a Fund's performance. Although fixed time
deposits do not in all cases have a secondary market, there are no
contractual restrictions on a Fund's right to transfer a beneficial
interest in the deposits to third parties.
Each Fund may invest in securities of foreign issuers. Funds that invest in
foreign securities may invest in Eurodollar certificates of deposit, which
are issued by offices of foreign and domestic banks located outside the
United States; Yankee certificates of deposit, which are issued by a U.S.
branch of a foreign bank and held in the United States; Eurodollar time
deposits, which are deposits in a foreign branch of a U.S. bank or a
foreign bank; and Canadian time deposits, which are issued by Canadian
offices of major Canadian banks. Each of these instruments is U.S. dollar
denominated.
o PARTICIPATION INTERESTS. A Fund may purchase participation interests in
loans or instruments in which the Fund may invest directly that are owned
by banks or other institutions. A participation interest gives a Fund an
undivided proportionate interest in a loan or instrument. Participation
interests may carry a demand feature permitting the holder to tender the
interests back to the bank or other institution. Participation interests,
however, do not provide the Fund with any right to enforce compliance by
the borrower, nor any rights of set-off against the borrower and the Fund
may not directly benefit from any collateral supporting the loan in which
it purchased a participation interest. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the
participation interest. A Fund will not invest more than 10% of its total
assets in participation interests in which the Fund does not have demand
rights.
BORROWING
Each Fund may borrow money in accordance with its investment policies set forth
under "Investment Limitations." Interest costs on borrowings may 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. 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, dollar roll transactions and other
similar investments that involve a form of leverage have characteristics similar
to borrowings but are not considered borrowings if the Fund maintains a
segregated account.
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DOLLAR ROLL TRANSACTIONS
Dollar roll transactions are transactions in which a Fund sells securities to a
bank or securities dealer, and makes a commitment to purchase similar, but not
identical, securities at a later date from the same party. During the period
between the commitment and settlement, no payment is made for the securities
purchased and no interest or principal payments on the securities accrue to the
purchaser, but the Fund assumes the risk of ownership. A Fund is compensated for
entering into dollar roll transactions by the difference between the current
sales price and the forward price for the future purchase, as well as by the
interest earned on the cash proceeds of the initial sale. The Funds will engage
in dollar roll transactions for the purpose of acquiring securities for their
investment portfolios. A Fund will limit its obligations on dollar roll
transactions to 35% of the Fund's net assets.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which a Fund purchases securities from
a bank or securities dealer and simultaneously commits to resell the securities
to the bank or dealer at an agreed-upon date and at a price reflecting a market
rate of interest unrelated to the purchased security. During the term of a
repurchase agreement, the Funds' custodian maintains possession of the purchased
securities and any underlying collateral, which is maintained at not less than
100% of the repurchase price. Repurchase agreements allow a Fund to earn income
on its uninvested cash for periods as short as overnight, while retaining the
flexibility to pursue longer-term investments.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand agreements,
there is no agreed upon repurchase date and interest payments are calculated
daily, often based upon the prevailing overnight repurchase rate.
LENDING FUND SECURITIES
Each Fund may lend Fund securities in an amount up to 33-1/3% of its total
assets to brokers, dealers and other financial institutions. Securities loans
must be continuously collateralized and the collateral must have market value at
least equal to value of the Fund's loaned securities, plus accrued interest. In
a portfolio securities lending transaction, the Fund receives from the borrower
an amount equal to the interest paid or the dividends declared on the loaned
securities during the term of the loan as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. The Fund may share the interest it receives on the
collateral securities with the borrower. The terms of a Fund's loans permit the
Fund to reacquire loaned securities on five business days' notice or in time to
vote on any important matter. Loans are subject to termination at the option of
a Fund or the borrower at any time, and the borrowed securities must be returned
when the loan is terminated. The Funds will not lend portfolio securities to any
officer, director, employee or affiliate of the Funds or an Adviser.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase or sell portfolio securities on a "when-issued," "delayed
delivery" or "forward commitment" basis. When-issued securities may be purchased
on a "when, as and if issued" basis under which the issuance of the securities
depends upon the occurrence of a subsequent event. When these transactions are
negotiated, the price is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date, but
the Funds enter into these transactions only with the intention of actually
receiving securities or delivering them, as appropriate. The Funds may dispose
of the right to acquire these securities before the settlement date if deemed
advisable. During the period between the time of commitment and settlement, no
payment is made for the securities purchased and no interest or dividends on the
securities accrue 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. The use of when-issued transactions and
forward commitments enables a Fund to protect against anticipated changes in
interest rates and prices, but also tends to increase the volatility of the
Fund's net asset value per share. 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 its total assets would be
committed to such transactions.
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The use of when-issued transactions and forward commitments enables the Funds 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 when-issued or forward transactions at
prices inferior to the current market values.
At the time a Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, the Fund will record the transaction as a purchase
and thereafter reflect the value each day of such securities in determining its
net asset value.
ILLIQUID INVESTMENTS
No Fund may knowingly invest more than 15% of its net assets in illiquid
investments. Illiquid investments are investments 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 investment and include, among other
instruments, repurchase agreements not entitling the Fund to payment of
principal within seven days.
An institutional market has developed for certain securities that are not
registered under the 1933 Act. Institutional investors usually will not seek to
sell these instruments to the general public, but instead will often depend on
either an efficient institutional market in which the unregistered security can
be readily resold or on an 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 therefore may not be
determinative of the liquidity of such investments.
If unregistered securities are eligible for purchase by institutional buyers in
accordance with applicable exemptions under guidelines adopted by the Board, the
Adviser may determine that the securities are liquid. Under these guidelines,
the Adviser must take into account: (1) the frequency of trades and quotations
for the investment; (2) the number of dealers willing to purchase or sell the
investment; (3) the number of dealers that have undertaken to make a market in
the investment; (4) the number of other potential purchasers; and (5) the nature
of the marketplace trades, including the time needed to dispose of the
investment, the method of soliciting offers and the mechanics of the transfer.
Illiquid investments may be more difficult to value than liquid investments and
the sale of illiquid investments generally may require more time and result in
higher selling expenses than the sale of liquid investments. 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.
Restrictions on resale may have an adverse effect on the marketability of
illiquid investments and a Fund might also have to register certain investments
in order to dispose of them, resulting in expense and delay.
SHORT SALES "AGAINST THE BOX"
All Funds may engage in short sales "against the box." A short sale is "against
the box" to the extent that while the short position is open, the Fund must own
an equal amount of the securities sold short, or by virtue of ownership of
securities have the right, without payment of further consideration, to obtain
an equal amount of the securities sold short. Short sales against-the-box may in
certain cases be made to defer, for Federal income tax purposes, recognition of
gain or loss on the sale of securities "in the box" until the short position is
closed out. If a Fund has unrealized gain with respect to a long position and
enters into a short sale against-the-box, the Fund generally will be deemed to
have sold the long position for tax purposes and thus will recognize gain.
Prohibitions on entering short sales other than against the box does not
restrict a Fund's ability to use short-term credits necessary for the clearance
of portfolio transactions and to make margin deposits in connection with
permitted transactions in options and futures contracts.
OPTIONS AND FUTURES CONTRACTS
Each Fund may (1) purchase or sell (write) put and call options on securities to
enhance the Fund's performance and (2) seek to hedge against a decline in the
value of securities owned by the Fund or an increase in the price of securities
that the Fund plans to purchase through the writing and purchase of
exchange-traded and over-the-counter options on individual securities or
securities or financial indices and through the purchase and sale of
interest-rate futures contracts and options on those futures contracts. A Fund
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may only write options that are covered. To the extent a Fund invests in foreign
securities, it may in the future invest in options on foreign currencies,
foreign currency futures contracts and options on those futures contracts. These
instruments are considered to be derivatives. Use of these instruments is
subject to regulation by the SEC, the several options and futures exchanges on
which futures and options are traded or the CFTC. No assurance can be given that
any hedging or option income strategy will achieve its intended result. A Fund
may enter into futures contracts only if the aggregate of initial margin
deposits for open futures contract positions does not exceed 5% of its total
assets.
o COVER FOR OPTIONS AND FUTURES CONTRACTS. A Fund will hold securities,
currencies, or other options or futures positions whose values are expected
to offset ("cover") its obligations under the transactions. A Fund will
enter into a hedging strategy that exposes it to an obligation to another
party only if the Fund owns either (1) an offsetting ("covered") position
in the underlying security, currency or options or futures contract, or (2)
cash, receivables and liquid debt securities with a value sufficient at all
times to cover its potential obligations. Each Fund will comply with SEC
guidelines with respect to coverage of these strategies and, if the
guidelines require, will set aside cash, liquid debt securities and other
permissible assets ("Segregated Assets") in a segregated account with the
Custodian in the prescribed amount. Segregated Assets cannot be sold or
closed out while the hedging or option income strategy is outstanding,
unless the Segregated Assets 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 a
Fund's ability to meet redemption requests or other current obligations.
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. Income Fund may
not 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.
o OPTIONS ON SECURITIES. A call option is a contract under which the
purchaser of the call option, in return for a premium paid, has the right
to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium, has the obligation upon exercise of the option to
deliver the underlying security against payment of the exercise price
during the option period. A put option gives its purchaser, in return for a
premium, the right to sell the underlying security at a specified price
during the term of the option. The writer of the put, who receives the
premium, has the obligation to buy the underlying security upon exercise at
the exercise price during the option period. The amount of premium received
or paid is based upon certain factors, including the market price of the
underlying assets, the relationship of the exercise price to the market
price, the historical price volatility of the underlying assets, the option
period, supply and demand and interest rates.
o 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 options on securities
except that exercises of stock index options are effected with cash
payments and do not involve delivery of securities (i.e., stock index
options are settled exclusively in cash). Thus, upon exercise of stock
index options, the purchaser will realize and the writer will pay an amount
based on the differences between the exercise price and the closing price
of the stock index.
o OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position
in a futures contract rather than to purchase or sell stock, at a specified
exercise price at any time during the period of the option. Upon exercise
of the option, the delivery of the futures position to the holder of the
option will be accompanied by transfer to the holder of an accumulated
balance representing the amount by which the market price of the futures
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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.
o FUTURES CONTRACTS AND INDEX FUTURES CONTRACTS. A futures contract is a
bilateral agreement where one party agrees to accept, and the other party
agrees to make, delivery of cash, an underlying debt security or a
currency, as called for in the contract, at a specified date and at an
agreed-upon price. A bond or stock index futures contract involves the
delivery of an amount of cash equal to a specified dollar amount times the
difference between the bond or stock 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. Generally, these futures contracts are closed out prior to the
expiration date of the contracts.
FOREIGN CURRENCY TRANSACTIONS
Each Fund may invest in foreign securities. Funds that make foreign investments
may conduct foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign exchange market or by entering
into a forward foreign currency contract. A forward foreign currency contract
("forward contract") involves an obligation to purchase or sell a specific
amount of a specific currency at a future date, which may be any fixed number of
days (usually less than one year) from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. Forward contracts are
considered to be derivatives. A Fund enters into forward contracts in order to
"lock in" the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. In addition, a Fund
may enter into forward contracts to hedge against risks arising from securities
a Fund owns or anticipates purchasing, or the U.S. dollar value of interest and
dividends paid on those securities.
If a Fund makes delivery of the foreign currency at or before the settlement of
a forward contract, it may be required to obtain the currency through the
conversion of assets of the Fund into the currency. The Fund may close out a
forward contract obligating it to purchase a foreign currency by selling an
offsetting contract, in which case it will realize a gain or a loss.
Foreign currency transactions involve certain costs and risks. The Fund incurs
foreign exchange expenses in converting assets from one currency to another.
Forward contracts involve a risk of loss if the Adviser is inaccurate in its
prediction of currency movements. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The precise matching of forward contract
amounts and the value of the securities involved is generally not possible.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency if the market value of the security is less than the amount of the
foreign currency the Fund is obligated to deliver under the forward contract and
the decision is made to sell the security and make delivery of the foreign
currency. The use of forward contracts as a hedging technique does not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. Although forward
contracts can reduce the risk of loss due to a decline in the value of the
hedged currencies, they also limit any potential gain that might result from an
increase in the value of the currencies.
In addition, there is no systematic reporting of last sale information for
foreign currencies, and there is no regulatory requirement that quotations
available through dealers or other market sources be firm or revised on a timely
basis. Quotation information available is generally representative of very large
transactions in the interbank market. The interbank market in foreign currencies
is a global around-the-clock market. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, a Fund may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
The Funds have no present intention to enter into currency futures or options
contracts, but may do so in the future. A Fund might take positions in options
on foreign currencies in order to hedge against the risk of foreign exchange
fluctuation on foreign securities the Fund holds in its portfolio or which it
intends to purchase.
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SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and mortgage (or other asset)
swaps, and may purchase and sell interest rate "caps," "floors," and "collars."
Interest rate swaps involve the exchange by a Fund and a counterparty of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed rate payments). Mortgage swaps are similar to interest
rate swap agreements, except that the contractually-based principal amount (the
"notional principal amount") is tied to a reference pool of mortgages. Currency
swaps' notional principal amount is tied to one or more currencies, and the
exchange commitments can involve payments in the same or different currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on the notional principal amount from the party selling the cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar entitles
the purchaser to receive payments to the extent a specified interest rate falls
outside an agreed range.
A Fund will enter into these transactions primarily to preserve a return or a
spread on a particular investment or portion of its portfolio or to protect
against any interest rate fluctuations or increase in the price of securities it
anticipates purchasing at a later date. A Fund would intend to use these
transactions as a hedge and not as a speculative investment, and would enter
into the transactions in order to shift the Fund's investment exposure from one
type of investment to another.
A Fund may enter into interest rate protection transactions on an asset-based
basis, depending on whether it is hedging its assets or its liabilities, and
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments.
The use of interest rate protection transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the Adviser
incorrectly forecasts market values, interest rates and other applicable
factors, there may be considerable impact on a Fund's performance. Even if the
Adviser is correct in its forecasts, there is a risk that the transaction may
correlate imperfectly with the price of the asset or liability being hedged.
TEMPORARY DEFENSIVE POSITION
When, in the judgment of the Adviser, market or economic conditions warrant,
each Fund may assume a defensive position and temporarily hold cash or invest
without limit in cash equivalents to retain flexibility in meeting redemptions,
paying expenses and timing of new investments. These investments will be rated
in one of the two highest short-term rating categories by an NRSRO or, if not
rated, determined by the Adviser to be of comparable quality, including: (1)
short-term U.S. Government securities; (2) certificates of deposit, bankers'
acceptances and interest-bearing savings deposits of commercial banks doing
business in the United States that have, at the time of investment total assets
in excess of one billion dollars and that are insured by the Federal Deposit
Insurance Corporation; (3) commercial paper; (4) repurchase agreements covering
any of the securities in which the Fund may invest directly; and (5) shares of
money market funds registered under the 1940 Act within the limits specified
therein. To the extent that a Fund assumes a temporary defensive position, it
may not be invested to pursue its investment objective.
Apart from temporary defensive purposes, a Fund may at any time invest a portion
of its assets in cash and cash equivalents as described above.
RISK CONSIDERATIONS
COUNTERPARTY RISK
The Funds may be exposed to the risks of financial failure or insolvency of
another party. To help reduce those risks, the Adviser, subject to the Board's
supervision, monitors and evaluates the creditworthiness of counterparties to
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the Funds' transactions and intends to enter into a transaction only when it
believes that the counterparty presents minimal credit risks and the benefits
from the transaction justify the attendant risks.
The use of repurchase agreements, securities lending, reverse repurchase
agreements, interest rate protection transactions (such as swaps, caps, collars
and floors), forward commitments (including dollar roll transactions) and
forward contracts involving currencies present particular counterparty risk. In
the event that bankruptcy, insolvency or similar proceedings were commenced
against a counterparty while these transactions remained open or a counterparty
defaulted on its obligations, a Fund may have difficulties in exercising its
rights to the underlying securities or currencies, as applicable, it may incur
costs and expensive time delays in disposing of the underlying securities and it
may suffer a loss. Failure by the other party to deliver a security or currency
purchased by a Fund may result in a missed opportunity to make an alternative
investment. 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, reverse repurchase
agreements and dollar roll transactions, and therefore, those transactions
involve more risk than repurchase agreements. For example, in the event the
purchaser of securities in a dollar roll transaction files for bankruptcy or
becomes insolvent, a 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.
As a result of entering into forward commitments and reverse repurchase
agreements, as well as lending its securities, a Fund may be exposed to greater
potential fluctuations in the value of its assets and net asset value per share.
FIXED INCOME SECURITIES
o GENERAL. The market value of the interest-bearing fixed income securities
held by the Funds will be affected by changes in interest rates. There is
normally an inverse relationship between the market value of securities
sensitive to prevailing interest rates and actual changes in interest
rates. The longer the remaining maturity (and duration) of a security, the
more sensitive the security is to changes in interest rates. All fixed
income securities, including U.S. Government securities, can change in
value when there is a change in interest rates. Changes in the ability of
an issuer to make payments of interest and principal and in the markets'
perception of an issuer's creditworthiness will also affect the market
value of that issuer's debt securities. As a result, an investment in a
Fund is subject to risk even if all fixed income securities in the Fund's
investment portfolio are paid in full at maturity. In addition, certain
fixed income securities may be subject to extension risk, which refers to
the change in total return on a security resulting from an extension or
abbreviation of the security's maturity.
Yields on fixed income securities, including municipal securities, are
dependent on a variety of factors, including the general conditions of
the fixed income securities markets, the size of a particular offering,
the maturity of the obligation and the rating of the issue. Fixed income
securities with longer maturities tend to produce higher yields and are
generally subject to greater price movements than obligations with
shorter maturities. A portion of the municipal securities held by the
Funds may be supported by credit and liquidity enhancements, such as
letters of credit (which are not covered by federal deposit insurance)
or puts or demand features of third party financial institutions,
generally domestic and foreign banks.
The issuers of fixed income securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies
of creditors that may restrict the ability of the issuer to pay, when
due, the principal of and interest on its debt securities. The
possibility exists therefore, that, as a result of bankruptcy,
litigation or other conditions, the ability of an issuer to pay, when
due, the principal of and interest on its debt securities may become
impaired.
o CREDIT RISK. The Funds' investments in fixed income securities are subject
to credit risk relating to the financial condition of the issuers of the
securities that each Fund holds. To limit credit risk, Income Fund will
invest at least 80% of its total assets in debt securities that are rated
in the top four long-term rating categories by an NRSRO or in the top two
short-term rating categories by an NRSRO. Moody's, Standard & Poor's and
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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 securities
by several NRSROs is included in Appendix A. The Adviser may use these
ratings to determine whether to purchase, sell or hold a security. Ratings
are not, however, absolute standards of quality. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate
the risks of fluctuations in market value. Consequently, similar securities
with the same rating may have different market prices. In addition, rating
agencies may fail to make timely changes in credit ratings and the issuer's
current financial condition may be better or worse than a rating indicates.
A Fund may retain a security that ceases to be rated or 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.
A Fund may purchase unrated securities if the Adviser determines that the
security is of comparable quality to a rated security that the Fund may
purchase. Unrated securities may not be as actively traded as rated
securities.
o MORTGAGE-RELATED SECURITIEs. The value of mortgage-related securities may
be significantly affected by changes in interest rates, the markets'
perception of issuers, the structure of the securities and the
creditworthiness of the parties involved. The ability of the Funds to
successfully utilize mortgage-related securities depends in part upon the
ability of the Adviser to forecast interest rates and other economic
factors correctly. Some mortgage-related securities have structures that
make their reaction to interest rate changes and other factors difficult to
predict.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related
securities. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic
conditions, the location and age of the mortgages and other social and
demographic conditions. In periods of rising interest rates, the prepayment
rate tends to decrease, lengthening the average life of a pool of
mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
The volume of prepayments of principal on the mortgages underlying a
particular mortgage-related security will influence the yield of that
security, affecting the Fund's yield. Because prepayments of principal
generally occur when interest rates are declining, it is likely that a
Fund, to the extent it retains the same percentage of debt securities, may
have to reinvest the proceeds of prepayments at lower interest rates then
those of its previous investments. If this occurs, a Fund's yield will
correspondingly decline. Thus, mortgage-related securities may have less
potential for capital appreciation in periods of falling interest rates
(when prepayment of principal is more likely) than other fixed income
securities of comparable duration, although they may have a comparable risk
of decline in market value in periods of rising interest rates. A decrease
in the rate of prepayments may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in
market interest rates. To the extent that a Fund purchases mortgage-related
securities at a premium, unscheduled prepayments, which are made at par,
result in a loss equal to any unamortized premium.
o ASSET-BACKED SECURITIES. Like mortgages underlying mortgage-related
securities, the collateral underlying assets are subject to prepayment,
which may reduce the overall return to holders of asset-backed securities.
Asset-backed securities present certain additional and unique risks.
Primarily, these securities do not always have the benefit of a security
interest in collateral comparable to the security interests associated with
mortgage-related securities. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing
the balance due. Automobile receivables generally are secured by
automobiles. Most issuers of automobile receivables permit the loan
servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk
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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. As a result, the risk that recovery on repossessed
collateral might be unavailable or inadequate to support payments on
asset-backed securities is greater for asset-backed securities than for
mortgage-related 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.
o NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities are
securities rated below the fourth highest rating category by an NRSRO or
which are unrated and judged by the Adviser to be of comparable quality.
Such high risk securities (commonly referred to as "junk bonds") are not
considered to be investment grade and have speculative or predominantly
speculative characteristics. Non-investment grade, high risk securities
provide poor protection for payment of principal and interest but may have
greater potential for capital appreciation than do higher quality
securities. These lower rated securities involve greater risk of default or
price changes due to changes in the issuers' creditworthiness than do
higher quality securities. The market for these securities may be thinner
and less active than that for higher quality securities, which may affect
the price at which the lower rated securities can be sold. In addition, the
market prices of lower rated securities may fluctuate more than the market
prices of higher quality securities and may decline significantly in
periods of general economic difficulty or rising interest rates. Under such
conditions, the Funds may have to use subjective rather than objective
criteria to value its high yield/high risk securities investments
accurately and rely more heavily on the judgment of the Fund's Adviser.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund's
Adviser may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. If a Fund experiences
unexpected net redemptions, the Fund's Adviser may be forced to sell the
Fund's higher rated securities, resulting in a decline in the overall
credit quality of the Fund's portfolio and increasing the exposure of the
Fund to the risks of high yield/high risk securities.
FOREIGN SECURITIES
Beyond the investments discussed in the Funds' Prospectus, each Fund may invest
in foreign securities. All investments, domestic and foreign, involve certain
risks. Investments in the securities of foreign issuers may involve risks in
addition to those normally associated with investments in the securities of U.S.
issuers. All foreign investments are subject to risks of foreign political and
economic instability, adverse movements in foreign exchange rates, the
imposition or tightening of exchange controls or other limitations on
repatriation of foreign capital, and changes in foreign governmental attitudes
towards private investment, possibly leading to nationalization, increased
taxation or confiscation of foreign investors' assets.
Moreover, dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income available for distribution to a
Fund's shareholders; commission rates payable on foreign transactions are
generally higher than in the United States; foreign accounting, auditing and
financial reporting standards differ from those in the United States and,
accordingly, less information may be available about foreign companies than is
available about issuers of comparable securities in the United States; and
foreign securities may trade less frequently and with lower volume and may
exhibit greater price volatility than United States securities.
Changes in foreign exchange rates will also affect the value in U.S. Dollars of
all foreign currency-denominated securities held by a Fund. Exchange rates are
influenced generally by the forces of supply and demand in the foreign currency
markets and by numerous other political and economic events occurring outside
the United States, many of which may be difficult, if not impossible, to
predict.
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Income from foreign securities will be received and realized in foreign
currencies, and a Fund is required to compute and distribute income in U.S.
dollars. Accordingly, a decline in the value of a particular foreign currency
against the U.S. Dollar occurring after the 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.
A Fund may purchase foreign bank obligations. In addition to the risks described
above that are generally applicable to foreign investments, the investments that
the Funds make in obligations of foreign banks, branches or subsidiaries may
involve further risks, including differences between foreign banks and U.S.
banks in applicable accounting, auditing and financial reporting standards, and
the possible establishment of exchange controls or other foreign government laws
or restrictions applicable to the payment of certificates of deposit or time
deposits that may affect adversely the payment of principal and interest on the
securities held by the Funds.
LEVERAGE
The Funds may use leverage in an effort to increase their returns. Leverage
involves special risks and may involve speculative investment techniques.
Leverage exists when cash made available to a Fund through an investment
technique is used to make additional Fund investments. Borrowing for other than
temporary or emergency purposes, lending portfolio securities, entering into
reverse repurchase agreements, purchasing securities on a when-issued, delayed
delivery or forward commitment basis (including dollar roll transactions) and
the use of swaps and related agreements are transactions that result in
leverage. The Funds also may purchase securities on margin or enter into short
sales, although they have no current intention to do so. The Funds use these
investment techniques only when the Adviser believes that the leveraging and the
returns available to the Funds from investing the cash will provide investors a
potentially higher return.
Leverage creates the risk of magnified capital losses which occur when losses
affect an asset base, enlarged by borrowings or the creation of liabilities,
that exceeds the equity base of the Fund. Leverage may involve the creation of a
liability that requires a Fund to pay interest (for instance, reverse repurchase
agreements) or the creation of a liability that does not entail any interest
costs (for instance, forward commitment costs). The risks of leverage include a
higher volatility of the net asset value of the Fund's interests and the
relatively greater effect on the net asset value of the interests caused by
favorable or adverse market movements or changes in the cost of cash obtained by
leveraging and the yield from invested cash. So long as a Fund is able to
realize a net return on its investment portfolio that is higher than interest
expense incurred, if any, leverage will result in higher current net investment
income for the Fund than if a Fund were not leveraged. Changes in interest rates
and related economic factors could cause the relationship between the cost of
leveraging and the yield to change so that rates involved in the leveraging
arrangement may substantially increase relative to the yield on the obligations
in which the proceeds of the leveraging have been invested. To the extent that
the interest expense involved in leveraging approaches the net return on the
Fund's investment portfolio, the benefit of leveraging will be reduced, and, if
the interest expense on borrowings were to exceed the net return to investors,
the Fund's use of leverage would result in a lower rate of return 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.
o SEGREGATED ACCOUNTs. In order to attempt to reduce the risks involved in
various transactions involving leverage, a Fund's custodian will set
aside and maintain, in a segregated account, cash and liquid securities.
The account's value, which is marked to market daily, will be at least
equal to the Fund's commitments under these transactions. The use of a
segregated account in connection with leveraged transactions may result
in a Fund's investment portfolio being 100% leveraged.
OPTIONS AND FUTURES CONTRACTS
A Fund's use of options and futures contracts subjects the Fund to certain
unique investment risks. These risks include: (1) dependence on the Adviser's
ability to correctly predict movements in the prices of individual securities
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and fluctuations in interest rates, the general securities markets and other
economic factors; (2) imperfect correlations between movements in the prices of
options or futures contracts and movements in the price of the securities hedged
or used for cover which may cause a given hedge not to achieve its objective;
(3) the fact that the skills and techniques needed to trade these instruments
are different from those needed to select the other securities in which a Fund
invests; (4) lack of assurance that a liquid secondary market will exist for any
particular instrument at any particular time, which, among other things, may
hinder a Fund's ability to limit exposures by closing its positions; (5) the
possible need to defer closing out certain options, futures contracts and
related options to avoid adverse tax consequences; and (6) the potential for
unlimited losses when investing in futures contracts or writing options for
which an offsetting position is not held.
Other risks include the inability of a Fund, as the writer of covered call
options, to benefit from any appreciation of the underlying securities above the
exercise price and the possible loss of the entire premium paid for options
purchased by the Fund. In addition, the futures exchanges may limit the amount
of fluctuation permitted in certain futures contract prices on related options
during a single trading day. A Fund may be forced, therefore, to liquidate or
close out a futures contract position at a disadvantageous price. There is no
assurance that a counterparty in an over-the-counter option transaction will be
able to perform its obligations. There are a limited number of options on
interest rate futures contracts and exchange-traded options contracts on fixed
income securities. The Funds 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. A Fund's activities in the futures and
options markets may result in higher portfolio turnover rates and additional
brokerage costs, which could reduce a Fund's yield.
SMALL CAPITALIZATION STOCKS
Investments in smaller capitalization companies carry greater risk than
investments in larger capitalization companies. Smaller capitalization companies
generally experience higher growth rates and higher failure rates than do larger
capitalization companies; and the trading volume of smaller capitalization
companies' securities is normally lower than that of larger capitalization
companies and, consequently, generally has a disproportionate effect on market
price (tending to make prices rises more in response to buying demand and fall
more in response to selling pressure).
Securities owned by a 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 a Fund of a portfolio security, to meet redemption requests by
investors 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.
Investments in small, unseasoned issuers generally carry greater risk than is
customarily associated with larger, more seasoned companies. Such issuers often
have products and management personnel that have not been tested by time or the
marketplace and their financial resources may not be as substantial as those of
more established companies. Their securities (which a Fund may purchase when
they are offered to the public for the first time) may have a limited trading
market which can adversely affect their sale by the Fund and can result in such
securities being priced lower than otherwise might be the case. If other
institutional investors engage in trading this type of security, a Fund may be
forced to dispose of its holdings at prices lower than might otherwise be
obtained.
INVESTMENT LIMITATIONS
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 without
shareholder approval.
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As part of its regular banking operations, Norwest Bank may make loans to public
companies. Thus, it may be possible, from time to time, for a Fund to hold or
acquire the securities of issuers which are also lending clients of Norwest
Bank. A lending relationship will not be a factor in the selection of portfolio
securities for a Fund.
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 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) ILLIQUID SECURITIES. The Fund may not invest more than 15% of its
net assets in illiquid securities or more than 10% of the Fund's total
assets in restricted securities.
(5) ISSUANCE OF SENIOR SECURITIES: The Fund may not issue senior
securities except to the extent permitted by the 1940 Act.
(6) 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.
(7) 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. No Fund
will lend portfolio securities in excess of 33 1/3% of its total
assets.
(8) 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
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not deemed to be physical commodities.
(9) PURCHASES AND SALES OF REAL ESTATE: The Fund may not purchase or
sell real estate or any interest therein, except that the Fund may
invest in debt obligations secured by real estate or interests therein
or securities issued by companies that invest in real estate or
interests therein.
NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations, which are not
fundamental policies of the Fund and may be changed by the Board 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, as amended.
(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: (1) 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 (2) 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, individually owning
beneficially more than one-half of 1% of the securities of the issuer,
in the aggregate own more than 5% of the issuer's securities.
(8) OIL, GAS, AND MINERAL INVESTMENTS AND REAL ESTATE: The Fund may
not invest in interests in oil, gas, or other mineral leases of
interests in other mineral exploration or development programs, and
the Fund may not invest in real estate limited partnerships.
(9) SECURITIES WITH VOTING RIGHTS: Income Fund may not purchase
securities having voting rights at the time of purchase, except
securities of other investment companies.
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PERFORMANCE AND ADVERTISING DATA
The Funds may quote performance in various ways. These quotations may from time
to time be used in advertisements and shareholder/contractholder reports or
other communications. 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. Investment return and principal value will fluctuate, and 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, including mortality and expense risk charges. A Fund will
not advertise its performance unless such advertisement is accompanied by
information reflecting the performance of the applicable Separate Account.
SEC YIELD CALCULATIONS
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that each Fund's yield fluctuates
from day to day and that the 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 a Fund are not fixed or guaranteed, and an
investment in a Fund is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of a Fund with
investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to compare
a Fund's yield information directly to similar information regarding investment
alternatives which are insured or guaranteed.
Standardized yields for the Funds used in advertising are computed by dividing a
Fund's dividend and interest earned (in accordance with specific standardized
rules) for a given 30 days or one month period, net of expenses, by the average
number of shares entitled to receive distributions during the period, dividing
this figure by the Fund's net asset value per share at the end of the period and
annualizing the result (assuming compounding of income in accordance with
specific standardized rules) in order to arrive at an annual percentage rate. In
general, interest income is reduced with respect to municipal securities
purchased at a premium over their par value by subtracting a portion of the
premium from income on a daily basis . In general, interest income is increased
with respect to municipal securities purchased at original issue at a discount
by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from these calculations.
Income calculated for the purpose of determining each Fund's standardized yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
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TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions and any change in the
Fund's net asset value per share over the period. Average annual 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:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote 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, 1998 was as follows. The actual dates of the commencement of
each Fund's operations is listed in the Fund's financial statements.
<TABLE>
<S> <C> <C> <C> <C>
ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION
INCOME FUND 9.12% N/A N/A 7.94%
INCOME EQUITY FUND 18.42% N/A N/A 20.71%
VALUGROWTH STOCK FUND 16.18% N/A N/A 17.57%
SMALL COMPANY STOCK FUND -14.47% N/A N/A 10.26%
</TABLE>
27
<PAGE>
MANAGEMENT
The Trustees and officers of the Trust and their principal occupations during
the past five years and age as of the date of this SAI 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 56.
President and Owner, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, Limited Liability Company (a
mutual fund administrator), Forum Shareholder Services, LLC (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 67.
Former Director Federal Farm Credit Banks Funding Corporation and Farm
Credit System Financial Assistance Corporation (1993-March 1999). His address is
5038 Kestral Parkway South, Sarasota, Florida 34231.
DONALD H. BURKHARDT, Trustee, Age 72.
Principal of The Burkhardt Law Firm. His address is 777 South Steele
Street, Denver, Colorado 80209.
JAMES C. HARRIS, Trustee, Age 78.
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 65.
President of Richard M. Leach Associates (a financial consulting firm)
since 1992. Prior thereto, Mr. Leach was Senior Adviser of Taylor Investments (a
registered investment adviser), a Director of Mountainview Broadcasting (a radio
station) and Managing Director of Digital Techniques, Inc. (an interactive video
design and manufacturing company). His address is P.O. Box 1888, New London, New
Hampshire 03257.
JOHN S. MCCUNE,* Trustee, Age 53.
President, Norwest Investment Services, Inc. (a broker-dealer subsidiary of
Norwest Bank). His address is 608 2nd Avenue South, Minneapolis, Minnesota
55479.
TIMOTHY J. PENNY, Trustee, Age 46.
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 58.
Principal of the law firm of Willeke & Daniels. His address is 201
Ridgewood Avenue, Minneapolis, Minnesota 55403.
28
<PAGE>
SARA M. MORRIS, Vice President and Treasurer, Age 35.
Managing Director, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, from 1991 to 1994 Ms. Morris 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. Morris is also an officer of various registered investment
companies for which Forum Administrative Services, LLC or Forum Financial
Services, Inc. serves as manager, administrator and/or distributor. Her address
is Two Portland Square, Portland, Maine 04101.
DAVID I. GOLDSTEIN, Vice President and Secretary, Age 37.
Managing Director and General Counsel, Forum Financial Services, Inc., with
which he has been associated since 1991. Mr. Goldstein is also an officer of
various registered investment companies for which Forum Administrative Services,
LLC or Forum Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine 04101.
THOMAS G. SHEEHAN, Vice President and Assistant Secretary, Age 44.
Managing Director and 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
Administrative Services, LLC or Forum Financial Services, Inc. serves as
manager, administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
PAMELA J. WHEATON, Assistant Treasurer, Age 39.
Manager - Fund Accounting, Forum Financial Services, Inc., with which she
has been associated since 1989. Ms. Wheaton is also an officer of various
registered investment companies for which Forum Administrative Services, LLC or
Forum Financial Services, Inc. serves as manager, administrator and/or
distributor. Her address is Two Portland Square, Portland, Maine 04101.
DON L. EVANS, Assistant Secretary, Age 50.
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 an officer of various registered investment
companies for which Forum Administrative Services, LLC or Forum Financial
Services, Inc. serves as manager, administrator and/or distributor. His address
is Two Portland Square, Portland, Maine.
EDWARD C. LAWRENCE, Assistant Secretary, Age 30.
Fund Administrator, Forum Financial Services, Inc., with which he has been
associated since 1997. Prior thereto, Mr. Lawrence was a self-employed
contractor on antitrust cases with the law firm of White & Case. After
graduating from law school, from 1994-1996, Mr. Lawrence worked as an assistant
public defender for the Missouri State Public Defender's Office. His address is
Two Portland Square, Portland, Maine 04101.
TRUSTEE COMPENSATION
Each Trustee of the Trust is paid a quarterly retainer fee of $6,000, for the
Trustee's service to the Trust and to Norwest Advantage Funds, a separate
registered open-end management investment company for which each Trustee serves
as trustee. In addition, each Trustee is paid $3,000 for each regular Board
meeting attended except the annual meeting, for which each Trustee is paid
$5,000 (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. Messrs. Keffer and McCune received no
29
<PAGE>
compensation for their services as Trustees for the past year or reimbursement
for their associated expenses. In addition, no officer of the Trust is
compensated by the Trust.
Mr. Burkhardt, Chairman of the Trust's and Norwest Advantage Funds' audit
committees, receives additional compensation of $8,000 from the Trust and
Norwest Advantage Funds allocated pro rata between the Trust and Norwest
Advantage Funds based upon relative net assets, for his services as Chairman.
Each Trustee was elected by shareholders on April 30, 1997.
The following table provides the aggregate compensation paid to the trustees of
the Trust by the Trust and Norwest Advantage Funds combined. Information is
presented for the year ended December 31, 1998, the fiscal year end of
portfolios of the Trust.
<TABLE>
<S> <C> <C>
TOTAL COMPENSATION TOTAL COMPENSATION FROM THE TRUST
FROM THE TRUST AND NORWEST ADVANTAGE FUNDS
Mr. Brown $190.45 $35,000
Mr. Burkhardt $223.23 $41,000
Mr. Harris $158.62 $29,000
Mr. Leach $190.45 $35,000
Mr. Penny $190.45 $35,000
Mr. Willeke $190.45 $35,000
Neither the Trust nor Norwest Advantage Funds has adopted any form of retirement
plan covering Trustees or officers.
</TABLE>
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' 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 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.
30
<PAGE>
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE PAYABLE ADVISORY FEE ADVISORY FEE RETAINED
WAIVED
INCOME FUND
Year Ended December 31, 1998 $89,772 $79,229 $10,543
Year Ended December 31, 1997 $44,422 $44,422 $0
Year Ended December 31, 1996 $25,920 $25,920 $0
INCOME EQUITY FUND
Year Ended December 31, 1998 $507,440 $66,982 $440,459
Year Ended December 31, 1997 $172,660 $62,502 $110,158
Period Ended December 31, 1996 $23,198 $23,198 $0
VALUGROWTH STOCK FUND
Year Ended December 31, 1998 $234,312 $72,118 $162,194
Year Ended December 31, 1997 $61,011 $61,011 $0
Year Ended December 31, 1996 $24,138 $23,138 $0
SMALL COMPANY STOCK FUND
Year Ended December 31, 1998 $101,914 $65,543 $36,371
Year Ended December 31, 1997 $66,869 $62,651 $4,218
Year Ended December 31, 1996 $31,252 $31,252 $0
</TABLE>
ADMINISTRATION AND MANAGEMENT
Forum Administrative Services, LLC ("FAdS") and Forum supervise 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 separate administration and management
agreements.
Each of the administration and management agreements 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.
Each of the administration and management agreements terminate 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'
written notice. The administration and management agreements also provide that,
with respect to each Fund, neither FAdS nor Forum, respectively, 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.
For their services under each of the administration and management agreements,
each of FAdS and Forum is compensated at an annual rate of 0.05% of each Fund's
average daily net assets. Administration and management fees are accrued daily
and paid monthly. FAdS and Forum, in their sole discretion, may waive all or any
portion of their administration and management fee, respectively with respect to
each Fund. The following tables show the dollar amount of fees payable under the
administration and management agreements between each of FAdS and Forum and the
Trust with respect to each Fund, the amount of fee that was waived by FAdS and
Forum, if any, and the actual fee received by FAdS and Forum. The data are for
the past three fiscal years.
31
<PAGE>
<TABLE>
<S> <C> <C> <C>
ADMINISTRATION FEE ADMINISTRATION FEE ADMINISTRATION FEE
PAYABLE WAIVED RETAINED
INCOME FUND
Year Ended December 31, 1998 $14,962 $14,962 $0
Year Ended December 31, 1997 $11,299 $4,190 $7,109
Year Ended December 31, 1996 $8,640 $8,640 $0
INCOME EQUITY FUND
Year Ended December 31, 1998 $63,430 $63,430 $0
Year Ended December 31, 1997 $30,354 $13,235 $17,119
Period Ended December 31, 1996 $5,799 $5,799 $0
VALUGROWTH STOCK FUND
Year Ended December 31, 1998 $29,290 $29,288 $0
Year Ended December 31, 1997 $23,565 $9,364 $14,201
Year Ended December 31, 1996 $15,253 $15,253 $0
SMALL COMPANY STOCK FUND
Year Ended December 31, 1998 $12,740 $12,739 $0
Year Ended December 31, 1997 $12,351 $4,876 $7,475
Year Ended December 31, 1996 $1,916 $1,916 $0
MANAGEMENT FEE MANAGEMENT FEE WAIVED MANAGEMENT FEE
PAYABLE RETAINED
INCOME FUND
Year Ended December 31, 1998 $14,962 $14,962 $0
Year Ended December 31, 1997 $11,299 $4,190 $7,109
Year Ended December 31, 1996 $8,640 $8,640 $0
INCOME EQUITY FUND
Year Ended December 31, 1998 $63,430 $63,430 $0
Year Ended December 31, 1997 $30,354 $13,235 $17,119
Period Ended December 31, 1996 $5,799 $5,799 $0
VALUGROWTH STOCK FUND
Year Ended December 31, 1998 $29,290 $29,290 $0
Year Ended December 31, 1997 $23,565 $9,364 $14,201
Year Ended December 31, 1996 $15,253 $15,253 $0
SMALL COMPANY STOCK FUND
Year Ended December 31, 1998 $12,740 $12,740 $0
Year Ended December 31, 1997 $12,351 $4,876 $7,475
Year Ended December 31, 1996 $1,916 $1,916 $0
</TABLE>
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 (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. The custodian employs qualified foreign subcustodians
to provide custody of the Funds' foreign assets in accordance with applicable
regulations.
32
<PAGE>
For its services as Transfer Agent, Norwest Bank is compensated at an annual
rate of 0.08% of each Fund's average daily net assets. For its services as
Custodian, Norwest Bank is paid at an annual rate of 0.02% 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.
<TABLE>
<S> <C> <C> <C>
TRANSFER FEE PAYABLE TRANSFER FEE TRANSFER FEE RETAINED
WAIVED
INCOME FUND
Year Ended December 31, 1998 $11,970 $11,970 $0
Year Ended December 31, 1997 $7,404 $7,404 $0
Year Ended December 31, 1996 $3,456 $3,456 $0
INCOME EQUITY FUND
Year Ended December 31, 1998 $50,744 $50,744 $0
Year Ended December 31, 1997 $21,583 $21,583 $0
Period Ended December 31, 1996 $2,320 $2,320 $0
VALUGROWTH STOCK FUND
Year Ended December 31, 1998 $23,431 $23,431 $0
Year Ended December 31, 1997 $15,835 $15,835 $0
Year Ended December 31, 1996 $6,101 $6,101 $0
SMALL COMPANY STOCK FUND
Year Ended December 31, 1998 $10,191 $10,191 $0
Year Ended December 31, 1997 $8,359 $8,359 $0
Year Ended December 31, 1996 $3,125 $3,125 $0
</TABLE>
DISTRIBUTION 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.
FUND ACCOUNTING
Forum Accounting Services, LLC ("FAcS"), an affiliate of Forum, performs fund
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.
Under its agreement, FAcS 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, FAcS receives from the Trust with respect to each Fund a fee
of $36,000 per year. In addition, FAcS 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.
FAcS 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. FAcS is not
responsible or liable for any failure or delay in performance of its fund
33
<PAGE>
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 FAcS, 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 FAcS'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 FAcS by a duly authorized officer of the Trust. This indemnification does not
apply to FAcS's actions or failures to act in cases of FAcS'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.
<TABLE>
<S> <C> <C> <C>
ACCOUNTING FEE ACCOUNTING FEE WAIVED ACCOUNTING FEE
PAYABLE RETAINED
INCOME FUND
Year Ended December 31, 1998 $44,000 $0 $44,000
Year Ended December 31, 1997 $52,800 $10,500 $42,300
Year Ended December 31, 1996 $38,000 $8,000 $30,000
INCOME EQUITY FUND
Year Ended December 31, 1998 $38,000 $0 $38,000
Year Ended December 31, 1997 $37,800 $2,500 $35,300
Period Ended December 31, 1996 $23,516 $3,919 $19,597
VALUGROWTH STOCK FUND
Year Ended December 31, 1998 $39,000 $0 $39,000
Year Ended December 31, 1997 $37,800 $2,500 $35,300
Year Ended December 31, 1996 $38,000 $8,000 $30,000
SMALL COMPANY STOCK FUND
Year Ended December 31, 1998 $44,000 $0 $44,000
Year Ended December 31, 1997 $48,800 $6,500 $42,300
Year Ended December 31, 1996 $46,000 $16,000 $30,000
</TABLE>
OTHER INFORMATION
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION Shares of each Fund are sold on a
continuous basis.
The Trust may redeem shares involuntarily, from time to time, to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder or to collect any charge
relating to transactions effected for the benefit of a shareholder which is
applicable to the shares as provided in the Prospectus.
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partially in portfolio securities if the Board determines that payment
in cash would be detrimental to the best interests of the Fund and its
shareholders. If payment for Shares redeemed is made wholly or partially in
portfolio securities, brokerage costs may be incurred by the shareholder in
converting securities to cash.
DETERMINATION OF NET ASSET VALUE
Securities owned by a Fund for which market quotations are readily available are
valued at current market value. The Funds value their securities as follows. A
security listed or traded on an exchange is valued at its last sale price (prior
to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the security
is valued at the mean of the last bid and asked prices. All other securities for
which OTC market quotations are readily available generally are valued at the
mean of the current bid and asked prices. When market quotations are not readily
available, securities are valued at fair value as determined in good faith by
the Board. Debt securities may be valued on the basis of valuations furnished by
34
<PAGE>
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 Norwest, 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 Norwest's
opinion, is equitable to each and in accordance with the amount being purchased
or sold by each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
In addition, when purchases or sales of the same security for a Fund and other
client accounts managed by an Adviser occur contemporaneously, the purchase or
sale orders may be aggregated in order to obtain any price advantages available
to large denomination purchases or sales.
Purchases and sales of fixed income portfolio securities are generally effected
as principal transactions. These securities are normally purchased directly from
the issuer or from an underwriter or market maker for the securities. There
usually are no brokerage commissions paid for such purchases. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers serving as market
makers include the spread between the bid and ask prices. In the case of
securities traded in the foreign and domestic OTC markets, there is generally no
stated commission, but the price usually includes an undisclosed commission or
markup. In underwritten offerings, the price includes a disclosed fixed
commission or discount.
Purchases and sales of equity securities on exchanges are generally effected
through brokers who charge commissions except in the OTC markets. Allocations of
transactions to brokers and dealers and the frequency of transactions are
determined by the Adviser in its 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 Adviser takes 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 Adviser may also take into account
payments made by brokers effecting transactions for a Fund: (1) to the Fund; or
(2) to other persons on behalf of the Fund for services provided to it for which
it would be obligated to pay.
35
<PAGE>
In addition, the Adviser may give consideration to research services furnished
by brokers to the Adviser for its 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 Adviser in connection with services to
clients other than the Funds, and 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
Adviser 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 Adviser 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: (1) at least as favorable as commissions contemporaneously charged
by the affiliate on comparable transactions for its most favored unaffiliated
customers; and (2) 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.
36
<PAGE>
The following table shows the dollar amount of brokerage commissions paid by
each Fund. The data is for the past three fiscal years.
For the fiscal year ended December 31, 1998, ValuGrowth Stock Fund paid to its
affiliate Norwest Investment Services, Inc. aggregate brokerage commissions of
less than 1% of the Trust's aggregate brokerage commissions.
<TABLE>
<S> <C>
AGGREGATE COMMISSIONS PAID
INCOME FUND
Year Ended December 31, 1998 $0
Year Ended December 31, 1997 $0
Year Ended December 31, 1996 $0
INCOME EQUITY FUND
Year Ended December 31, 1998 $51,165
Year Ended December 31, 1997 $45,755
Period Ended December 31, 1996 $15,664
VALUGROWTH STOCK FUND
Year Ended December 31, 1998 $22,615
Year Ended December 31, 1997 $27,568
Year Ended December 31, 1996 $21,307
SMALL COMPANY STOCK FUND
Year Ended December 31, 1998 $35,757
Year Ended December 31, 1997 $34,734
Year Ended December 31, 1996 $12,579
</TABLE>
During their last fiscal year, certain Funds acquired securities issued by their
"regular brokers and dealers" or the parents of those brokers and dealers.
Regular brokers and dealers means the 10 brokers or dealers that: (1) received
the greatest amount of brokerage commissions during the Fund's last fiscal year;
(2) engaged in the largest amount of principal transactions for portfolio
transactions of the Fund during the Fund's last fiscal year; or (3) sold the
largest amount of the Fund's shares during the Fund's last fiscal year.
Following is a list of the regular brokers and dealers of the Funds whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of December 31, 1998.
<TABLE>
<S> <C> <C> <C>
REGULAR BROKER VALUE OF
OR DEALER SECURITIES HELD
INCOME FUND Morgan Stanley & Co. $339,000
Lehman Brothers, Inc. $126,000
Norwest Cash Investment Fund $368,000
INCOME EQUITY FUND J.P. Morgan & Co., Inc. $1,705,000
American Express/IDS Securities Corp.
$1,701,000
Nationsbanc Montgomery Securities,
Inc. $3,033,000
VALUGROWTH STOCK FUND Chase Manhattan Corp. $408,000
SunAmerica Capital Services, Inc. $554,000
State Street Corp. $529,000
Dreyfus Cash Management $1,470,000
Institutional Funds Group $1,593,000
First Union Corp. $456,000
Bank America Corp. $421,000
Banc One Capital Corp. $276,000
SMALL COMPANY STOCK FUND Fidelity Money Market Fund $386,000
Provident Money Market Fund $235,000
</TABLE>
37
<PAGE>
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, as amended (the
"Code").
To qualify as a regulated investment company, each Fund generally must, among
other things: (1) 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; (2) 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 (3) 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).
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 gain
(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 gain. 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: (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year; (2) 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 (3)
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.
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. Distributions of net
capital gain will 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. Any distribution received by a shareholder on shares of a Fund will have
the effect of reducing the net asset value of such shares by the amount of such
distribution. Furthermore, a distribution made shortly after the purchase of
such shares by a shareholder, although in effect a return of capital to that
particular shareholder, would be taxable as described above. If a shareholder
has held shares in a Fund for six months or less and during that period has
received a distribution of net capital gain, any loss recognized by the
shareholder on the sale of those shares during the six-month period will be
treated as a long-term capital loss to the extent of the distribution.
38
<PAGE>
If a Fund invests in shares of a "passive 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 gain.
Certain investments by a Fund, including investments in zero coupon debt
instruments, may cause the Fund to recognize income in a period in which no
corresponding cash or other payment is received. Such amounts will nonetheless
generally be required to be distributed in the period in which recognized.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues interest or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts, and options, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered 60% long-term and 40% short-term
capital gain or loss. Each Fund can elect to exempt its section 1256 contracts
which are part of a "mixed straddle" (as described below) from the application
of section 1256.
With respect to OTC put and call options, gain or loss realized by a Fund upon
the lapse or sale of such options held by such Fund will be either long-term or
short-term capital gain or loss depending upon the Fund's holding period with
respect to such option. However, gain or loss realized upon the lapse or closing
out of such options that are written by a Fund will be treated as 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: (1) 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;
(2) 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); (3) 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; (4) losses recognized with respect to certain straddle positions
which would otherwise constitute short-term capital losses be treated as
long-term capital losses; and (5) 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.
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.
39
<PAGE>
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
As of May 1, 1998, 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 April 20, 1998, 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:
<TABLE>
<S> <C> <C>
FUND SHARE BALANCE % OF FUND
INCOME FUND 2,144,915.153 99.81%
INCOME EQUITY FUND 5,896,931.232 100.00%
VALUGROWTH STOCK FUND 1,789,508.091 99.80%
SMALL COMPANY STOCK FUND 1,168,158.996 100.00%
</TABLE>
As of April 20, 1998, Fortis owned in excess of 99% of the outstanding shares of
each Fund.
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 Fund has issued separate classes of shares.
The Trust's shareholders are not personally liable for the obligations of the
Trust under Delaware law. The Delaware Business Trust Act (the "Delaware Act")
provides that a shareholder of a Delaware business trust shall be entitled to
the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust shareholder liability exists in many other states,
including Texas. As a result, to the extent that the Trust or a shareholder is
subject to the jurisdiction of courts in those states, the courts may not apply
Delaware law, and may thereby subject the Trust's shareholders to liability. To
guard against this risk, the Trust Instrument of the Trust disclaims shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation and instrument entered into by
the Trust or its Trustees, and provides for indemnification out of Trust
property of any shareholder held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss beyond his
investment because of shareholder liability is limited to circumstances in
which: (1) a court refuses to apply Delaware law; (2) no contractual limitation
of liability is in effect; and (3) the Trust itself is 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.
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 Funds' 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.
40
<PAGE>
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 the 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 affiliate from continuing to
perform all or a part of the activities contemplated by the 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.
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 and Trustees 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
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, 1998, 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.
FINANCIAL STATEMENTS
The financial statements of each Fund as of and for the year ended December 31,
1998 (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.
41
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
MUNICIPAL AND CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates municipal and corporate bond issues, including convertible issues,
as follows:
Bonds which are 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 edged." 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 which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in AAA securities.
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 some time in the future.
Bonds which are rated BAA are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated CAA are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated CA represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the AA, A, BAA, BA or B groups which Moody's ranks in the
higher end of its generic rating category are designated by the symbols AA1, A1,
BAA1, BA1 and B1.
A-1
<PAGE>
STANDARD & POOR'S ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
Bonds rated AAA have the highest rating assigned by S&P. The capacity to meet
the financial commitment on the obligation is extremely strong.
Bonds rated AA have a very strong capacity to meet the financial commitment on
the obligation and differ from the highest-rated issues only in small degree.
Bonds rated A have a strong capacity to meet the financial commitment on the
obligation, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations rated in
higher-rated categories.
Bonds rated BBB exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet the financial commitment on the obligation than in
higher-rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, as having significant speculative
characteristics. BB indicates the least degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions. Bonds rated BB have less vulnerability to
nonpayment than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet the financial commitment on the
obligation.
Bonds rated B are more vulnerable to nonpayment then bonds rated BB, but
currently have the capacity to meet the financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to meet the financial commitment on the obligation.
Bonds rated CCC are currently vulnerable to nonpayment, and are dependent upon
favorable business, financial, and economic conditions to meet the financial
commitment on the obligation. In the event of adverse business, financial, or
economic conditions, they are not likely to have the capacity to meet the
financial commitment on the obligation.
Bonds rated CC are currently highly vulnerable to nonpayment.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but payments are being continued.
Bonds are rated D when the issue is in payment default. The D rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will made during such grace period. The D rating will also be used upon the
filing of the bankruptcy petition or the taking of a similar action if payments
on the obligation are jeopardized.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)or
minus (-) sign to show the relative standing within the major rating categories.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and/or
dividends and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
A-2
<PAGE>
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and/or dividends and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and/or dividends and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest or dividends 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.
BB Bonds are considered speculative. The obligor's ability to pay interest or
dividends 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.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements or paying dividends, 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.
CCC Bonds have certain identifiable characteristics that if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds 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 (-) 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, DDD, DD or D categories.
PREFERRED STOCK
MOODY'S
Moody's rates preferred stock 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
within the universe of preferred stock.
An issue rated AA is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance the earnings and asset protection
will remain relatively well-maintained in the foreseeable future.
A-3
<PAGE>
An issue rated A is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the AAA and AA
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated BAA is considered to be a medium-grade preferred stock, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
An issue rated BA is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is 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 which is 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 which is rated CA is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated C can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: 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 issuer ranks in the lower end of its
generic rating category.
S&P
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality, fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A-4
<PAGE>
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
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
Fitch utilizes the same ratings criteria in rating preferred stock as it does in
rating corporate bond issues, as described earlier in this Appendix.
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
broadbased access to the market for refinancing. Loans bearing the MIG 2/VMIG 2
designation are of high quality. Margins of protection are ample although not so
large as in the MIG 1/VMIG 1 group. A rating of MIG 3/VMIG 3 denotes favorable
quality. All security elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established. A rating of MIG 4/VMIG 4 denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
S&P. S&P's highest rating for short-term municipal loans is SP-1. S&P states
that short-term municipal securities bearing the SP-1 designation have very
strong or strong capacity to pay principal and interest. Those issues rated SP-1
which are determined to possess overwhelming safety characteristics will be
given a plus (+) designation. Issues rated SP-2 have satisfactory capacity to
pay principal and interest. Issues rated SP-3 have speculative capacity to pay
principal and interest.
FITCH. short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
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.
SHORT TERM DEBT (INCLUDING 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 capacity of rated issuers.
Issuers rated PRIME-1 have a superior capacity for repayment of short-term
promissory obligations. PRIME-1 repayment capacity will normally be evidenced by
the following characteristics: Leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
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generation; well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 have a strong capacity for repayment of short-term
promissory 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, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market. An A-1
designation indicates the highest category and that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
capacity for timely payment on issues with an A-2 designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1. Issues carrying an A-3 designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
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.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+. Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good credit quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 rating.
F-3. Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be rated below
investment grade.
F-5. Weak credit quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D. Default. Issues assigned this rating are in actual or imminent payment
default.
LOC. The symbol LOC indicates that the rating is based on a letter of credit
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issued by a commercial bank.
