AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
Registration No. 33-79708
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 5 [X]
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 7
THE SARATOGA ADVANTAGE TRUST
(Exact Name of Registrant as Specified in Charter)
1501 Franklin Avenue, Mineola, NY 11501-4803
(Address of Principal Executive Offices)
(616) 873-7011
(Registrant's Telephone Number)
Stuart Strauss, Esq.
Gordon Altman Butowsky
Weitzen Shalov & Wein
114 West 47th Street
New York, NY 10036
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[ ]immediately upon filing pursuant to paragraph (b)
[ ]On pursuant to paragraph (b)
[x]60 days after filing pursuant to paragraph (a)(1)
[ ]on pursuant to paragraph (a)(1)
[ ]75 days after filing pursuant to paragraph (a)(2)
[ ]on pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ]this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item
Part A Caption Prospectus
- ------ ------- ----------
<S> <C>
1.Cover Page Cover Page
2.Synopsis Summary
3.Condensed Financial Information Financial Highlights
4.General Description of Registrant Objectives and Policies of the Portfolios; Certain
Securities and Investment Techniques; Risk Factors;
Additional Information; Cover Page
5.Management of the Fund Objectives and Policies of the Portfolios; Management
of the Trust; Custodian and
Transfer Agent
5A.Management's Discussion of Fund Performance Not Applicable
6.Capital Stock and Other Securities Dividends, Distributions and Taxes; Redemption of
Shares; Additional Information
7.Purchase of Securities Purchase of Shares
8.Redemption or Repurchase Redemption of Shares
9.Legal Proceedings N/A
Part B Caption Statement of Additional Information
- ------ ------- -----------------------------------
10.Cover Page Cover Page
11.Table of Contents Table of Contents
12.General Information and History Not Applicable
13.Investment Objective and Policies Investment of the Trust's Assets; Investment
Restrictions
14.Management of the Fund Trustees and Officers
15.Control Persons and Principal Principal Holders of Securities and Control Persons of
Holders of Securities the Portfolios; Trustees and Officers
16.Investment Advisory and Other Management and Other Services; Investment Advisory
Services Services; Additional Information
17.Brokerage Allocation Investment Advisory Services
18.Capital Stock and Other Securities Additional Information
19.Purchase, Redemption and Pricing Determination of Net Asset Value
of Securities
20.Tax Status Additional Information
21.Underwriters Additional Information
22.Calculations of Performance Data Portfolio Yield and Total Return
Information
23.Financial Statements Financial Statements
</TABLE>
<PAGE>
PROSPECTUS Dated ________________
T H E S A R A T O G A A D V A N T A G E T R U S T
The Saratoga Advantage Trust (the "Trust") is an open-end, management
investment company providing a convenient means of investing in a series of
separate investment portfolios (the "Portfolios") professionally managed by
Saratoga Capital Management (the "Manager"). Each of the Portfolios is
diversified and is provided with discretionary advisory services by a registered
investment advisor (the "Advisor") identified, retained, supervised and
compensated by the Manager. The Trust is a series company that currently
consists of the following Portfolios to which this Prospectus relates:
Income Portfolios:
( - U.S. Government Money Market Portfolio
( - Investment Quality Bond Portfolio
( - Municipal Bond Portfolio
Equity Portfolios:
( - Large Capitalization Value Portfolio
( - Large Capitalization Growth Portfolio
( - Small Capitalization Portfolio
( - International Equity Portfolio
SHARES OF THE U.S. GOVERNMENT MONEY MARKET PORTFOLIO ARE NOT GUARANTEED
OR INSURED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE U.S.
GOVERNMENT MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A CONSTANT NET ASSET
VALUE OF $1.00 PER SHARE.
Shares of the Portfolios are offered to participants in investment
advisory programs that provide asset allocation recommendations to investors
based on an evaluation of the investor's investment objectives and risk
tolerance. The advisors in certain of these investment advisory programs may use
an asset allocation methodology developed by the Manager, the Saratoga Strategic
Horizon Asset Reallocation Program (sm) (the "Saratoga Sharp (sm) Program"), to
assist them in translating investor needs, preferences and attitudes identified
from an investment questionnaire into suggested portfolio allocations. Shares of
the Portfolios are also available to other investors and investment advisory
services. Investors purchasing shares through an investment advisory service
will be subject to the payment of a separate fee imposed by the investment
advisor for such services. See "Purchase of Shares_General." The operating
expenses of the Portfolios, when combined with any investment advisory fees
separately paid, may involve greater fees and expenses than other investment
companies whose shares are purchased without the benefit of the professional
consulting and asset allocation services rendered by the investment advisors.
<PAGE>
This Prospectus sets forth concisely certain information about the
Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
Additional information about the Trust is contained in a Statement of
Additional Information dated ___________, which is available upon request and
without charge by calling or writing the Trust or Saratoga Capital Management at
1501 Franklin Avenue, Mineola, New York 11501-4803, 800-807-FUND (800-807-3863).
The Statement of Additional Information, which has been filed with the
Securities and Exchange Commission, is incorporated by reference into this
Prospectus in its entirety.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY ANY BANK AND THE SHARES OF THE PORTFOLIOS ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY AND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
Summary................................................................
Summary of Trust Expenses..............................................
Financial Highlights...................................................
Objectives and Policies of the Portfolios..............................
Certain Securities and Investment Techniques...........................
Risk Factors...........................................................
Certain Investment Policies............................................
Management of the Trust................................................
Purchase of Shares.....................................................
Redemption of Shares...................................................
Net Asset Value........................................................
Exchange Privilege.....................................................
Dividends, Distributions and Taxes.....................................
Custodian and Transfer Agent...........................................
Performance of the Portfolios..........................................
Additional Information.................................................
SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.
The Trust. The Trust is a management investment company providing a convenient
means of investing in separate Portfolios professionally managed by the Manager.
The assets of each of the Portfolios are invested on a discretionary basis by a
separate Advisor. See "Management of the Trust." The Trust is a series company
currently consisting of the following 7 Portfolios:
Income Portfolios:
( - U.S. Government Money Market Portfolio, whose Advisor is Sterling
Capital Management Company.
( - Investment Quality Bond Portfolio, whose Advisor is Fox Asset
Management, Inc.
( - Municipal Bond Portfolio, whose Advisor is OpCap Advisors.
Equity Portfolios:
( - Large Capitalization Value Portfolio, whose Advisor is OpCap Advisors.
( - Large Capitalization Growth Portfolio, whose Advisor is Harris Bretall
Sullivan & Smith, L.L.C.
( - Small Capitalization Portfolio, whose Advisor is Thorsell, Parker
Partners, Inc.
( - International Equity Portfolio, whose Advisor is Ivory & Sime
International, Inc.
<PAGE>
MANAGEMENT. Saratoga Capital Management is the Manager of the Portfolios. Each
of the Portfolios is provided with the discretionary advisory services of an
Advisor identified, retained, supervised and compensated by the Manager. Unified
Advisers, Inc. serves as the Trust's administrator and, in connection therewith,
provides administration services to each Portfolio. See "Management of the
Trust."
INVESTMENT ADVISORY SERVICES. Shares of the Portfolios are offered to
participants in certain investment advisory programs and to other investors and
investment advisory services. Generally, the investment advisors for the
investment advisory programs provide asset allocation recommendations with
respect to the Portfolios based on an evaluation of an investor's investment
objectives and risk tolerance. Certain investment advisors offering asset
allocation programs may enter into agreements with the Manager pursuant to which
the Manager will make available its Saratoga Sharp SM SM Program and provide
various administrative services to the investment advisor ("Consulting
Programs"). The investment advisory fee for these Consulting Programs will be
determined by the investment advisors and their clients. The fee is paid to the
client's investment advisor either directly or by redeeming a sufficient number
of Portfolio shares. The Manager is paid a fee by the client's investment
advisor for services provided to the investment advisor in connection with the
investment advisory program. See "Purchase of Shares-General."
PURCHASE AND REDEMPTION OF SHARES. Shares of the Portfolios are offered for
purchase and redemption at their respective net asset values next determined,
WITHOUT IMPOSITION OF ANY SALES CHARGE. See "Purchase of Shares" and "Redemption
of Shares."
RISK FACTORS AND SPECIAL CONSIDERATIONS. No assurance can be given that the
Portfolios will achieve their investment objectives. Investing in an investment
company that invests in securities of companies and governments of foreign
countries, particularly developing countries, involves risks that go beyond the
usual risks inherent in an investment company limiting its holdings to domestic
investments. Certain Portfolios may also be subject to certain risks in using
investment techniques and strategies such as entering into forward currency
contracts, repurchase agreements, trading futures contracts and options on
futures contracts. In addition, the Investment Quality Bond Portfolio and the
Municipal Bond Portfolio may invest in zero coupon securities, which, due to
changes in interest rates, may be more speculative and subject to greater
fluctuations in value than securities that pay interest currently. See
"Objectives and Policies of the Portfolios," "Certain Securities and Investment
Techniques" and "Risk Factors."
Investors should be aware that the Manager receives a fee from the
investment advisor for each participant in a Consulting Program for services
rendered to the investment advisor in connection with the investment advisory
program. This fee does not vary based on the Portfolios recommended for the
participant's investments. The Manager also serves as the Trust's Manager with
responsibility for identifying, retaining, supervising and compensating each
Portfolio's Advisor and receives a fee from each Portfolio. The portion of each
Portfolio's management fee that is retained by the Manager does not vary based
on the Portfolio involved. The Manager's decisions as to the retention of
particular Advisors and specific amount of the Manager's compensation to be paid
to the Advisor are subject to review and approval by a majority of the Board of
Trustees and separately by a majority of the
<PAGE>
Trustees who are not affiliated with the Manager or any of its affiliates. See
"Management of the Trust-Investment Manager" and "Purchase of
Shares-General-Investment Advisory Programs."
The Portfolios are intended primarily as vehicles for the
implementation of long term asset allocation strategies rendered through
investment advisory programs that are based on an evaluation of an investor's
investment objectives and risk tolerance. Because these asset allocation
strategies are designed to spread investment risk across the various segments of
the securities markets through investment in a number of Portfolios, each
individual Portfolio generally intends to be substantially fully invested in
accordance with its investment objectives and policies during most market
conditions. Although the Advisor of a Portfolio may, upon the concurrence of the
Manager, take a temporary defensive position during adverse market conditions,
it can be expected that a defensive posture will be adopted less frequently than
would be by other mutual funds. This policy may impede an Advisor's ability to
protect a Portfolio's capital during declines in the particular segment of the
market to which the Portfolio's assets are committed. Consequently, no single
Portfolio should be considered a complete investment program and an investment
among the Portfolios should be regarded as a long term commitment that should be
held through several market cycles. In addition, although the investment
advisors for the Consulting Programs may recommend adjustments in the allocation
of assets among the Portfolios based on, among other things, anticipated market
trends, there can be no assurance that these recommendations can be developed,
transmitted and acted upon in a manner sufficiently timely to avoid market
shifts, which can be sudden and substantial. Participants in Consulting Programs
should note that responsibility for investment recommendations rests solely with
the investment advisor for the program or the client itself and not with the
Trust or the Manager. Investors intending to purchase Portfolio shares through
investment advisory programs should evaluate carefully whether the service is
ongoing and continuous, as well as their investment advisors' ability to
anticipate and respond to market trends. See "Objectives and Policies of the
Portfolios," and "Certain Securities and Investment Techniques-Temporary
Investments."
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio intends to distribute annually to
its shareholders substantially all of its net investment income and its net
realized long and short term capital gains. Dividends from the net investment
income of the U.S. Government Money Market Portfolio, the Investment Quality
Bond Portfolio, and the Municipal Bond Portfolio are declared daily and paid
monthly. Dividends from the net investment income of the remaining Portfolios
are declared and paid annually. Distributions of any net realized long term and
short term capital gains earned by a Portfolio will be made annually. See
"Dividends, Distributions and Taxes."
TAXATION. Each of the Portfolios intends to qualify as a regulated investment
company for U.S. federal income tax purposes. As such, the Trust anticipates
that no Portfolio will be subject to U.S. federal income tax on income and
gains, if any, that are distributed to shareholders. It is expected that certain
capital gains and certain dividends and interest earned by the International
Equity Portfolio will be subject to foreign withholding taxes. These taxes may
be deductible or creditable in whole or in part by shareholders of the Portfolio
for U.S. federal income tax purposes. See "Dividends, Distributions and Taxes."
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company ("State
Street") acts as the custodian of the Trust's U.S. and non-U.S. assets and may
employ sub-custodians outside the United States approved by the Trustees of the
Trust in accordance with regulations of the Securities and Exchange Commission
(the "SEC"). State Street also serves as the transfer agent for the Portfolios'
shares. See "Custodian and Transfer Agent."
SUMMARY OF TRUST EXPENSES
Annual Portfolio Operating Expenses. The following table lists the costs and
expenses that an investor will incur as a shareholder of each of the Portfolios
based on operating expenses incurred during the fiscal year ended August 31,
1997. There are no shareholder transaction expenses, sales loads or distribution
fees.
<TABLE>
<CAPTION>
U.S.
Government Investment Large Large
Money Quality Municipal Capitalization Capitalization Small International
Market Bond Bond Value Growth Capitalization Equity
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses None None None None None None None
Annual Portfolio
Operating Expenses
(as a percentage of
average net assets)
Management Fees .475% .55% .55% .65% .65% .65% .75%
Distribution (Rule
12b-1 Expenses) None None None None None None None
Other Expenses
(after reimbursement) .65% .65% .65% .65% .65% .65% .65%
--- --- --- --- --- --- ---
Total Operating
Expenses (after
reimbursement) 1.125% 1.20% 1.30% 1.30% 1.30% 1.30% 1.40%
</TABLE>
MANAGEMENT FEES AND OTHER EXPENSES: Each Portfolio pays the Manager a fee for
its services that is computed daily and paid monthly at an annual rate ranging
from .475% to .75% of the value of the average daily net assets of the
Portfolio. The fees of each Advisor are paid by the Manager. The nature of the
services provided to, and the aggregate management fees paid by, each Portfolio
are described under "Management of the Trust." The expenses set forth in the
above table reflect voluntary expense limitations currently in effect. For the
year ended August 31, 1997, the Manager waived all or a portion of its
management fee and assumed certain operating expenses of each Portfolio. In
addition, the Portfolios benefitted from expense offset arrangements with their
custodian bank. Without such voluntary waivers, expense assumptions and expense
offsets, total operating expenses of each of the Portfolios would have been as
follows: U.S. Government Money Market Portfolio, 1.35%; Investment Quality Bond
Portfolio, 1.52%; Municipal Bond Portfolio, 2.96%; Large Capitalization Value
Portfolio, 1.56%; Large Capitalization Growth Portfolio, 1.36%; Small
Capitalization Portfolio, 1.64%; and International Equity Portfolio, 2.76%.
"Other Expenses" include fees for shareholder services, administration,
custodial fees, legal and accounting fees, printing costs, registration fees,
the costs of regulatory compliance, a Portfolio's allocated portion of the costs
associated with maintaining the Trust's legal existence and the costs involved
in the Trust's communications with shareholders. The table does not reflect any
fees paid by investors pursuant to Consulting Programs.
Example. The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Portfolios. These amounts are based upon (i)
payment by the Portfolios of operating expenses at the levels set forth in the
table above and (ii) the specific assumptions stated below:
A shareholder would pay the following expenses on a $1,000 investment assuming
(i) a 5% annual return and (ii) redemption at the end of each time period:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1 year $11.47 $12.23 $12.23 $13.24 $13.24 $13.24 $14.25
3 years 35.75 38.09 38.09 41.21 41.21 41.21 44.32
5 years 61.95 65.97 65.97 71.29 71.29 71.29 76.59
10 years 136.88 145.46 145.46 156.78 156.78 156.78 167.98
</TABLE>
The purpose of this example is to assist an investor in understanding various
costs and expenses that an investor in a Portfolio will bear. THIS EXAMPLE
SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE EXPENSES;
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, although the
table assumes a 5% annual return, a Portfolio's actual performance will vary and
may result in an actual return greater or less than 5%.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
The following schedules of per share data and ratios for the period from
September 2, 1994 to August 31, 1995 and for the fiscal years ended August 31,
1996 and 1997 have been audited by KPMG Peat Marwick LLP, independent
accountants, whose report thereon is included in the 1997 Annual Report to
Shareholders which is incorporated by reference in the Statement of Additional
Information. These schedules should be read in conjunction with the other
financial statements and notes thereto included in the Annual Report, which is
available without charge by calling the Manager at 1-800-807-3863.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
INCOME FROM DIVIDENDS AND
INVESTMENT OPERATIONS DISTRIBUTIONS RATIOS
----------------------------------- ----------------------- -----------------------------------------
Distributions
to
Net Realized Shareholders
and Dividends to from Net Net Net Ratio of Net Ratio of Net
Net Asset Unrealized Total Shareholders Realized Asset Assets Operating Investment
Value, Net Gain(Loss) from from Net Gain Value, End of Expenses Income(Loss) Portfolio Average
Beginning Investment on Investment Investment on End of Total Period to Average to Average Turnover Commission
of Period Income(Loss) Investments Operations Income Investments Period Return*(000's) Net Assets Net Assets Rate Rate
U.S. Government Money Market Portfolio
Year Ended August 31,
1997
$1.000 $0.043 $0.000 0.043 ($0.043) -- $1.000 4.41% $28,572 1.12%(1,2,6) 4.31%(1,2) -- --
Year Ended August 31,
1996
1.000 0.044 0.000 0.044 (0.044) -- 1.000 4.47% 22,906 1.12%(1,2,6) 4.30%(1,2) -- --
September 2, 1994 (3)
to August 31, 1995
1.000(4) 0.052 0.000 0.052 (0.052) -- 1.000 5.36% 5,072 0.40%(1,5) 5.38%(1,5) -- --
</TABLE>
(1) During the fiscal year ended August 31,1997, Saratoga Capital
Management waived a portion of its management fees. During all other
time periods presented above, Saratoga Capital Management waived all
of its fees and assumed a portion of the operating expenses.
Additionally, for the periods presented above, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such
waivers, assumptions and expense offsets had not been in effect for
the respective periods, the ratios of net operating expenses to
average daily net assets and the rations of net investment income
(loss) to average daily net assets would have been 1.35% and 4.08%,
respectively, for the year ended August 31, 1997, 1.79% and 3.64%,
respectively, for the year ended August 31,1996 and 6.69% and (0.91%),
annualized, respectively, for the period September 2, 1994
(commencement of operations) to August 31,1995.
Investment Quality Bond Portfolio
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended August 31,
1997
$9.91 $0.51 $0.18 $0.69 ($0.51) $0.00 $10.09 7.16% $22,507 1.28(1,2,6) 5.03%(1,2) 30% --
Year Ended August 31,
1996
10.08 0.48 (0.16) 0.32 (0.48) (0.01) 9.91 3.23% 16,864 1.31%(1,2,6) 4.84%(1,2) 55% --
September 2, 1994 (3)
to August 31, 1995
10.00(4) 0.60 0.08 0.68 (0.60) -- 10.08 7.12% 4,503 0.45%(1,5) 5.77%(1,5) 18% --
</TABLE>
(1) During the fiscal year ended August 31,1997, Saratoga Capital
Management waived a portion of its management fees. During all other
time periods presented above, Saratoga Capital Management waived all
of its fees and assumed a portion of the operating expenses.
Additionally, for the periods presented above, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such
waivers, assumptions and expense offsets had not been in effect for
the respective periods, the ratios of net operating expenses to
average daily net assets and the rations of net investment income
(loss) to average daily net assets would have been 1.52% and 4.71%,
respectively, for the year ended August 31, 1997, 2.12% and 3.90%,
respectively, for the year ended August 31,1996 and 7.93% and (1.71%),
annualized, respectively, for the period September 2, 1994
(commencement of operations) to August 31,1995.
Municipal Bond Portfolio
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended August 31,
1997
$10.00 $0.43 $0.33 $0.76 ($0.43) -- $10.33 7.67% $7,223 1.21%(1,2,6) 4.19%(1,2) 20% --
Year Ended August 31,
1996
9.93 0.41 0.07 0.48 (0.41) -- 10.00 4.88% 4,708 1.23%(1,2,6) 4.03%(1,2) 12% --
September 2, 1994 (3)
to August 31, 1995
10.00(4) 0.51 (0.07) 0.44 (0.51) -- 9.93 4.65 % 1,477 0.37%(1,5) 4.79%(1,5) 27% --
</TABLE>
(1) During the periods presented above, Saratoga Capital Management waived
all of its fees and assumed a portion of the operating expenses.
Additionally, for the period presented above, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such
waivers, assumptions and expense offsets had not been in effect for
the respective periods, the ratios of net operating expenses to
average daily net assets and the ratios of net investment income
(loss) to average daily net assets would have been 2.96% and 2.43%,
respectively, for the year ended August 31, 1997, 5.32% and (0.12)%,
respectively, for the year ended August 31, 1996 and 20.15% and
(14.99%), annualized, respectively, for the period September 2, 1994
(commencement of operations) to August 31,1995.
Large Capitalization Value Portfolio
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended August 31,
1997
$14.45 $0.09 $4.37 4.46 ($0.08) ($0.26) $18.57 31.37% $29,676 1.31%(1,2,6) 0.60%(1,2) 25% $0.06
Year Ended August 31,
1996
12.30 0.07 2.33 2.40 (0.11) (0.14) 14.45 19.73% 18,274 1.28%(1,2,6) 0.97%(1,2) 26% 0.06
September 2, 1994 (3)
to August 31, 1995
10.00(4) 0.15 2.20 2.35 (0.05) -- 12.30 23.60% 5,515 0.40%(1,5) 2.29%(1,5) 33% --
</TABLE>
(1) During the fiscal year ended August 31,1997, Saratoga Capital
Management waived a portion of its management fees. During all other
time periods presented above, Saratoga Capital Management waived all
of its fees and assumed a portion of the operating expenses.
Additionally, for the periods presented above, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such
waivers, assumptions and expense offsets had not been in effect for
the respective periods, the ratios of net operating expenses to
average daily net assets and the ratios of net investment income
(loss) to average daily net assets would have been 1.56% and 0.35%,
respectively, for the year ended August 31, 1997, 2.19% and 0.04%,
respectively, for the year ended August 31,1996 and 6.54% and (3.85%),
annualized, respectively, for the period September 2, 1994
(commencement of operations) to August 31,1995.
Large Capitalization Growth Portfolio
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended August 31,
1997
$13.16 ($0.02) $4.73 $4.71 -- -- $17.87 35.79% $47,197 1.36%(1,2,6) (0.12%)(1,2) 53% $0.07
Year Ended August 31,
1996
12.86 (0.02) 0.35 0.33 (0.01) (0.02) 13.16 2.56% $33,962 1.34%(1,2,6) (0.13%)(1,2) 50% 0.07
September 2, 1994 (3)
to August 31, 1995
10.00(4) 0.02 2.85 2.87 (0.01) -- 12.86 28.77% 11,107 0.51%(1,5) 0.32% (1,5) 23% --
</TABLE>
(1) During the fiscal year ended August 31,1997, Saratoga Capital
Management waived a portion of its management fees. During all other
time periods presented above, Saratoga Capital Management waived all
of its fees and assumed a portion of the operating expenses.
Additionally, for the periods presented above, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such
waivers, assumptions and expense offsets had not been in effect for
the respective periods, the ratios of net operating expenses to
average daily net assets and the ratios of net investment income
(loss) to average daily net assets would have been 1.36% and (0.20%),
respectively, for the year ended August 31, 1997, 1.67% and (0.60%),
respectively, for the year ended August 31,1996 and 5.00% and (4.17%),
annualized, respectively, for the period September 2, 1994
(commencement of operations) to August 31,1995.
Small Capitalization Portfolio
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended August 31,
1997
$13.58 ($0.07) $2.37 $2.30 -- ($0.83) $15.05 18.07% 28,781 1.30%(1,2,6) (0.70%(1,2) 162% $0.06
Year Ended August 31,
1996
12.62 (0.09) 1.44 1.35 ($0.00) (0.39) 13.58 11.03% 22,071 1.25%(1,2,6) (0.83%(1,2) 95% 0.06
September 2, 1994 (3)
to August 31, 1995
10.00(4) 0.02 2.61 2.63 (0.01) -- 12.62 26.38% 15,103 0.42%(1,5) 0.07(1,5) 111% --
</TABLE>
(1) During the fiscal year ended August 31,1997, Saratoga Capital
Management waived a portion of its management fees. During all other
time periods presented above, Saratoga Capital Management waived all
of its fees and assumed a portion of the operating expenses.
Additionally, for the periods presented above, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such
waivers, assumptions and expense offsets had not been in effect for
the respective periods, the ratios of net operating expenses to
average daily net assets and the ratios of net investment income
(loss) to average daily net assets would have been 1.64% and (1.04%),
respectively, for the year ended August 31, 1997, 1.84% and (1.42%),
respectively, for the year ended August 31,1996 and 3.57% and (3.08%),
annualized, respectively, for the period September 2, 1994
(commencement of operations) to August 31,1995.
International Equity Portfolio
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended August 31,
1997
$9.59 $0.23 $1.12 $1.35 (0.20) -- $10.74 14.39% $10,389 1.64%(1,2,6) 0.32%(1,2) 58% $0.06
Year Ended August 31,
1996
9.33 0.00 0.34 0.34 (0.03) (0.05) 9.59 3.68% 6,857 1.65%(1,2,6) 0.23%(1,2) 58% 0.09
September 2, 1994 (3)
to August 31, 1995
10.00(4) 0.05 (0.71) (0.66) (0.01) -- 9.33 (6.61%) 2,907 0.38%(1,5) 1.03%(1,5) 36% --
</TABLE>
(1) During the periods presented above, Saratoga Capital Management waived
all of its fees and assumed a portion of the operating expenses.
Additionally, for the periods presented above, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such
waivers, assumptions and expense offsets had not been in effect for
the respective periods, the ratios of net operating expenses to
average daily net assets and the ratios of net investment income
(loss) to average daily net assets would have been 2.76% and (1.00%),
respectively, for the year ended August 31, 1997, 3.91% and (2.33)%,
respectively, for the year ended August 31, 1996 and 8.96% and
(7.55%), annualized, respectively, for the period September 2, 1994
(commencement of operations) to August 31,1995.
----------------------------------------------------------------------
(2) Average daily net assets for the year ended August 31, 1997 were
$26,214,812; $20,394,151; $6,248,007; $24,370,240; $41,259,956;
$23,254,384 and $8,539,603 for U.S. Government Money Market,
Investment Quality Bond, Municipal Bond, Large Capitalization Value,
Large Capitalization Growth, Small Capitalization and International
Equity, respectively.
(3) Commencement of operations.
(4) Initial offering price.
(5) Annualized.
(6) Does not reflect expense offsets.
* Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.
<PAGE>
OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Set forth below is a description of the investment objectives and policies of
each Portfolio. There can be no assurance that any Portfolio will achieve its
investment objectives. Further information about the investment policies of each
Portfolio, including a list of those restrictions on its investment activities
that cannot be changed without shareholder approval, appears in the Statement of
Additional Information.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO is advised by Sterling Capital Management
Company. The Portfolio's investment objective is to provide maximum current
income to the extent consistent with the maintenance of liquidity and the
preservation of capital by investing exclusively in short term securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government Securities") and repurchase agreements with respect to those
securities. The Portfolio may purchase securities on a when-issued or
delayed-delivery basis. See "Certain Securities and Investment Techniques." The
Portfolio will invest only in securities that are purchased with and payable in
U.S. dollars and that have remaining maturities of 397 days or less at the time
of purchase. The Portfolio maintains a dollar-weighted average portfolio
maturity of 90 days or less. All securities purchased by the Portfolio,
including repurchase agreements, will present minimal credit risks in the
opinion of the Advisor acting pursuant to criteria adopted by the Trust's Board
of Trustees. The Portfolio follows these policies in order to maintain a
constant net asset value of $1.00 per share, although there can be no assurance
it can do so on a continuing basis. The Portfolio is not insured or guaranteed
by the U.S. Government. The yield attained by the Portfolio may not be as high
as that of other funds that invest in lower quality or longer term securities.
All investment decisions for the Portfolio are made by Sterling Capital
Management Company's investment committee which is primarily responsible for
management of the Portfolio.
INVESTMENT QUALITY BOND PORTFOLIO is advised by Fox Asset Management, Inc.
("Fox"). The Portfolio seeks, as its investment objectives, current income and
reasonable stability of principal. The Portfolio seeks to achieve its objectives
through investment in investment quality fixed income securities and the active
management of such securities. The average maturity of the securities held by
the Portfolio may be shortened, but not below three years, in order to preserve
capital if the Advisor anticipates a rise in interest rates. Conversely, the
average maturity may be lengthened, but not beyond ten years, to maximize
returns if interest rates are expected to decline.
Under normal conditions, the Portfolio will invest at least 65% of its
assets in debt instruments including U.S. Government Securities, corporate
bonds, debentures, Eurodollar bonds, Yankee bonds and foreign currency
denominated bonds. In addition, the Portfolio may invest in non-convertible
fixed income preferred stock and mortgage pass-through securities. The Portfolio
limits its investments to investment grade securities, which are securities
rated within the four highest categories established by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"), and unrated
securities determined by the Advisor to be of comparable quality. The Portfolio
is not obligated to dispose of securities that fall below such ratings due to
changes made by the rating agencies subsequent to the purchase of the securities
but will dispose of any such securities in order to limit its holdings of
securities rated below Baa by Moody's or BBB by S&P to no more than 5% of its
net assets. See the Appendix to the Statement of Additional Information for a
description of Moody's and S&P ratings and "Risk Factors_Medium and Lower Rated
and Unrated Securities" for a description of certain risks associated with
securities in the fourth highest rating category. Although the Portfolio is
authorized to hedge against unfavorable changes in interest rates by entering
into interest rate futures contracts and purchasing and writing put and call
options thereon, its Advisor has no present intention of using such techniques.
The Portfolio also may engage in repurchase agreements, purchase temporary
investments, purchase securities on a when-issued basis and lend its portfolio
securities. See "Certain Securities and Investment Techniques."
The Portfolio is managed by Paul Stach, Russell Tompkins and Thayer
Potter. Mr. Stach is a Managing Director and Director of Fixed Income Research
at Fox where he has worked since 1993. He joined the firm from Kidder, Peabody &
Co. where he was a Managing Director in Investment Banking. Mr. Tompkins is a
Managing Director and also coordinates all compliance matters for the firm. He
joined the firm in 1988. Mr. Potter is a Vice President and Portfolio Manager of
Fox. He has been with the firm since 1993, and was previously with Acorn Asset
Management, serving as Vice President and portfolio manager.
MUNICIPAL BOND PORTFOLIO is advised by OpCap Advisors. The Portfolio seeks, as
its investment objective, a high level of interest income that is excluded from
federal income taxation to the extent consistent with prudent investment
management and the preservation of capital. The Portfolio seeks to achieve its
objectives through investment in a diversified portfolio of general obligation,
revenue and private activity bonds, including lease obligations, and notes that
are issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities, or multi-state agencies or authorities, the interest on
which, in the opinion of counsel to the issuer of the instrument, is excluded
from gross income for federal income tax purposes ("Municipal Obligations"). See
"Municipal Obligations" on page 16.
Portfolio composition generally covers a full range of maturities with
broad geographic and issuer diversification. The Portfolio may also invest in
variable rate Municipal Obligations, most of which permit the holder thereof to
receive the principal amount on demand upon seven days' notice. The Portfolio
will invest primarily in municipal bonds rated at the time of purchase within
the four highest ratings assigned by Moody's, S&P or by Fitch Municipal Division
("Fitch") or, if unrated, which are of comparable quality in the opinion of
OpCap Advisors. See the Appendix to the SAI for a description of such ratings
and "Risk Factors_Medium and Lower Rated and Unrated Securities" for a
description of certain risks associated with securities in the fourth highest
rating category. The Portfolio is not obligated to dispose of securities that
fall below such ratings due to changes made by the rating agencies subsequent to
purchase of the securities but will dispose of any such securities in order to
limit its holdings of securities rated below Baa by Moody's or BBB by S&P or
Fitch to no more than 5% of its net assets.
It is a fundamental policy of the Portfolio that under normal
circumstances at least 80% of its assets will be invested in Municipal
Obligations. Also, at least 65% of its assets will be invested in bonds. The
Portfolio will not invest more than 25% of its total assets in Municipal
Obligations whose issuers are located in the same state. The Portfolio will also
not invest more than 25% of its assets in private activity bonds of similar
projects. It is possible that the Portfolio from time to time will invest more
than 25% of its assets in a particular segment of the municipal securities
market, such as hospital revenue bonds, housing agency bonds, industrial
development bonds or airport bonds, or in securities the interest on which is
paid from revenues of a similar type of project. In such circumstances,
economic, business, political or other changes affecting one bond (such as
proposed legislation affecting the financing of a project; shortages or price
increases of needed materials; or declining markets or needs for the projects)
might also affect other bonds in the same segment, thereby potentially
increasing market risk.
The Portfolio may invest without limit in private activity bonds,
although it does not currently expect to invest more than 20% of its total
assets in private activity bonds. Dividends attributable to interest income on
certain types of private activity bonds issued after August 7, 1986 to finance
nongovernmental activities are a specific tax preference item for purposes of
the federal individual and corporate alternative minimum tax.
When the Portfolio is maintaining a temporary defensive position, it
may invest in short term investments, some of which may not be tax exempt.
Securities eligible for short term investment by the Portfolio are tax exempt
notes of municipal issuers having, at the time of purchase, a rating within the
two highest grades of Moody's or S&P or, if not rated, having an issue of
outstanding Municipal Obligations rated within the three highest grades by
Moody's or S&P, and taxable short term instruments having quality
characteristics comparable to those for Municipal Obligations. The Portfolio may
invest in temporary investments for defensive reasons in anticipation of a
market decline. At no time will more than 20% of the Portfolio's total assets be
invested in temporary investments unless the Portfolio has adopted a defensive
investment policy. The Portfolio will purchase tax exempt temporary investments
pending the investment of the proceeds from the sale of the securities held by
the Portfolio or from the purchase of the Portfolio's shares by investors or in
order to have highly liquid securities available to meet anticipated
redemptions. To the extent that the Portfolio holds temporary investments, it
may not achieve its investment objective. The Portfolio may purchase securities
on a when-issued basis, lend its portfolio securities and purchase stock index
futures contracts and write options thereon. See "Certain Securities and
Investment Techniques."
The Portfolio is managed by Matthew Greenwald, Vice President of
Oppenheimer Capital, the parent of OpCap Advisors. Mr. Greenwald has been a
fixed income portfolio manager and financial analyst for Oppenheimer Capital
since 1989. From 1984-1989 he was a fixed income portfolio manager with
PaineWebber's Mitchell Hutchins Asset Management.
LARGE CAPITALIZATION VALUE PORTFOLIO is advised by OpCap Advisors. The Portfolio
seeks, as its investment objective, total return consisting of capital
appreciation and dividend income by investing primarily in a diversified
portfolio of highly liquid equity securities that, in the Advisor's opinion,
have above average price appreciation potential at the time of purchase. For
purposes of the Portfolio's investment policies, equity securities consist of
common and preferred stock and securities such as bonds, rights and warrants
that are convertible into common stock. In general, these securities are
characterized as having above average dividend yields and below average price
earnings ratios relative to the stock market in general, as measured by the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500"). Other
factors, such as earnings, the ability of the issuer to generate cash flow in
excess of business needs and to sustain above average profitability, as well as
industry outlook and market share, also are considered. Under normal conditions,
at least 80% of the Portfolio's assets will be invested in common stocks. No
less than 65% of the Portfolio's assets will be invested in common stocks of
issuers with total market capitalization of $1 billion or greater at the time of
purchase. The Portfolio may purchase temporary investments and purchase stock
index futures contracts and purchase and write options thereon. The Portfolio
also may lend its portfolio securities. See "Certain Securities and Investment
Techniques."
The Portfolio is managed by Eileen Rominger, Managing Director of
Oppenheimer Capital, the parent of OpCap Advisors. Ms. Rominger has been an
analyst and portfolio manager at Oppenheimer Capital since 1981.
LARGE CAPITALIZATION GROWTH PORTFOLIO is advised by Harris Bretall Sullivan &
Smith, L.L.C. ("Harris Bretall"). The Portfolio seeks capital appreciation by
investing primarily in a diversified portfolio of common stocks that, in the
Advisor's opinion, are characterized by a growth of earnings at a rate faster
than that of the S&P 500. Dividend income is an incidental consideration in the
selection of investments. In selecting securities for the Portfolio, the Advisor
evaluates factors believed to be favorable to long-term capital appreciation
including specific financial characteristics of the issuer such as historical
earnings growth, sales growth, profitability and return on equity. The Advisor
also analyzes the issuer's position within its industry as well as the quality
and experience of the issuer's management. Under normal conditions, at least 80%
of the Portfolio's assets will be invested in common stocks and at least 65% of
the Portfolio's assets will be invested in common stocks of issuers with total
market capitalization of $1 billion or greater at the time of purchase. Although
the Portfolio is authorized to purchase temporary investments and purchase stock
index futures contracts and purchase and write options thereon, its Advisor has
no present intention of using such techniques during the coming year. The
Portfolio also may lend its portfolio securities. See "Certain Securities and
Investment Techniques."
Stock selections for the Portfolio will be made by the Strategy and
Investment Committees of Harris Bretall. The Portfolio is managed by Jack
Sullivan and Gordon Ceresino. Mr. Sullivan is a partner of Harris Bretall and
has been associated with the firm since 1981. Mr. Ceresino is a Vice President
of Harris Bretall and has been associated with the firm since 1991. Prior
thereto, he was Senior Vice President of Capitol Associates and was responsible
for sales and marketing.
SMALL CAPITALIZATION PORTFOLIO is advised by Thorsell, Parker Partners, Inc.
(Prior to April 14, 1997, the Small Capitalization Portfolio was advised by
Axe-Houghton Associates, Inc.). The Portfolio seeks, as its investment
objective, maximum capital appreciation. Under normal conditions at least 80% of
the Portfolio's assets will be invested in common stocks, at least 65% of the
Portfolio's assets will be invested in common stock of issuers with total market
capitalization of less than $1 billion and at least one third of the Portfolio's
assets will be invested in common stocks of companies with total market
capitalization of $550 million or less at the time of purchase. Dividend income
is not a consideration in the selection of investments. In selecting investments
for the Portfolio, the Advisor seeks small capitalization growth companies that
it believes are undervalued in the marketplace. These companies typically are
under-followed by investment firms and undervalued relative to their growth
prospects. The Portfolio may also invest in companies that offer the possibility
of accelerating earnings growth due to internal changes such as new product
introductions, synergistic acquisitions or distribution channels or external
changes affecting the marketplace for the company's products and services.
External factors can be demographics, regulatory, legislative, technological,
social or economic. Although the Portfolio is authorized to purchase temporary
investments and purchase stock index futures contracts and purchase and write
options thereon, its Advisor has no present intention of using such techniques
during the coming year. The Portfolio also may lend its portfolio securities.
See "Certain Securities and Investment Techniques."
The Portfolio is managed by Richard Thorsell. Mr. Thorsell has been
Managing Partner of Thorsell since 1991.
INTERNATIONAL EQUITY PORTFOLIO is advised by Ivory & Sime International, Inc.
The investment objective of the Portfolio is long-term capital appreciation. The
Portfolio ordinarily invests at least 80% of its assets in equity securities of
companies domiciled outside the United States. For purposes of the Portfolio's
investment policies, equity securities consist of common and preferred stock and
securities such as bonds, rights and warrants that are convertible into common
stock. The Portfolio has no present intention of investing in bonds other than
bonds convertible into common stock.
Under normal market conditions, at least 65% of the Portfolio's assets
will be invested in securities of issuers domiciled in at least three foreign
countries. The Portfolio may invest 25% or more of its total assets in
securities of issuers domiciled in one country. The Portfolio presently intends
to invest more than 25% of its total assets in Japan. Accordingly, the
investment performance of the Portfolio will be subject to social, political and
economic events occurring in Japan to a greater extent than those occurring in
other foreign countries. Investments may be made in companies in developed as
well as developing countries. It is the present intention of the Portfolio not
to invest more than 20% of its total assets in securities of issuers located in
developing countries. Investing in the equity markets of developing countries
involves exposure to economies that are generally less diverse and mature, and
to political systems that can be expected to have less stability, than those of
developed countries. The Advisor attempts to limit exposure to investments in
developing countries where both liquidity and sovereign risks are high. Although
there is no established definition, a developing country is generally considered
to be a country that is in the initial stages of its industrialization cycle
with per capita gross national product of less than $5,000. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of developed countries, although securities traded in
the former markets have provided higher rates of return to investors. For a
discussion of the risks associated with investing in foreign securities, see
"Risk Factors-Foreign Securities."
It is expected that the Portfolio will invest primarily in securities
of foreign issuers in the form of American Depositary Receipts ("ADRs") or
Global Depositary Receipts ("GDRs"), which are U.S. dollar-denominated receipts,
which represent and may be converted into the underlying foreign security,
typically issued by domestic banks or trust companies that represent the deposit
with those entities of securities of a foreign issuer. Issuers of the stock of
ADRs or GDRs sponsored by banks or trust companies are not obligated to disclose
material information in the United States and therefore, there may not be a
correlation between such information and the market value of such ADRs or GDRs.
ADRs or GDRs are publicly traded on exchanges or over-the-counter in the United
States. The Portfolio may purchase temporary investments, lend its portfolio
securities and purchase stock index futures contracts and purchase and write
options thereon. See "Certain Securities and Investment Techniques."
John Stubbs, Chief Investment Officer ("CIO") and Chairman of the
Investment Committee at Ivory & Sime plc has been overseeing the management of
the Portfolio since January 31, 1997. Mr. Stubbs has been CIO of Ivory & Sime
plc since April 1995. Previously, he was head of UK equities with Hermes
Pensions Management Ltd. During his 29 year investment career Mr. Stubbs has
managed money in most of the world's major markets. Individual stock selections
are made by the following regional specialists: Dr. Michael Woodward, Thomas
Maxwell, Julie Dent, James Anderson and Jonathan Harrison. Each of the regional
specialists has been responsible for individual stock selections for the
Portfolio since its inception, with the exception of Mr. Maxwell, who began on
January 31, 1997. Prior to assuming the position of regional specialist for the
Portfolio, each Portfolio regional specialist acted in the same capacity at
Ivory & Sime plc.
Except as indicated, the Portfolios' limitations on investments and
investment policies are non-fundamental and can be changed without a vote of
shareholders.
CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when the
Advisor of a Portfolio, other than the U.S. Government Money Market Portfolio,
believes, with the concurrence of the Manager, that pursuing the Portfolio's
basic investment strategy may be inconsistent with the best interests of its
shareholders, the Portfolio may invest up to 100% of its assets in the following
money market instruments: U.S. Government Securities (including those purchased
in the form of custodial receipts), repurchase agreements, certificates of
deposit and bankers' acceptances issued by banks or savings and loan
associations having assets of at least $500 million as of the end of their most
recent fiscal year and high quality commercial paper. In addition, for the same
purposes the Advisor of the International Equity Portfolio may invest in
obligations issued or guaranteed by foreign governments or by any of their
political subdivisions, authorities, agencies or instrumentalities that are
rated at least AA by S&P or Aa by Moody's or, if unrated, are determined by the
Advisor to be of equivalent quality. See "Foreign Securities" below. Each
Portfolio also may hold a portion of its assets in money market instruments or
cash in amounts designed to pay expenses, to meet anticipated redemptions or
pending investments in accordance with its objectives and policies. Any
temporary investments may be purchased on a when-issued basis. A Portfolio's
investment in any other short term debt instruments would be subject to the
Portfolio's investment objectives and policies, and to approval by the Trust's
Board of Trustees.
The Portfolios are intended primarily as vehicles for the
implementation of a long term investment program utilizing asset allocation
strategies rendered through investment advisory programs that are based on an
evaluation of an investor's investment objectives and risk tolerance. Because
these asset allocation strategies are designed to spread investment risk across
the various segments of the securities markets through investment in a number of
Portfolios, each individual Portfolio generally intends to be substantially
fully invested in accordance with its investment objectives and policies during
most market conditions. Although the Advisor of a Portfolio may, upon the
concurrence of the Manager, take a temporary defensive position during adverse
market conditions, it can be expected that a defensive posture will be adopted
less frequently than would be by other mutual funds. This policy may impede an
Advisor's ability to protect a Portfolio's capital during declines in the
particular segment of the market to which the Portfolio's assets are committed.
Consequently, no single Portfolio should be considered a complete investment
program. An investment among the Portfolios should be regarded as a long term
commitment that should be held through several market cycles. In addition,
although the investment advisors for the Consulting Programs may recommend
adjustments in the allocation of assets among the Portfolios based on, among
other things, anticipated market trends, there can be no assurance that these
recommendations can be developed, transmitted and acted upon in a manner
sufficiently timely to avoid market shifts, which can be sudden and substantial.
Participants in Consulting Programs should note that responsibility for
investment recommendations rests solely with the investment advisor for the
program or the client itself and not with the Trust or the Manager. Investors
intending to purchase Portfolio shares through investment advisory programs
should evaluate carefully whether the service is ongoing and continuous, as well
as their investment advisors' ability to anticipate and respond to market
trends.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios
may engage in repurchase agreement and (except for the U.S. Government Money
Market Portfolio) reverse repurchase agreement transactions. Under the terms of
a typical repurchase agreement, a Portfolio would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Portfolio to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Portfolio's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the Portfolio's
holding period. A Portfolio may enter into repurchase agreements with respect to
U.S. Government Securities with member banks of the Federal Reserve System and
certain non-bank dealers approved by the Board of Trustees. The International
Equity Portfolio will not engage in repurchase agreements with foreign brokers
or dealers. Under each repurchase agreement, the selling institution is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. The Portfolio's Advisor, acting under the
supervision of the Board of Trustees, reviews on an ongoing basis the value of
the collateral and the creditworthiness of those non-bank dealers with whom the
Portfolio enters into repurchase agreements. A Portfolio will not invest in a
repurchase agreement maturing in more than seven days if the investment,
together with illiquid securities held by the Portfolio, exceeds 15% (10% for
the U.S. Government Money Market Portfolio) of the Portfolio's total assets. See
"Certain Investment Policies." In entering into a repurchase agreement, a
Portfolio bears a risk of loss in the event that the other party to the
transaction defaults on its obligations and the Portfolio is delayed or
prevented from exercising its right to dispose of the underlying securities,
including the risk of a possible decline in the value of the underlying
securities during the period in which the Portfolio seeks to assert its rights
to them, the risk of incurring expenses associated with asserting those rights
and the risk of losing all or a part of the income from the agreement. Under a
reverse repurchase agreement, a Portfolio sells securities and agrees to
repurchase them at a mutually agreed date and price. At the time the Portfolio
enters into a reverse repurchase agreement, it will establish and maintain a
segregated account with an approved custodian containing liquid high grade
securities having a value not less than the repurchase price (including accrued
interest). Reverse repurchase agreements involve the risk that the market value
of the securities retained in lieu of sale by the Portfolio may decline more
than or appreciate less than the securities the Portfolio has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Portfolio's obligation to repurchase the securities and the
Portfolio's use of the proceeds of the reverse repurchase agreements may
effectively be restricted pending such decisions. Reverse repurchase agreements
create leverage, a speculative factor, and will be considered borrowings for
purposes of a Portfolio's limitation on borrowing.
U.S. GOVERNMENT SECURITIES. Each Portfolio may invest in U.S. Government
Securities, which are obligations issued or guaranteed by the U.S. Government,
its agencies, authorities or instrumentalities. Some U.S. Government Securities,
such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ
only in their interest rates, maturities and time of issuance, are supported by
the full faith and credit of the United States. Others are supported by: (i) the
right of the issuer to borrow from the U.S. Treasury, such as securities of the
Federal Home Loan Bank; (ii) the discretionary authority of the U.S. Government
to purchase the agency's obligations, such as securities of the FNMA; or (iii)
only the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. Government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities include: (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or any of its
agencies, authorities or instrumentalities; and (ii) participation in loans made
to foreign governments or other entities that are so guaranteed. The secondary
market for certain of these participations is limited and, therefore, may be
regarded as illiquid.
U.S. Government Securities may include zero coupon securities that may
be purchased when yields are attractive and/or to enhance portfolio liquidity.
Zero coupon U.S. Government Securities are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon U.S. Government Securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. Government Securities
that make regular payments of interest. A Portfolio accrues income on these
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations, in which case the Portfolio will forego the purchase
of additional income producing assets with these funds. Zero coupon U.S.
Government Securities include STRIPS and CUBES, which are issued by the U.S.
Treasury as component parts of U.S. Treasury bonds and represent scheduled
interest and principal payments on the bonds.
CUSTODIAL RECEIPTS. Each Portfolio other than the U.S. Government Money Market
Portfolio may acquire custodial receipts or certificates, such as CATS, TIGRs
and FICO Strips, underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies, authorities or
instrumentalities. The underwriters of these certificates or receipts 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 periodic unmatured coupon payments
and the final principal payment on the U.S. Government Security. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government Securities, described above. Although
typically under the terms of a custodial receipt a Portfolio is authorized to
assert its rights directly against the issuer of the underlying obligation, the
Portfolio may be required to assert through the custodian bank such rights as
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, a Portfolio may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Portfolio had purchased a direct obligation of the
issuer. In addition, in the event that the trust or custodial account in which
the underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.
LENDING PORTFOLIO SECURITIES. To generate income for the purpose of helping to
meet its operating expenses, each Portfolio other than the U.S. Government Money
Market Portfolio may lend securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 33 1/3% of a
Portfolio's assets taken at value. A Portfolio's loans of securities will be
collateralized by cash, letters of credit or U.S. Government Securities. The
cash or instruments collateralizing a Portfolio's loans of securities will be
maintained at all times in a segregated account with the Portfolio's custodian,
or with a designated sub-custodian, in an amount at least equal to the current
market value of the loaned securities. In lending securities to brokers, dealers
and other financial organizations, a Portfolio is subject to risks, which, like
those associated with other extensions of credit, include delays in recovery and
possible loss of rights in the collateral should the borrower fail financially.
State Street arranges for each Portfolio's securities loans and manages
collateral received in connection with these loans. See "Management of the
Trust-Administration."
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, each Portfolio may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment of or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. A Portfolio will enter into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Portfolio
may include securities purchased on a "when, as and if issued" basis under which
the issuance of the securities depends on the occurrence of a subsequent event,
such as approval of a merger, corporate reorganization or debt restructuring.
The Portfolio will establish with its custodian, or with a designated
sub-custodian, a segregated account consisting of cash, U.S. Government
Securities or other liquid high grade debt obligations in an amount equal to the
amount of its when-issued or delayed-delivery purchase commitments.
Securities purchased on a when-issued or delayed-delivery basis may
expose a Portfolio to risk because the securities may experience fluctuations in
value prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
FIXED INCOME SECURITIES. The market value of fixed income obligations of the
Portfolios will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Portfolios. The market value of the obligations held by a Portfolio can be
expected to vary inversely to changes in prevailing interest rates. Investors
also should recognize that, in periods of declining interest rates, a
Portfolio's yield will tend to be somewhat higher than prevailing market rates
and, in periods of rising interest rates, a Portfolio's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to a Portfolio from the continuous sale of its shares will tend to be
invested in instruments producing lower yields than the balance of its
portfolio, thereby reducing the Portfolio's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Portfolio may invest may not yield as high a level of current income
as might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
Ratings made available by S&P and Moody's are relative and subjective
and are not absolute standards of quality. Although these ratings are initial
criteria for the selection of portfolio investments, a Portfolio's Advisor also
will make its own evaluation of these securities. Among the factors that will be
considered are the long term ability of the issuers to pay principal and
interest and general economic trends.
MUNICIPAL OBLIGATIONS. The term "Municipal Obligations" generally is understood
to include debt obligations issued to obtain funds for various public purposes,
the interest on which is, in the opinion of bond counsel to the issuer, excluded
from gross income for federal income tax purposes. In addition, if the proceeds
from private activity bonds are used for the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities, the
interest paid on such bonds may be excluded from gross income for federal income
tax purposes, although current federal tax laws place substantial limitations on
the size of these issues.
The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or the specific revenue source, but not from the
general taxing power. Sizable investments in these obligations could involve an
increased risk to the Portfolio should any of the related facilities experience
financial difficulties. Private activity bonds are in most cases revenue bonds
and do not generally carry the pledge of the credit of the issuing municipality.
Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. States and local agencies or authorities
issue lease obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Lease obligations and conditional sale
contracts (which may provide for title to the leased asset to pass eventually to
the issuer), have developed as a means for government issuers to acquire
property and equipment without the necessity of complying with the
constitutional and statutory requirements generally applicable for the issuance
of debt. Certain lease obligations contain "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 purposes by
the appropriate legislative body on an annual or other periodic basis.
Consequently, continued lease payments on those lease obligations containing
"non-appropriation" clauses are dependent on future legislative actions. If such
legislative actions do not occur, the holders of the lease obligation may
experience difficulty in exercising their rights, including disposition of the
property.
In addition, lease obligations may not have the depth of marketability
associated with other municipal obligations, and as a result, certain of such
lease obligations may be considered illiquid securities. To determine whether or
not the Municipal Bond Portfolio will consider such securities to be illiquid
(the Portfolio may not invest more than 15% of its net assets in illiquid
securities), the following guidelines have been established to determine the
liquidity of a lease obligation. The factors to be considered in making the
determination include: (1) the frequency of trades and quoted prices for the
obligation; (2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer. There are, of
course, variations in the security of Municipal Obligations, both within a
particular classification and between classifications.
MORTGAGE RELATED SECURITIES. The Investment Quality Bond Portfolio may invest in
mortgage related securities including modified pass-through certificates. There
are several risks associated with mortgage related securities generally. One is
that the monthly cash inflow from the underlying loans may not be sufficient to
meet the monthly payment requirements of the mortgage related security.
Prepayment of principal by mortgagors or mortgage foreclosures will
shorten the term of the underlying mortgage pool for a mortgage related
security. Early returns of principal will affect the average life of the
mortgage related securities remaining in the Portfolio. The occurrence of
mortgage prepayments is affected by factors including the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. In periods of rising interest rates,
the rate of prepayment tends to decrease, thereby lengthening the average life
of a pool of mortgage related securities. Conversely, in periods of falling
interest rates the rate of prepayment tends to increase, thereby shortening the
average life of a pool. Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of the
Portfolio. Because prepayments of principal generally occur when interest rates
are declining, it is likely that the Portfolio will have to reinvest the
proceeds of prepayments at lower interest rates than those at which the assets
were previously invested. If this occurs, the Portfolio's yield will
correspondingly decline. Thus, mortgage related securities may have less
potential for capital appreciation in periods of falling interest rates than
other fixed income securities of comparable maturity, although these securities
may have a comparable risk of decline in market value in periods of rising
interest rates. To the extent that the Portfolio purchases mortgage related
securities at a premium, unscheduled prepayments, which are made at par, will
result in a loss equal to any unamortized premium.
The Investment Quality Bond Portfolio may invest in a type of
mortgage-backed security known as modified pass-through certificates. Each
certificate evidences an interest in a specific pool of mortgages that have been
grouped together for sale and provides investors with payments of interest and
principal. The issuer of modified pass-through certificates guarantees the
payment of the principal and interest whether or not the issuer has collected
such amounts on the underlying mortgage.
The average life of these securities varies with the maturities of the
underlying mortgage instruments (generally up to 30 years) and with the extent
of prepayments or the mortgages themselves. Any such prepayments are passed
through to the certificate holder, reducing the stream of future payments.
Prepayments tend to rise in periods of falling interest rates, decreasing the
average life of the certificate and generating cash which must be invested in a
lower interest rate environment. This could also limit the appreciation
potential of the certificates when compared to similar debt obligations which
may not be paid down at will, and could cause losses on certificates purchased
at a premium or gains on certificates purchased at a discount. Government
National Mortgage Association ("Ginnie Mae") certificates represent pools of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veteran's Administration. The guarantee of
payments under these certificates is backed by the full faith and credit of the
United States. Federal National Mortgage Association ("Fannie Mae") is a
government-sponsored corporation owned entirely by private stockholders. The
guarantee of payments under these instruments is that of Fannie Mae only. They
are not backed by the full faith and credit of the United States but the U.S.
Treasury may extend credit to Fannie Mae through discretionary purchases of its
securities. The U.S. Government has no obligation to assume the liabilities of
Fannie Mae. Federal Home Loan Mortgage Corp. ("Freddie Mac") is a corporate
instrumentality of the United States government whose stock is owned by the
Federal Home Loan Banks. Certificates issued by Freddie Mac represent interest
in mortgages from its portfolio. Freddie Mac guarantees payments under its
certificates but this guarantee is not backed by the full faith and credit of
the United States and Freddie Mac does not have authority to borrow from the
U.S. Treasury.
The coupon rate of these instruments is lower than the interest rate on
the underlying mortgages by the amount of fees paid to the issuing agencies,
usually approximately 1/2 of 1%. Mortgage-backed securities, due to the
scheduled periodic repayment of principal, and the possibility of accelerated
repayment of underlying mortgage obligations, fluctuate in value in a different
manner than other, non-redeemable debt securities.
CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage related securities. Although the Portfolio is authorized to invest
in CMOs, it has no present intention of doing so.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Portfolio other than the U.S.
Government Money Market Portfolio may enter into futures contracts and purchase
and write (sell) options on these contracts, including but not limited to
interest rate, securities index and foreign currency futures contracts and put
and call options on these futures contracts. These contracts will be entered
into only upon the concurrence of the Manager that such contracts are necessary
or appropriate in the management of the Portfolio's assets. These contracts will
be entered into on exchanges designated by the Commodity Futures Trading
Commission ("CFTC") or, consistent with CFTC regulations, on foreign exchanges.
These transactions may be entered into for bona fide hedging and other
permissible risk management purposes including protecting against anticipated
changes in the value of securities a Portfolio intends to purchase.
So long as Commodities Futures Trading Commission rules so require, a
Portfolio will not enter into any financial futures or options contract unless
such transactions are for bona-fide hedging purposes or for other purposes only
if the aggregate initial margins and premiums required to establish such
non-hedging positions would not exceed 5% of the liquidation value of the
Portfolio's total assets. All futures and options on futures positions will be
covered by owning the underlying security or segregation of assets. With respect
to long positions in a futures contract or option (e.g., futures contracts to
purchase the underlying instrument and call options purchased or put options
written on these futures contracts or instruments), the underlying value of the
futures contract at all times will not exceed the sum of cash, short term U.S.
debt obligations or other high quality obligations set aside in a segregated
account with the Trust's Custodian for this purpose.
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to an Advisor's ability
to predict correctly movements in the direction of the securities markets
generally, which ability may require different skills and techniques than
predicting changes in the prices of individual securities. Moreover, futures and
options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can be no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Portfolio may realize
a loss on a futures contract or option that is not offset by an increase in the
value of its portfolio securities that are being hedged or a Portfolio may not
be able to close a futures or options position without incurring a loss in the
event of adverse price movements.
GOVERNMENT STRIPPED MORTGAGE RELATED SECURITIES. Although the Investment Quality
Bond Portfolio may invest in certain government stripped mortgage related
securities issued and guaranteed by GNMA, FNMA or FHLMC, it has no present
intention of doing so.
RISK FACTORS
MEDIUM AND LOWER RATED AND UNRATED SECURITIES. Securities rated in the fourth
highest category by S&P or Moody's, although considered investment grade, have
speculative characteristics, and changes in economic or other conditions are
more likely to impair the ability of issuers of these securities to make
interest and principal payments than is the case with respect to issuers of
higher grade bonds.
Subsequent to its purchase by a Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event will require sale of these securities
by the Portfolio, but the Advisor will dispose of any such securities in order
to limit the holdings by a Portfolio of securities rated below Baa by Moody's or
BBB by S & P to no more than 5% of its net assets. It is the intention of the
Portfolios to invest no more than 5% of their respective net assets in debt
securities rated below Baa by Moody's or BBB by S & P (commonly known as "high
yield" or "junk bonds").
NON-PUBLICLY TRADED SECURITIES. Each Portfolio may invest in non-publicly traded
securities, which may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the
Portfolios. In addition, companies whose securities are not publicly traded are
not subject to the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded.
SMALL CAPITALIZATION COMPANIES. Smaller capitalization companies may experience
higher growth rates and higher failure rates than do larger capitalization
companies. Companies in which the Small Capitalization Portfolio is likely to
invest may have limited product lines, markets or financial resources and may
lack management depth. The trading volume of securities of smaller
capitalization companies is normally less than that of larger capitalization
companies and, therefore, may disproportionately affect their market price,
tending to make them rise more in response to buying demand and fall more in
response to selling pressure than is the case with larger capitalization
companies.
FOREIGN SECURITIES. All the Portfolios except for the U.S. Government Money
Market Portfolio and the Municipal Bond Portfolio may invest in foreign
securities. The Investment Quality Bond Portfolio and the Large Capitalization
Value Portfolio do not intend to invest more than 20% of their respective total
assets in foreign securities. The Large Capitalization Growth Portfolio and the
Small Capitalization Portfolio do not intend to purchase foreign securities in
an amount more than 5% of each Portfolio's total assets. The International
Equity Portfolio expects to invest at least 80% of its assets in foreign
securities. Investing in securities issued by foreign companies and governments
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. Government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance settlement periods.
CURRENCY EXCHANGE RATES. A Portfolio's share value may change significantly when
the currencies, other than the U.S. dollar, in which the Portfolio's investments
are denominated strengthen or weaken against the U.S. dollar. Currency exchange
rates generally are determined by the forces of supply and demand in the foreign
exchange markets of investments in different countries as seen from an
international perspective. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
by currency controls or political developments in the United States or abroad.
FORWARD CURRENCY CONTRACTS. Each Portfolio that may invest in foreign
currency-denominated securities may hold currencies to meet settlement
requirements for foreign securities and may engage in currency exchange
transactions in order to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Portfolio's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another-for example, to exchange a certain amount of U.S. dollars for a
certain amount of French francs at a future date. The date (which may be any
agreed-upon fixed number of days in the future), the amount of currency to be
exchanged and the price at which the exchange will take place will be negotiated
with a currency trader and fixed for the term of the contract at the time that
the Portfolio enters into the contract. To assure that a Portfolio's forward
currency contracts are not used to achieve investment leverage, the Portfolio
will segregate cash or high grade securities with its custodian in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to these
contracts.
In hedging specific portfolio positions, a Portfolio may enter into a
forward contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by the Portfolio's Advisor.
The amount the Portfolio may invest in forward currency contracts is limited to
the amount of the Portfolio's aggregate investments in foreign currencies. Risks
associated with entering into forward currency contracts include the possibility
that the market for forward currency contracts may be limited with respect to
certain currencies and, upon a contract's maturity, the inability of a Portfolio
to negotiate with the dealer to enter into an offsetting transaction. Forward
currency contracts may be closed out only by the parties entering into an
offsetting contract. In addition, the correlation between movements in the
prices of those contracts and movements in the price of the currency hedged or
used for cover will not be perfect. There is no assurance that an active forward
currency contract market will always exist. These factors will restrict a
Portfolio's ability to hedge against the risk of devaluation of currencies in
which a Portfolio holds a substantial quantity of securities and are unrelated
to the qualitative rating that may be assigned to any particular security. See
the Statement of Additional Information for further information concerning
forward currency contracts. See also "Certain Securities and Investment
Techniques-Futures Contracts and Related Options" on page 18 and "Certain
Investment Policies-Portfolio Turnover" on page 22.
CERTAIN INVESTMENT POLICIES
FUNDAMENTAL POLICIES. The Trust on behalf of each Portfolio has adopted certain
investment restrictions that are enumerated in detail in the Statement of
Additional Information. Among other restrictions, each Portfolio may not, with
respect to 75% of its total assets taken at market value, invest more than 5% of
its total assets in the securities of any one issuer, except U.S. Government
Securities, or acquire more than 10% of any class of the outstanding voting
securities of any one issuer. In addition, except as described above with
respect to the Municipal Bond Portfolio, each Portfolio may not invest 25% or
more of its total assets in securities of issuers in any one industry. The Trust
on behalf of a Portfolio may borrow money as a temporary measure from banks in
an aggregate amount not exceeding one-third of the value of the Portfolio's
total assets to meet redemptions and for other temporary or emergency purposes
not involving leveraging. A Portfolio may not purchase securities while
borrowings exceed 5% of the value of the Portfolio's assets. The Portfolios each
may purchase securities which are not registered under the Securities Act of
1933 ("1933 Act") but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board of Trustees or the
Portfolio's Adviser, acting under guidelines approved and monitored by the
Board, which has the ultimate responsibility for any determination regarding
liquidity, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of illiquidity
in each of the Portfolios during any period that qualified institutional buyers
become uninterested in purchasing these restricted securities. The ability to
sell to qualified institutional buyers under Rule 144A is a recent development
and it is not possible to predict how this market will develop. The Board will
carefully monitor any investments by each of the Portfolios in these securities.
The investment restrictions listed above as well as the Portfolios'
investment objectives are fundamental policies and accordingly may not be
changed with respect to any Portfolio without the approval of a majority of the
outstanding shares of that Portfolio, as defined in the Investment Company Act
of 1940 (the "1940 Act").
NON-FUNDAMENTAL POLICIES. A Portfolio will not invest more than 15% (10% with
respect to the U.S. Government Money Market Portfolio) of the value of its net
assets in securities that are illiquid, including certain government stripped
mortgage related securities, repurchase agreements maturing in more than seven
days and that cannot be liquidated prior to maturity and securities that are
illiquid by virtue of the absence of a readily available market. Securities that
have legal or contractual restrictions on resale but have a readily available
market are deemed not illiquid for this purpose. These policies are not
fundamental and may be changed by the Board of Trustees.
Portfolio Turnover
Active trading will increase a Portfolio's rate of turnover, certain transaction
expenses and the incidence of short term capital gains taxable as ordinary
income. An annual turnover rate of 100% would occur when all the securities held
by the Portfolio are replaced one time during a period of one year. The Advisor
of the International Equity Portfolio anticipates that the annual turnover in
that Portfolio will not be in excess of 100%. The Advisor of the Small
Capitalization Portfolio anticipates that the annual turnover in that Portfolio
will not be in excess of 150%. The Advisors of each of the other Portfolios
anticipate that the annual turnover in those Portfolios will not exceed 80%. The
U.S. Government Money Market Portfolio's turnover is expected to be zero for
regulatory reporting purposes.
MANAGEMENT OF THE TRUST
Board of Trustees
Overall responsibility for management and supervision of the Trust and the
Portfolios rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the persons and companies that
furnish services to the Trust and the Portfolios, including agreements with the
Trust's distributor, custodian, transfer agent, the Manager, Advisors and
administrator. One of the Trustees and all of the Trust's executive officers are
affiliated with the Manager. The Statement of Additional Information contains
background information regarding each Trustee and executive officer of the
Trust.
Investment Manager
Saratoga Capital Management, a registered investment advisor, located at 1501
Franklin Avenue, Mineola, New York, 11501-4803, serves as the Trust's Manager.
Saratoga Capital Management is a Delaware general partnership which is
owned by certain executives of Saratoga Capital Management and by Mr. Ronald J.
Goguen, whose address is Major Drilling Group International Inc., 111 St. George
Street, Suite 200, Moncton, New Brunswick, Canada E1C177 and Mr. John Schiavi,
whose address is Schiavi Enterprises, 985 Main Street, Oxford, Maine 04270.
The Trust has entered into an investment management agreement (the
"Management Agreement") with the Manager which, in turn, has entered into an
advisory agreement ("Advisory Agreement") with each Advisor selected for the
Portfolios. It is the Manager's responsibility to select, subject to the review
and approval of the Board of Trustees, the Advisors who have distinguished
themselves by able performance in their respective areas of expertise in asset
management and to review their continued performance.
Subject to the supervision and direction of the Trust's Board of
Trustees, the Manager provides to the Trust investment management evaluation
services principally by performing initial due diligence on prospective Advisors
for each Portfolio and thereafter monitoring Advisor performance. In evaluating
prospective Advisors, the Manager considers, among other factors, each Advisor's
level of expertise, relative performance and consistency of performance to
investment discipline or philosophy; personnel and financial strength; and
quality of service and client communications. The Manager has responsibility for
communicating performance expectations and evaluations to the Advisors and
ultimately recommending to the Board of Trustees of the Trust whether the
Advisors' contracts should be renewed, modified or terminated. The Manager
provides reports to the Board of Trustees regarding the results of its
evaluation and monitoring functions. The Manager is also responsible for
conducting all operations of the Trust except those operations contracted to the
Advisors, custodian, distributor, transfer agent and administrator. Each
Portfolio pays the Manager a fee for its services that is computed daily and
paid monthly at the annual rate specified below of the value of the average net
assets of the Portfolios. The Manager pays a portion of its fee to each Advisor
for the advisory services provided to the Portfolio that is computed daily and
paid monthly at the annual rate specified below of the value of the Portfolio's
average daily net assets:
Advisors
The Advisors have agreed to the foregoing fees, which are generally lower than
the fees they charge to institutional accounts for which they serve as
investment advisor and perform all administrative functions associated with
serving in that capacity in recognition of the reduced administrative
responsibilities they have undertaken with respect to the Portfolios. Subject to
the supervision and direction of the Manager and, ultimately, the Board of
Trustees, each Advisor's responsibilities are to manage the securities held by
the Portfolio it serves in accordance with the Portfolio's stated investment
objective and policies, make investment decisions for the Portfolio and place
orders to purchase and sell securities on behalf of the Portfolio.
The following sets forth certain information about each of the
Advisors:
OpCap Advisors ("OpCap"), a registered investment advisor, located at
One World Financial Center, New York, NY 10281, serves as Advisor to the
Municipal Bond Portfolio and Large Capitalization Value Portfolio. OpCap is a
majority owned subsidiary of Oppenheimer Capital, a registered investment
advisor, founded in 1968. PIMCO Advisors, L.P. ("PIMCO"), a publicly traded
money management firm, and its affiliate, PA Holdings, Inc., hold a 33% interest
in Oppenheimer Capital, and Oppenheimer Capital, L.P., a Delaware limited
partnership whose units are traded on the New York Stock Exchange and of which
Oppenheimer Financial Corp is the sole general partner, owns the remaining 67%
interest. PIMCO and PA Holdings also own a 1% interest in OpCap Advisors and a
1% interest in Oppenheimer Capital, L.P. As of September 30, 1997, Oppenheimer
Capital and its subsidiary OpCap had assets under management of approximately
$60.9 billion.
Fox Asset Management, Inc. ("Fox"), a registered investment advisor,
serves as Advisor to the Investment Quality Bond Portfolio. Fox was formed in
1985. Fox is owned by its current employees, with a controlling interest held by
J. Peter Skirkanich, President, Managing Director and Chairman of Fox's
Investment Committee. Fox is located at 44 Sycamore Avenue, Little Silver, NJ
07739. As of September 30, 1997, assets under management by Fox were
approximately $5 billion.
Harris Bretall Sullivan & Smith, L.L.C. ("Harris Bretall"), a
registered investment advisor, serves as Advisor to the Large Capitalization
Growth Portfolio. The firm's predecessor, Harris Bretall Sullivan & Smith, Inc.,
was founded in 1971. Value Asset Management, Inc., a holding company owned by
BancBoston Ventures, Inc., is the majority owner. Located at One Post Street,
San Francisco, CA 94104, the firm managed assets of approximately $3 billion as
of Septebmer 30, 1997.
Thorsell, Parker Partners, Inc. ("Thorsell"), a registered investment
advisor serves as Advisor to the Small Capitalization Portfolio. The firm is
located at 265 Post Road West, Westport, Connecticut 06880. Thorsell is owned by
its current employees with a controlling interest (approximately 70%) held by
Richard L. Thorsell. As of September 30, 1997, the firm had approximately $477
million of assets under management.
Sterling Capital Management Company ("Sterling"), a registered
investment advisor, is the Advisor to the U.S. Government Money Market
Portfolio. Sterling is a North Carolina corporation formed in 1970 and located
at One First Union Center, 301 S. College Street, Suite 3200, Charlotte, NC
28202. Sterling is a wholly-owned subsidiary of United Asset Management
Corporation and provides investment management services to corporations, pension
and profit-sharing plans, trusts, estates and other institutions and
individuals. As of September 30, 1997, Sterling had approximately $2.5 billion
in assets under management. Since 1982, Sterling has been involved with the
distribution of the North Carolina Capital Management Trust, a money market
mutual fund offered exclusively to public units in the state, the first such
fund to be registered with the Securities and Exchange Commission. As of
September 30, 1997, the asset value of this fund was approximately $2.3 billion.
Ivory & Sime International, Inc. ("ISI"), a registered investment
advisor, is the Advisor to the International Equity Portfolio and, in connection
therewith, has entered into a sub-investment advisory agreement with Ivory &
Sime plc of Edinburgh, Scotland. Pursuant to such sub-investment advisory
agreement, Ivory & Sime plc performs investment advisory and portfolio
transaction services for such Portfolio. While Ivory & Sime plc is responsible
for the day-to-day management of the Portfolio's assets, ISI reviews investment
performance, policies and guidelines, facilitates communication between Ivory &
Sime plc and the Manager and maintains certain books and records. As
compensation for its services as investment advisor, the Manager pays ISI a
monthly fee at the annual rate of .40% of the average daily net assets of the
International Equity Portfolio. As compensation for its services, Ivory & Sime
plc receives from ISI 78% of the net monthly fees paid by the Manager to ISI
pursuant to the Investment Advisory Agreement between the Manager and ISI.
ISI was organized in 1978. Twenty-five percent of its voting stock is
owned by Jamison, Eaton & Wood, Inc. and 75% is owned by Ivory & Sime plc. ISI
offers clients in the United States the services of Ivory & Sime plc in global
securities markets. Ivory & Sime plc, founded in 1895, is one of the leading
independent investment managers in the United Kingdom. As of September 30, 1997,
the firm and its affiliates managed approximately $5.5 billion of global equity
investments. ISI is located at 39 Main Street, Chatham, NJ 07928, and Ivory &
Sime plc is located at 1 Charlotte Square, Edinburgh, Scotland EH24DZ. Ivory &
Sime plc is a public limited company listed on the London Stock Exchange. As of
December 31, 1996, approximately 29.3% of Ivory & Sime's outstanding shares were
held by Caledonia Investments.
Administration
State Street Bank and Trust Company ("State Street"), located at One Heritage
Drive, North Quincy, Massachusetts 02171, calculates the net asset value of the
Portfolios' shares and creates and maintains the Trust's financial records
required by Section 31 of the 1940 Act.
Unified Advisers, Inc. provides administrative services and manages the
administrative affairs of the Trust pursuant to an Administration Agreement with
the Trust. Such services include the preparation of proxy statements and reports
filed with federal and state securities commissions (except to the extent that
the participation of independent accountants and attorneys is, in the opinion of
Unified Advisers, Inc., necessary or desirable), preparation of materials for
regular and special meetings of the Board of Trustees of the Trust, and
supervising the determination of the net asset value of the Trust's Portfolios.
For these services, each Portfolio pays Unified Advisers, Inc. an annual rate of
.12% of the Portfolio's average daily net assets per year with an annual cap of
$234,000.
Expenses of The Portfolios
Each Portfolio bears its own expenses, which generally include all costs not
specifically borne by the Manager, the Advisors, State Street and Unified
Advisers, Inc. as Administrator to the Trust. Included among a Portfolio's
expenses are: costs incurred in connection with the Portfolio's organization;
investment management and administration fees; fees for necessary professional
and brokerage services; fees for any pricing service; costs of the determination
of net asset value; the costs of regulatory compliance; and costs associated
with maintaining the Trust's legal existence and shareholder relations. The
Trust's agreement with the Manager provides that the Manager will reduce its
fees to a Portfolio to the extent required by applicable state laws for certain
expenses that are described in the Statement of Additional Information.
Portfolio Transactions
To the extent consistent with the applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC under the 1940 Act, the Board of
Trustees of the Trust has determined that brokerage transactions for a Portfolio
may be executed through affiliated broker-dealers if, in the judgment of the
Advisor, the use of an affiliated broker-dealer is likely to result in price and
execution at least as favorable as those of other qualified broker-dealers. When
selecting broker-dealers, the Advisors may consider their record of sales of
shares of the Portfolios.
PURCHASE OF SHARES
General
Purchases of shares of a Portfolio by a participant in a Consulting Program must
be made through an entity having a sales agreement with Unified Management
Corporation (the "Distributor") ("Consulting Brokers"), the Trust's general
distributor, or directly through the Distributor.
Shares of the Portfolio are available to participants in Consulting
Programs and to other investors and investment advisory services. The Trust is
designed to allow Consulting Programs and other investment advisory programs to
relieve investors of the burden of devising an asset allocation strategy to meet
their individual needs as well as selecting individual investments within each
asset category among the myriad choices available.
INVESTMENT ADVISORY PROGRAMS. Generally, the Consulting Programs provide
advisory services in connection with investments among the Portfolios by
identifying the investor's risk tolerance and investment objectives through
evaluation of an investor questionnaire; identifying and recommending an
appropriate allocation of assets among the Portfolios that conforms to such risk
tolerance and objectives in a recommendation; and providing on a periodic basis,
a report to the investor containing an analysis and evaluation of the investor's
account and recommending any appropriate changes in the allocation of assets
among the Portfolios. The investment advisors for the Consulting Programs are
also responsible for reviewing the asset allocation recommendations and
performance reports with the investor, providing any interpretations, monitoring
identified changes in the investor's financial characteristics and the
implementation of investment decisions.
The investment advisors in the Consulting Programs may use the
Manager's Saratoga Sharp(sm) Program in assisting their clients in translating
investor needs, preferences and attitudes into suggested portfolio allocations.
In addition, the Manager may provide some or all of the following administrative
services to the investment advisers for the Consulting Programs: the
preparation, printing and processing of investment questionnaires and investment
literature and other client communications.
The fee for the Consulting Programs is subject to negotiation between
the client and his or her investment advisor and is paid directly by each
advisory client to his or her investment advisor either by redemption of
Portfolio shares or by separate payment.
Investors should be aware that the Manager receives a fee from the
investment advisor to each participant in a Consulting Program for services
rendered to the investment advisor in connection with the investment advisory
program. This fee does not vary based on the Portfolios recommended for the
participant's investments. Also, the Manager serves as the Trust's Manager with
responsibility for identifying, retaining, supervising and compensating each
Portfolio's Advisor under the supervision of the Trust's Board of Trustees and
receives a fee from each Portfolio.
Other Advisory Programs
Shares of the Portfolios are also available for purchase by certain registered
investment advisors (other than the investment advisors for the Consulting
Programs) as a means of implementing asset allocation recommendations based on
an investor's investment objectives and risk tolerance. In order to qualify to
purchase shares on behalf of its clients, the investment advisor must be
approved by the Manager. Investors purchasing shares through these investment
advisory programs will bear different fees for different levels of services as
agreed upon with the investment advisors offering the programs. Registered
investment advisors interested in utilizing the Portfolios for the purposes
described above should call 800-807-FUND (800-807-3863).
Continuous Offering
For participants in Consulting Programs, shares of the Portfolios may be
purchased from Consulting Brokers only after the completion and processing of
such documentation as may be required by the Consulting Broker for the Program.
The offering price is the net asset value per share next determined after
receipt of an order by the Distributor. Shareholders will not receive share
certificates because the Trust does not issue share certificates.
The Trust offers an Automatic Investment Plan under which purchase
orders may be placed periodically for Portfolio shares in an amount not less
than $100. The purchase price is paid automatically from cash held in the
shareholder's designated account. For further information regarding the
Automatic Investment Plan, shareholders should contact their Consulting Broker
or the Trust at 800-807-FUND (800-807-3863).
The minimum initial investment in the Trust is $10,000 and the minimum
investment in any individual Portfolio (other than the U.S. Government Money
Market Portfolio) is $250; there is no minimum investment for the U.S.
Government Money Market Portfolio. For employees of the Manager and its
affiliates and their relatives, the minimum initial investment is $1,000 with no
individual Portfolio minimum. There is no minimum initial investment for
employee benefit plans and individual retirement accounts. The minimum
subsequent investment in the Trust is $100 and there is no minimum subsequent
investment for any Portfolio. The Trust reserves the right at any time to vary
the initial and subsequent investment minimums.
The sale of shares will be suspended during any period when the
determination of net asset value is suspended and may be suspended by the Board
of Trustees of the Trust whenever the Board judges it to be in the best interest
of the Trust to do so. The Distributor in its sole discretion, may accept or
reject any purchase order.
The Distributor will from time to time provide compensation to dealers
in connection with sales of shares of the Trust including promotional gifts
(including gift certificates, dinners and other items), financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public and advertising campaigns.
REDEMPTION OF SHARES
Redemption in General
Shares of a Portfolio may be redeemed at no charge on any day that the
Portfolio calculates its net asset value as described below under "Net Asset
Value." Redemption requests received in proper form prior to the close of
regular trading on the NYSE will be effected at the net asset value per share
determined on that day. Redemption requests received after the close of regular
trading on the NYSE will be effected at the net asset value next determined. A
Portfolio is required to transmit redemption proceeds for credit to the
shareholder's account at no charge within seven days after receipt of a
redemption request. A shareholder who pays for Portfolio shares by personal
check will be credited with the proceeds of a redemption of those shares when
the purchase check has been collected, which may take up to 15 days.
Shareholders who anticipate the need for more immediate access to their
investment should purchase shares by Federal funds or bank wire or by a
certified or cashier's check.
Redemption requests may be given to the shareholder's Consulting Broker
who is responsible for transmitting them to the Trust's Transfer Agent or
directly to the Transfer Agent, if the shareholder purchased shares directly
from the Distributor. In order to be effective, a redemption request of a
shareholder other than an individual may require the submission of documents
commonly required to assure the safety of a particular account.
The agreement relating to participation in a Consulting Program between
a client and the investment advisor will provide that, absent separate payment
by the participant, fees charged pursuant to that agreement may be paid through
automatic redemptions of a portion of the participant's Trust account.
The Trust may suspend redemption procedures and postpone redemption
payment during any period when the NYSE is closed other than for customary
weekend or holiday closing or when the SEC has determined an emergency exists or
has otherwise permitted such suspension or postponement.
If the Board of Trustees determines that it would be detrimental to the
best interests of a Portfolio's shareholders to make a redemption payment wholly
in cash, the Portfolio may pay, in accordance with rules adopted by the SEC, any
portion of a redemption in excess of the lesser of $250,000 or 1% of the
Portfolio's net assets by a distributions in kind of readily marketable
portfolio securities in lieu of cash. Redemptions failing to meet this threshold
must be made in cash. Shareholders receiving distributions in kind of portfolio
securities may incur brokerage commissions when subsequently disposing of those
securities.
Involuntary Redemptions
Due to the relatively high cost of maintaining small accounts, the Trust may
redeem an account having a current value of $7,500 or less as a result of
redemptions, but not as a result of a fluctuation in a Portfolio's net asset
value or redemptions to pay fees for Consulting Programs, after the shareholder
has been given at least 30 days in which to increase the account balance to more
than that amount. Investors should be aware that involuntary redemptions may
result in the liquidation of Portfolio holdings at a time when the value of
those holdings is lower than the investor's cost of the investment or may result
in the realization of taxable capital gains.
NET ASSET VALUE
Each Portfolio's net asset value per share is calculated by State Street on each
day, Monday through Friday, except on days on which the NYSE is closed. The NYSE
is currently scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday when one of those holidays falls on a Saturday or on
the subsequent Monday when one of those holidays falls on a Sunday.
Net asset value per share is determined as of the close of trading on
the NYSE and is computed by dividing the value of a Portfolio's net assets by
the total number of its shares outstanding. Generally, a Portfolio's investments
are valued at market value or, in the absence of a market value, at fair value
as determined by or under the direction of the Board of Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued for purposes of calculating a Portfolio's net asset value at the
preceding closing values of the securities on their respective exchanges, except
that, when an occurrence subsequent to the time a value was so established is
likely to have changed that value, the fair market value of those securities
will be determined by consideration of other factors by or under the direction
of the Board of Trustees. A security that is primarily traded on a domestic or
foreign stock exchange is valued at the last sale price on that exchange or, if
no sales occurred during the day, at the current quoted bid price. All portfolio
securities held by the U.S. Government Money Market Portfolio and short term
dollar-denominated investments of the other Portfolios that mature in 60 days or
less are valued on the basis of amortized cost (which involves valuing an
investment at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the investment) when the Board of Trustees
has determined that amortized cost represents fair value. An option that is
written by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last offer price. An option that is
purchased by the Portfolio is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contact is equal to the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract. A settlement price may
not be used if the market makes a limit move with respect to a particular
futures contract if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement price.
When a settlement price cannot be used, futures contracts will be valued at
their fair market value as determined by or under the direction of the Board of
Trustees.
All assets and liabilities initially expressed in foreign currency
values will be converted into U.S. dollar values at the mean between the bid and
offered quotations of the currencies against U.S. dollars as last quoted by any
recognized dealer. If the bid and offered quotations are not available, the rate
of exchange will be determined in good faith by or under the direction of by the
Board of Trustees. In carrying out the Board's valuation policies, State Street
may consult with an independent pricing service retained by the Trust. Further
information regarding the Portfolio's valuation policies is contained in the
Statement of Additional Information.
EXCHANGE PRIVILEGE
Shares of a Portfolio may be exchanged without payment of any exchange fee
(except as set forth below) for shares of another Portfolio at their respective
net asset values.
An exchange of shares is treated for federal income tax purposes as a
redemption (sale) of shares given in exchange by the shareholder, and an
exchanging shareholder may, therefore, realize a taxable gain or loss in
connection with the exchange. Shareholders exchanging shares of a Portfolio for
shares of another Portfolio should review the disclosure provided herein
relating to the exchanged-for shares carefully prior to making an exchange. The
exchange privilege is available to shareholders residing in any state in which
Portfolio shares being acquired may be legally sold.
The Manager reserves the right to reject any exchange request and the
exchange privilege may be modified or terminated upon notice to shareholders in
accordance with applicable rules adopted by the Securities and Exchange
Commission.
The Distributor and the Trust's transfer agent will employ reasonable
procedures for telephone redemptions and exchanges to confirm that the
instructions received from shareholders or their account representatives are
genuine, and if they do not, the Distributor or the transfer agent may be liable
for any losses due to unauthorized or fraudulent instructions. Shareholders will
be required to provide their name, address, social security number and other
identifying information. Account representatives must identify themselves and
their firm and the Distributor will confirm that such firm has a valid selling
agreement with the Distributor and that the representative is authorized to act
on behalf of the firm.
Because excessive trading (including short-term "market timing" trading
can limit a Portfolio's performance, each Portfolio may refuse any exchange
orders (1) if they appear to be market-timing transactions involving significant
portions of a Portfolio's assets or (2) from any shareholder account if the
shareholder or his or her broker-dealer has been advised that previous use of
the exchange privilege is considered excessive. Accounts under common ownership
or control, including those with the same taxpayer ID number and those
administered so as to redeem or purchase shares based upon certain predetermined
market indicators, will be considered one account for this purpose.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
Net investment income (i.e., income other than long and short term
capital gains) and net realized long and short term capital gains will be
determined separately for each Portfolio. Dividends derived from net investment
income and distributions of net realized long and short term capital gains paid
by a Portfolio to a shareholder will be automatically reinvested (at current net
asset value) in additional shares of that Portfolio (which will be deposited in
the shareholder's account) unless the shareholder instructs the Trust, in
writing, to pay all dividends and distributions in cash. Dividends attributable
to the net investment income of the U.S. Government Money Market Portfolio, the
Municipal Bond Portfolio and the Investment Quality Bond Portfolio will be
declared daily and paid monthly. Shareholders of those Portfolios receive
dividends from the day following the purchase up to and including the date of
redemption. Dividends attributable to the net investment income of the remaining
Portfolios are declared and paid annually. Distributions of any net realized
long term and short term capital gains earned by a Portfolio will be made
annually.
Taxes
As each Portfolio will be treated as a separate entity for federal income tax
purposes, the amounts of net investment income and net realized capital gains
subject to tax will be determined separately for each Portfolio (rather than on
a Trust-wide basis).
Each Portfolio intends to qualify each year as a regulated investment
company for federal income tax purposes. The requirements for qualification (i)
may cause a Portfolio, among other things, to restrict the extent of its short
term trading or its transactions in warrants, currencies, options, futures or
forward contracts and (ii) will cause each of the Portfolios to maintain a
diversified asset portfolio.
A regulated investment company will not be subject to federal income
tax on its net investment income and its capital gains that it distributes to
shareholders, so long as it meets certain overall distribution requirements and
other conditions under the Code. Each Portfolio intends to satisfy these overall
distribution requirements and any other required conditions. Dividends declared
by a Portfolio in October, November or December of any calendar year and payable
to shareholders of record on a specified date in such a month shall be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Portfolio not later than such December 31 provided that
such dividend is actually paid by the Portfolio during January of the following
year.
Dividends derived from a Portfolio's taxable net investment income and
distributions of a Portfolio's net realized short term capital gains (including
short term gains from investments in tax exempt obligations) will be taxable to
shareholders as ordinary income for federal income tax purposes, regardless of
how long shareholders have held their Portfolio shares and whether the dividends
or distributions are received in cash or reinvested in additional shares.
Distributions of net realized long term capital gains will be taxable to
shareholders as long term capital gains for federal income tax purposes,
regardless of how long a shareholder has held his Portfolio shares and whether
the distributions are received in cash or reinvested in additional shares.
Dividends and distributions paid by the U.S. Government Money Market Portfolio,
the Investment Quality Bond Portfolio and the Municipal Bond Portfolio and
distributions of capital gains paid by all the Portfolios will not qualify for
the dividend received deduction for corporations. As a general rule, dividends
paid by a Portfolio, to the extent derived from dividends attributable to
certain types of stock issued by U.S. corporations, will qualify for the
dividend received deduction for corporations which hold shares in a Portfolio
for more than 45 days. Some states, if certain asset and diversification
requirements are satisfied, permit shareholders to treat their portions of a
Portfolio's dividends that are attributable to interest on U.S. Treasury
securities and certain U.S. Government Securities as income that is exempt from
state and local income taxes. Dividends attributable to repurchase agreement
earnings are, as a general rule, subject to state and local taxation.
Dividends paid by the Municipal Bond Portfolio that are derived from
interest earned on qualifying tax-exempt obligations are expected to be
"exempt-interest" dividends that shareholders may exclude from their gross
incomes for federal income tax purposes if the Portfolio satisfies certain asset
percentage requirements. To the extent that the Portfolio invests in bonds, the
interest on which is a specific tax preference item for federal income tax
purposes ("AMT-Subject Bonds"), any exempt-interest dividends derived from
interest on AMT-Subject Bonds will be a specific tax preference item for
purposes of the federal individual and corporate alternative minimum taxes.
Dividends distributed by the Municipal Bond Portfolio may not be exempt from
state or local taxation. Shareholders will receive notification annually stating
the portion of the Municipal Bond Portfolio's tax-exempt income attributable to
issuers in each state. You should contact your tax advisor if you have any
questions, particularly with regard to state and local taxes.
Net investment income or capital gains earned by the Portfolios
investing in foreign securities may be subject to foreign income taxes withheld
at the source. The United States has entered into tax treaties with many foreign
countries that entitle the Portfolios to a reduced rate of tax or exemption from
tax on this related income and gains. It is impossible to determine the
effective rate of foreign tax in advance since the amount of these Portfolios'
assets to be invested within various countries is not known. The Portfolios
intend to operate so as to qualify for treaty-reduced rates of tax where
applicable. Furthermore, if a Portfolio qualifies as a regulated investment
company, if certain distribution requirements are satisfied, and if more than
50% of the value of the Portfolio's assets at the close of the taxable year
consists of stock or securities of foreign corporations, the Portfolio may
elect, for U.S. federal income tax purposes, to treat foreign income taxes paid
by the Portfolio that can be treated as income taxes under U.S. income tax
principles as paid by its shareholders. The Trust anticipates that the
International Equity Portfolio will qualify for and make this election in most,
but not necessarily all, of its taxable years. If a Portfolio were to make an
election, an amount equal to the foreign income taxes paid by the Portfolio
would be included in the income of its shareholders and the shareholders would
be entitled to credit their portions of this amount against their U.S. tax
liabilities, if any, or to deduct such portions from their U.S. taxable income,
if any. Shortly after any year for which it makes an election, a Portfolio will
report to its shareholders, in writing, the amount per share of foreign tax that
must be included in each shareholder's gross income and the amount which will be
available for deduction or credit. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions. Certain limitations will be
imposed on the extent to which the credit (but not the deduction) for foreign
taxes may be claimed.
As noted above, shareholders who are participants in Consulting
Programs or other investment advisory services will pay an investment advisory
fee out of their own assets. For most shareholders who are individuals, this fee
will be treated as a "miscellaneous itemized deduction" for federal income tax
purposes. Under current federal income tax law, an individual's miscellaneous
itemized deductions for any taxable year shall be allowed as a deduction only to
the extent that the aggregate of these deductions exceeds 2% of adjusted gross
income.
As discussed above, an exchange of shares in a Portfolio for shares in
another Portfolio, including exchanges by participants in a Consulting Program,
is treated for federal income tax purposes as a redemption (sale) of shares and
taxable gain or loss may be realized.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Shareholders will also receive, if
appropriate, various written notices after the close of the Portfolios' taxable
year with respect to certain foreign taxes paid by the Portfolios and certain
dividends and distributions that were, or were deemed to be, received by
shareholders from the Portfolios during the Portfolios' prior taxable year.
Shareholders should consult with their own tax advisors with specific reference
to their own tax situations.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company is located at One Heritage Drive, North
Quincy, Massachusetts 02171 and serves as the Custodian of the Trust's
investments and the Trust's transfer agent. The Shareholder Services Group is
the subtransfer agent for certain retirement plan accounts. Cash balances of the
Portfolios with the Custodian in excess of $100,000 are unprotected by Federal
deposit insurance. Such uninsured balances may at times be substantial.
PERFORMANCE OF THE PORTFOLIOS
Yield
The Trust may, from time to time, include the yield and effective yield of the
U.S. Government Money Market Portfolio in advertisements or reports to
shareholders or prospective investors. Current yield for the U.S. Government
Money Market Portfolio will be based on income received by a hypothetical
investment over a given seven-day period (less expenses accrued during the
period), and then "annualized" (i.e., assuming that the seven-day yield would be
received for 52 weeks, stated in terms of an annual percentage return on the
investment). "Effective yield" for the U.S. Government Money Market Portfolio
will be calculated in a manner similar to that used to calculate yield, but will
reflect the compounding effect of earnings on reinvested dividends.
For the Investment Quality Bond Portfolio and the Municipal Bond
Portfolio, from time to time, the Trust may advertise the thirty-day "yield"
and, with respect to the Municipal Bond Portfolio, an "equivalent taxable
yield." The yield of a Portfolio refers to the income generated by an investment
in the Portfolio over the thirty-day period identified in the advertisement and
is computed by dividing the net investment income per share earned by the
Portfolio during the period by the net asset value per share on the last day of
the period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
Equivalent Taxable Yield
The equivalent taxable yield of the Municipal Bond Portfolio demonstrates the
yield on a taxable investment necessary to produce an after-tax yield equal to
the Portfolio's tax-exempt yield. It is calculated by increasing the yield shown
for the Portfolio, calculated as described above, to the extent necessary to
reflect the payment of specified tax rates. Thus, the equivalent taxable yield
always will exceed the Portfolio's yield.
Total Return
From time to time, the Trust may advertise a Portfolio's (other than the U.S.
Government Money Market Portfolio's) "average annual total return" over various
periods of time. This total return figure shows the average percentage change in
value of an investment in the Portfolio from the beginning date of the measuring
period to the ending date of the measuring period. The figure reflects changes
in the price of the Portfolio's shares and assumes that any income, dividends
and/or capital gains distributions made by the Portfolio during the period are
reinvested in shares of the Portfolio. Figures will be given for recent one-,
five-and ten-year periods (if applicable) and may be given for other periods as
well (such as from commencement of the Portfolio's operations or on a
year-by-year basis). When considering "average" total return figures for periods
longer than one year, investors should note that Portfolio's annual total return
for any one year in the period might have been greater or less than the average
for the entire period. A Portfolio also may use "aggregate" total return figures
for various periods, representing the cumulative change in value of an
investment in the Portfolio for the specific period (again reflecting changes in
the Portfolio's share price and assuming reinvestment of dividends and
distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs, and may indicate subtotals of the various components of total
return (that is, the change in value of initial investment, income dividends and
capital gains distributions).
It is important to note that yield and total return figures are based
on historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine a
Portfolio's yield and total return. Shareholders may make inquiries regarding a
Portfolio, including current yield quotations or total return figures, to any
Consulting Broker or the Trust at 800-807-FUND (800-807-3863).
In reports or other communications to shareholders or in advertising
material, a Portfolio may compare its performance with that of other mutual
funds as listed in the rankings prepared by Lipper Analytical Services, Inc.,
Morningstar or similar independent services that monitor the performance of
mutual funds or with other appropriate indices of investment securities, such as
the Lehman Brothers Government/Corporate Bond Index, the S&P 500, the S&P/Barra
Growth Index and S&P/Barra Value Index, the EAFE Index and the Russell 2000
Index. The performance information also may include evaluations of the
Portfolios published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Business Week, Forbes,
Fortune, Institutional Investor, Morningstar, Barron's, Investor's Business
Daily, The Wall Street Journal, USA Today, The New York Times and Money.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust under the laws of
Delaware on April 8, 1994 and is a trust fund commonly known as a "business
trust."
The shareholders of the Portfolios are each entitled to a full vote for
each full share of beneficial interest (par value $.001 per share) held and
fractional votes for fractional shares. Shares of each Portfolio are entitled to
vote as a class to the extent required by the provisions of the 1940 Act or as
otherwise permitted by the Trustees. When issued, shares of each Portfolio are
fully paid and have no preemptive, conversion or other subscription rights. The
shares do not have cumulative voting rights.
It is the intention of the Trust not to hold Annual Meetings of
Shareholders. The Trustees may call Special Meetings of Shareholders for action
by shareholder vote as may be required by the 1940 Act or the Master Trust
Agreement. Shareholders have certain rights, including the right to call a
meeting upon a vote of the Trust's outstanding shares for the purpose of voting
on the removal of one or more Trustees. The Trust may from time to time add
additional Portfolios to the Trust or with approval of the shareholders of an
existing Portfolio, if necessary, terminate one or more of the Portfolios.
Shareholder Inquiries
All inquiries regarding the Trust should be directed to Saratoga Capital
Management at 800-807-FUND (800-807-3863).
Major Shareholders
To the knowledge of the Trust, the only person who as of September 30, 1997 had
beneficial ownership of more than 25% of the voting securities of any of the
Portfolios is the American Medical Association Pension Trust which held 37% of
the outstanding shares of the Small Capitalization Portfolio and may be deemed
to control the Small Capitalization Portfolio until such time as it owns less
than 25% of the outstanding shares of the Small Capitalization Portfolio.
PROSPECTUS
Trust Manager:
Saratoga Capital Management
1501 Franklin Avenue
Mineola, NY 11501
(800) 807-FUND
(3863)
Transfer and Shareholder
Servicing Agent:
State Street Bank and Trust Company
P.O. Box 8514
Boston, MA 02266
General Distributor:
Unified Management Corporation
429 North Pennsylvania Street
Indianapolis, Indiana 46204
(317) 634-3300
(- U.S. Government Money Market Portfolio
(- Investment Quality Bond Portfolio
(- Municipal Bond Portfolio
(- Large Capitalization Value Portfolio
(- Large Capitalization Growth Portfolio
(- Small Capitalization Portfolio
(- International Equity Portfolio
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Statement of
Additional Information or the Trust's official sales literature in connection
with the offering of shares, and if given or made, such other information or
representations must not be relied upon as having been authorized by the Trust.
This prospectus does not constitute an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.
<PAGE>
THE SARATOGA ADVANTAGE TRUST
Statement of Additional Information
INCOME PORTFOLIOS:
U. S. Government Money Market Portfolio
Investment Quality Bond Portfolio
Municipal Bond Portfolio
EQUITY PORTFOLIOS:
Large Capitalization Value Portfolio
Large Capitalization Growth Portfolio
Small Capitalization Portfolio
International Equity Portfolio
1501 Franklin Avenue
Mineola, NY 11501-4803
800-807-FUND (800-807-3863).
This Statement of Additional Information (the "Additional Statement") is not a
Prospectus. Investors should understand that this Additional Statement should be
read in conjunction with the Trust's Prospectus dated _____________ (the
"Prospectus"), which may be obtained by written request to Saratoga Capital
Management at the address or phone listed above.
The date of this Additional Statement is ____________.
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT OF THE TRUST'S ASSETS . . . . . . . . . . . . . . . . .
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . .
PRINCIPAL HOLDERS OF SECURITIES AND
CONTROL PERSONS OF THE PORTFOLIOS. . . . . . . . . . . . . . . . .
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT AND OTHER SERVICES. . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY SERVICES . . . . . . . . . . . . . . . . . . .
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . .
PORTFOLIO YIELD AND TOTAL RETURN INFORMATION . . . . . . . . . . .
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A - RATINGS . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
INVESTMENT OF THE TRUST'S ASSETS
The investment objective and policies of each Portfolio are described in
the Prospectus. A further description of each Portfolio's investments and
investment methods appears below.
COLLATERALIZED MORTGAGE OBLIGATIONS. In addition to securities issued by
Ginnie Mae, Fannie Mae and Freddie Mac, another type of mortgage-backed security
is the "collateralized mortgage obligation," which is secured by groups of
individual mortgages but is similar to a conventional bond where the investor
looks only to the issuer for payment of principal and interest. Although the
obligations are recourse obligations to the issuer, the issuer typically has no
significant assets, other than assets pledged as collateral for the obligations,
and the market value of the collateral, which is sensitive to interest rate
movements, may affect the market value of the obligations. A public market for a
particular collateralized mortgage obligation may or may not develop and thus,
there can be no guarantee of liquidity of an investment in such obligations.
INFORMATION ON TIME DEPOSITS AND VARIABLE RATE NOTES. The Portfolios may
invest in fixed time deposits, whether or not subject to withdrawal penalties;
however, investment in such deposits which are subject to withdrawal penalties,
other than overnight deposits, are subject to the 15% limit on illiquid
investments set forth in the Prospectus for each Portfolio.
The commercial paper obligations which the Portfolios may buy are unsecured
and may include variable rate notes. The nature and terms of a variable rate
note (i.e., a "Master Note") permit a Portfolio to invest fluctuating amounts at
varying rates of interest pursuant to a direct arrangement between a Portfolio
as lender, and the issuer, as borrower. It permits daily changes in the amounts
borrowed. The Portfolio has the right at any time to increase, up to the full
amount stated in the note agreement, or to decrease the amount outstanding under
the note. The issuer may prepay at any time and without penalty any part of or
the full amount of the note. The note may or may not be backed by one or more
bank letters of credit. Because these notes are direct lending arrangements
between the Portfolio and the issuer, it is not generally contemplated that they
will be traded; moreover, there is currently no secondary market for them.
Except as specifically provided in the Prospectus there is no limitation on the
type of issuer from whom these notes will be purchased; however, in connection
with such purchase and on an ongoing basis, a Portfolio's Advisor will consider
the earning power, cash flow and other liquidity ratios of the issuer, and its
ability to pay principal and interest on demand, including a situation in which
all holders of such notes made demand simultaneously. A Portfolio will not
invest more than 5% of its total assets in variable rate notes. Variable rate
notes are subject to the Portfolio's investment restriction on illiquid
securities unless such notes can be put back to the issuer on demand within
seven days.
CONVERTIBLE SECURITIES. As specified in the Prospectus, certain of the
Portfolios may invest in fixed-income securities which are convertible into
common stock. Convertible securities rank senior to common stocks in a
corporation's capital structure and, therefore, entail less risk than the
corporation's common stock. The value of a convertible security is a function of
its "investment value" (its value as if it did not have a conversion privilege),
and its "conversion value" (the security's worth if it were to be
<PAGE>
exchanged for the underlying security, at market value, pursuant to its
conversion privilege).
To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, the convertible security will sell at some premium over
its conversion value. (This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security with a
possibility of capital appreciation due to the conversion privilege.) At such
times the price of the convertible security will tend to fluctuate directly with
the price of the underlying equity security. Convertible securities may be
purchased by the Portfolios at varying price levels above their investment
values and/or their conversion values in keeping with the Portfolios'
objectives.
INSURED BANK OBLIGATIONS. The Federal Deposit Insurance Corporation
("FDIC") insures the deposits of federally insured banks and savings and loan
associations (collectively referred to as "banks") up to $100,000. A Portfolio
may, within the limits set forth in the Prospectus, purchase bank obligations
which are fully insured as to principal by the FDIC. Currently, to remain fully
insured as to principal, these investments must be limited to $100,000 per bank;
if the principal amount and accrued interest together exceed $100,000, the
excess principal and accrued interest will not be insured. Insured bank
obligations may have limited marketability. Unless the Board of Trustees
determines that a readily available market exists for such obligations, a
Portfolio will treat such obligations as subject to the 15% limit for illiquid
investments set forth in the Prospectus unless such obligations are payable at
principal amount plus accrued interest on demand or within seven days after
demand.
WHEN-ISSUED SECURITIES. All Portfolios may take advantage of offerings of
eligible portfolio securities on a "when-issued" basis, i.e., delivery of and
payment for such securities take place sometime after the transaction date on
terms established on such date. Normally, settlement on U.S. Government
securities takes place within ten days. A Portfolio only will make when-issued
commitments on eligible securities with the intention of actually acquiring the
securities. If a Portfolio chooses to dispose of the right to acquire a
when-issued security (prior to its acquisition), it could, as with the
disposition of any other Portfolio obligation, incur a gain or loss due to
market fluctuation. No when-issued commitments will be made if, as a result,
more than 15% of the net assets of a Portfolio would be so committed.
HEDGING. Certain Portfolios may use certain Hedging Instruments as
described, and subject to the restrictions stated, in the Prospectus. To engage
in short hedging, a Portfolio would: (i) sell financial futures; (ii) purchase
puts on such futures or on individual securities held by it ("Portfolio
securities") or securities indexes; or (iii) write calls on Portfolio securities
or on financial futures or securities indexes. To engage in long hedging, a
Portfolio would: (i) purchase financial futures, or (ii) purchase calls or write
puts on such futures or on Portfolio securities or securities indexes.
<PAGE>
Additional information about the Hedging Instruments a Portfolio may use is
provided below.
FINANCIAL FUTURES. No price is paid or received upon the purchase of a
financial future. Upon entering into a futures transaction, a Portfolio will be
required to deposit an initial margin payment equal to a specified percentage of
the contract value. Initial margin payments will be deposited with a Portfolio's
custodian bank in an account registered in the futures commission merchant's
name; however the futures commission merchant can gain access to that account
only under specified conditions. As the future is marked to market to reflect
changes in its market value, subsequent payments, called variation margin, will
be made to or from the futures commission merchant on a daily basis. Prior to
expiration of the future, if the Portfolio elects to close out its position by
taking an opposite position, a final determination of variation margin is made,
additional cash is required to be paid by or released to the Portfolio, and any
loss or gain is realized for tax purposes. Although financial futures by their
terms call for the actual delivery or acquisition of the specified debt
security, in most cases the obligation is fulfilled by closing out the position.
All futures transactions are effected through a clearing house associated with
the exchange on which the contracts are traded. At present, no Portfolio intends
to enter into financial futures and options on such futures if after any such
purchase, the sum of initial margin deposits on futures and premiums paid on
futures options would exceed 5% of a Portfolio's total assets. This limitation
is not a fundamental policy.
ADDITIONAL INFORMATION ON PUTS AND CALLS. When a Portfolio writes a call,
it receives a premium and agrees to sell the callable securities to a purchaser
of a corresponding call during the call period (usually not more than 9 months)
at a fixed exercise price (which may differ from the market price of the
underlying securities) regardless of market price changes during the call
period. If the call is exercised, the Portfolio forgoes any possible profit from
an increase in market price over the exercise price. A Portfolio may, in the
case of listed options, purchase calls in "closing purchase transactions" to
terminate a call obligation. A profit or loss will be realized, depending upon
whether the net of the amount of option transaction costs and the premium
received on the call written is more or less than the price of the call
subsequently purchased. A profit may be realized if the call lapses unexercised,
because the Portfolio retains the underlying security and the premium received.
Sixty percent of any such profits are considered long-term gains and forty
percent are considered short-term gains for tax purposes. If, due to a lack of a
market, a Portfolio could not effect a closing purchase transaction, it would
have to hold the callable securities until the call lapsed or was exercised. A
Portfolio's Custodian, or a securities depository acting for the Custodian, will
act as the Portfolio's escrow agent, through the facilities of the Options
Clearing Corporation ("OCC") in connection with listed calls, as to the
securities on which the Portfolio has written calls, or as to other acceptable
escrow securities, so that no margin will be required for such transactions. OCC
will release the securities on the expiration of the calls or upon the
Portfolio's entering into a closing purchase transaction.
When a Portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period (or on a certain date for OTC options) at a fixed exercise
price. A Portfolio benefits only if the call is sold at a profit or if, during
<PAGE>
the call period, the market price of the underlying investment is above the call
price plus the transaction costs and the premium paid for the call and the call
is exercised. If a call is not exercised or sold (whether or not at a profit),
it will become worthless at its expiration date and the Portfolio will lose its
premium payment and the right to purchase the underlying investment.
With OTC options, such variables as expiration date, exercise price and
premium will be agreed upon between the Portfolio and the transacting dealer,
without the intermediation of a third party such as the OCC. If a transacting
dealer fails to make delivery on the U.S. Government securities underlying an
option it has written, in accordance with the terms of that option as written, a
Portfolio could lose the premium paid for the option as well as any anticipated
benefit of the transaction. The Portfolios will engage in OTC option
transactions only with primary U.S. Government securities dealers recognized by
the Federal Reserve Bank of New York. In the event that any OTC option
transaction is not subject to a forward price at which the Portfolio has the
absolute right to repurchase the OTC option which it has sold, the value of the
OTC option purchased and of the Portfolio assets used to "cover" the OTC option
will be considered "illiquid securities" and will be subject to the 15% limit on
illiquid securities. The "formula" on which the forward price will be based may
vary among contracts with different primary dealers, but it will be based on a
multiple of the premium received by the Portfolio for writing the option plus
the amount, if any, of the option's intrinsic value, i.e., current market value
of the underlying securities minus the option's strike price.
A put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying investment at the exercise price during the
option period (or on a certain date for OTC options). The investment
characteristics of writing a put covered by segregated liquid assets equal to
the exercise price of the put are similar to those of writing a covered call.
The premium paid on a put written by a Portfolio represents a profit, as long as
the price of the underlying investment remains above the exercise price.
However, a Portfolio has also assumed the obligation during the option period to
buy the underlying investment from the buyer of the put at the exercise price,
even though the value of the investment may fall below the exercise price. If
the put expires unexercised, the Portfolio (as writer) realizes a gain in the
amount of the premium. If the put is exercised, the Portfolio must fulfill its
obligation to purchase the underlying investment at the exercise price, which
will usually exceed the market value of the investment at that time. In that
case, the Portfolio may incur a loss upon disposition, equal to the sum of the
sale price of the underlying investment and the premium received minus the sum
of the exercise price and any transaction costs incurred.
When writing put options, to secure its obligation to pay for the
underlying security, a Portfolio will maintain in a segregated account at its
Custodian liquid assets with a value equal to at least the exercise price of the
option. As a result, the Portfolio forgoes the opportunity of trading the
segregated assets or writing calls against those assets. As long as the
Portfolio's obligation as a put writer continues, the Portfolio may be assigned
an exercise notice by the broker-dealer through whom such option was sold,
requiring the Portfolio to purchase the underlying security at the exercise
price. A Portfolio has no control over when it may be required to purchase the
underlying security, since it may be assigned an exercise notice at any time
prior to the termination of its obligation as the writer of the put. This
obligation terminates upon the earlier of the expiration of the put, or the
consummation by the Portfolio of a closing purchase transaction by purchasing a
put of the same series as that previously sold. Once a Portfolio has been
assigned an exercise notice, it is thereafter not allowed to effect a closing
purchase transaction.
A Portfolio may effect a closing purchase transaction to realize a profit
on an outstanding put option it has written or to prevent an underlying security
from being put to it. Furthermore, effecting such a closing purchase transaction
will permit the Portfolio to write another put option to the extent that the
exercise price thereof is secured by the deposited assets, or to utilize the
proceeds from the sale of such assets for other investments by the Portfolio.
The Portfolio will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
writing the option.
When a Portfolio purchases a put, it pays a premium and has the right to
sell the underlying investment at a fixed exercise price to a seller of a
corresponding put on the same investment during the put period if it is a listed
option (or on a certain date if it is an OTC option). Buying a put on securities
or futures held by it permits a Portfolio to attempt to protect itself during
the put period against a decline in the value of the underlying investment below
the exercise price. In the event of a decline in the market, the Portfolio could
exercise, or sell the put option at a profit that would offset some or all of
its loss on the Portfolio securities. If the market price of the underlying
investment is above the exercise price and as a result, the put is not
exercised, the put will become worthless at its expiration date and the
purchasing Portfolio will lose the premium paid and the right to sell the
underlying securities; the put may, however, be sold prior to expiration
(whether or not at a profit). Purchasing a put on futures or securities not held
by it permits a Portfolio to protect its Portfolio securities against a decline
in the market to the extent that the prices of the future or securities
underlying the put move in a similar pattern to the prices of the securities in
the Portfolio's portfolio.
An option position may be closed out only on a market which provides
secondary trading for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular option. A Portfolio's
option activities may affect its turnover rate and brokerage commissions. The
exercise of calls written by a Portfolio may cause the Portfolio to sell from
its Portfolio securities to cover the call, thus increasing its turnover rate in
a manner beyond the Portfolio's control. The exercise of puts on securities or
futures will increase portfolio turnover. Although such exercise is within the
Portfolio's control, holding a put might cause a Portfolio to sell the
underlying investment for reasons which would not exist in the absence of the
put. A Portfolio will pay a brokerage commission every time it purchases or
sells a put or a call or purchases or sells a related investment in connection
with the exercise of a put or a call.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS. Transactions in options by a
Portfolio are subject to limitations established (and changed from time to time)
by each of the exchanges governing the maximum number of options which may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
different exchanges or through one or more brokers. Thus, the number of options
which a Portfolio may write or hold may be affected by options written or held
by other investment companies and discretionary accounts of the Portfolio's
Advisor, including other investment companies having the same or an affiliated
investment adviser. An exchange may order the liquidation of positions found to
be in violation of those limits and may impose certain other sanctions.
Due to requirements under the Act when a Portfolio sells a future, it will
maintain in a segregated account or accounts with its custodian bank, cash or
readily marketable short-term (maturing in one year or less) debt instruments in
an amount equal to the market value of such future, less the margin deposit
applicable to it.
The Trust and each Portfolio must operate within certain restrictions as to
its positions in futures and options thereon under a rule ("CFTC Rule") adopted
by the Commodity Futures Trading Commission ("CFTC") under the Commodity
Exchange Act (the "CEA"), which excludes the Trust and each Portfolio from
registration with the CFTC as a "commodity pool operator" (as defined under the
CEA). Under those restrictions, a Portfolio may not enter into any financial
futures or options contract unless such transactions are for bona fide hedging
purposes, or for other purposes only if the aggregate initial margins and
premiums required to establish such non-hedging positions would not exceed 5% of
the liquidation value of its assets. Each Portfolio may use futures and options
thereon for bona fide hedging or for other purposes within the meaning and
intent of the applicable provisions of the CEA.
TAX ASPECTS OF HEDGING INSTRUMENTS. Each Portfolio in the Trust intends to
qualify as a "regulated investment company" under the Internal Revenue Code. One
of the tests for such qualification is that at least 90% of its gross income
must be derived from dividends, interest and gains from the sale or other
disposition of securities. Another test is that less than 30% of its gross
income must be derived from gains realized on the sale of securities held for
less than three months. In connection with the 90% test, recent amendments to
the Internal Revenue Code specify that income from options, futures and other
gains derived from investments in securities is qualifying income under the 90%
test. Due to the 30% limitation, each Portfolio will limit the extent to which
it engages in the following activities, but will not be precluded from them: (i)
selling investments, including futures, held for less than three months, whether
or not they were purchased on the exercise of a call held by the Portfolio; (ii)
writing or purchasing calls on investments held less than three months; (iii)
purchasing calls or puts which expire in less than three months; (iv) effecting
closing transactions with respect to calls or puts purchased less than three
months previously; and (v) exercising puts or calls held by a Portfolio for less
than three months.
Regulated futures contracts, options on broad-based stock indices, options
on stock index futures, certain other futures contracts and options thereon
(collectively, "Section 1256 contracts") held by a Portfolio at the end of each
taxable year may be required to be "marked to market" for federal income tax
purposes (that is, treated as having been sold at that time at market value).
Any unrealized gain or loss taxed pursuant to this rule will be added to
realized gains or losses recognized on Section 1256 contracts sold by a
Portfolio during the year, and the resulting gain or loss will be deemed to
consist of 60% long-term capital gain or loss and 40% short-term capital gain or
loss. A Portfolio may elect to exclude certain transactions from the
mark-to-market rule although doing so may have the effect of increasing the
relative proportion of short-term capital gain (taxable as ordinary income)
and/or increasing the amount of dividends that must be
<PAGE>
distributed annually to meet income distribution requirements, currently at 98%.
It should also be noted that under certain circumstances, the acquisition
of positions in hedging instruments may result in the elimination or suspension
of the holding period for tax purposes of other assets held by a Portfolio with
the result that the relative proportion of short-term capital gains (taxable as
ordinary income) could increase and the amount of dividends qualifying for the
dividends received deduction could decrease.
POSSIBLE RISK FACTORS IN HEDGING. In addition to the risks with respect to
futures and options discussed in the Prospectus and above, there is a risk in
selling futures that the prices of futures will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of a Portfolio's securities.
The ordinary spreads between prices in the cash and futures markets are subject
to distortions due to differences in the natures of those markets. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close out futures contracts through offsetting transactions which
could distort the normal relationship between the cash and futures markets.
Second, the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions.
When a Portfolio uses appropriate Hedging Instruments to establish a
position in the market as a temporary substitute for the purchase of individual
securities (long hedging) by buying futures and/or calls on such futures or on a
particular security, it is possible that the market may decline. If the
Portfolio then concludes not to invest in such securities at that time because
of concerns as to possible further market decline or for other reasons, it will
realize a loss on the Hedging Instruments that is not offset by a reduction in
the price of the securities purchased.
TYPE OF SECURITIES IN WHICH THE INTERNATIONAL EQUITY PORTFOLIO MAY INVEST.
As discussed in the Prospectus, the International Equity Portfolio seeks to
achieve its investment objectives through investment primarily in equity
securities. It is expected that the Portfolio will invest principally in
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs") although it also may invest directly in
equity securities. Generally, ADRs and GDRs in registered form are U.S. dollar
denominated securities designed for use in the U.S. securities markets, which
represent and may be converted into the underlying foreign security. EDRs are
typically issued in bearer form and are designed for use in the European
securities markets. Issuers of the stock of ADRs not sponsored by such
underlying issuers are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs. The Portfolio also may purchase
shares of investment companies or trusts which invest principally in securities
in which the Portfolio is authorized to invest. The return on the Portfolio's
investments in investment companies will be reduced by the operating expenses,
including investment advisory and administrative fees, of such companies. The
Portfolio's investment in an investment company may require the payment of a
premium above the net asset value of the investment company's shares, and the
market price of the investment company thereafter may decline without any change
in the value of the investment company's assets. The Portfolio will not invest
in any investment company or trust unless it is believed that the potential
benefits of such investment are sufficient to warrant the payment of any such
premium. Under the Act, the Portfolio may not invest more than 10% of its assets
in investment companies or more than 5% of its total assets in the securities of
any one investment company, nor may it own more than 3% of the outstanding
voting securities of any such company. To the extent the Portfolio invests in
securities in bearer form it may be more difficult to recover securities in the
event such securities are lost or stolen.
If the Portfolio invests in an entity which is classified as a "passive
foreign investment company" ("PFIC") for U.S. tax purposes, the application of
certain technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the
Portfolio level which could not be eliminated by distributions to shareholders.
The U.S. Treasury has issued proposed regulations which establish a
mark-to-market regime that allows a regulated investment company ("RIC") to
avoid most, if not all, of the difficulties posed by the PFIC rules. In any
event, it is not anticipated that any taxes on the Portfolio with respect to
investments in PFIC's would be significant.
PRIVATE PLACEMENTS. The Portfolios may invest in securities which are
subject to restriction on resale because they have not been registered under the
Securities Act of 1933, or which are otherwise not readily marketable. These
securities are generally referred to as private placements or restricted
securities. Limitations on the resale of such securities may have an adverse
effect on their marketability, and may prevent the Portfolios from disposing of
them promptly at reasonable prices. A Portfolio may have to bear the expense of
registering such securities for resale and risk the substantive delays in
effecting such registration. However, as described in the Prospectus, the
Portfolios may avail themselves of recently adopted regulatory changes to the
Securities Act of 1933 ("Rule 144A") which permit the Portfolios to purchase
securities which have been privately placed and resell such securities to
certain qualified institutional buyers without restriction. Since it is not
possible to predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will develop, the Board of Trustees
will carefully monitor the Portfolios' investments in these securities, focusing
on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Portfolios to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these restricted securities.
Securities of foreign issuers often have not been registered in the U.S.
Accordingly, if a Portfolio wishes to sell unregistered foreign securities in
the U.S. it will avail itself of Rule 144A.
FOREIGN CURRENCY TRANSACTIONS. When a Portfolio agrees to purchase or sell
a security in a foreign market it will generally be obligated to pay or entitled
to receive a specified amount of foreign currency and will then generally
convert dollars to that currency in the case of a purchase or that currency to
dollars in the case of a sale. The Portfolios will conduct their foreign
currency exchange transactions either on a spot basis (i.e., cash) at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward foreign currency contracts ("forward contracts") to purchase or
sell foreign currencies. A Portfolio may enter into forward contracts in order
to lock in the U.S. dollar amount it must pay or expects to receive for a
security it has agreed to buy or sell. A Portfolio may also enter into forward
currency contracts with respect to the Portfolio's portfolio positions when it
believes that a particular currency may change unfavorably compared to the U.S.
dollar. A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
A Portfolio's custodian bank will place cash, U.S. Government securities or
debt securities in a separate account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of any such
contract in such account and if the value of the securities placed in the
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Portfolio's commitments with respect to such forward contracts. If,
rather than cash, portfolio securities are used to secure such a forward
contract, on the settlement of the forward contract for delivery by the
Portfolio of a foreign currency, the Portfolio may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same settlement date, the same amount of foreign currency.
The Portfolios may effect currency hedging transactions in foreign currency
futures contracts, exchange-listed and over-the-counter call and put options on
foreign currency futures contracts and on foreign currencies. The use of forward
futures or options contracts will not eliminate fluctuations in the underlying
prices of the securities which the Portfolios own or intend to purchase or sell.
They simply establish a rate of exchange for a future point in time.
Additionally, while these techniques tend to minimize the risk of loss due to a
decline in the value of the hedged currency, their use tends to limit any
potential gain which might result from the increase in value of such currency.
In addition, such transactions involve costs and may result in losses.
Although each Portfolio values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will, however, do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the spread between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Under Internal Revenue Code Section 988, special rules are provided for
certain transactions in a currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from forward contracts,
futures contracts that are not "regulated futures contracts", and from unlisted
options will be treated as ordinary income or loss under Code Section 988. Also,
certain foreign exchange gains or losses derived with respect to fixed-income
securities are also subject to Section 988 treatment. In general, therefore,
Code Section 988 gains or losses will increase or decrease the amount of the
Portfolio's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Portfolio's net capital gain. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, a
Portfolio would not be able to make any ordinary income distributions.
FOREIGN CUSTODY. Rules adopted under the Act permit each Portfolio to
maintain its securities and cash in the custody of certain eligible banks and
securities depositories. The Portfolios' portfolios of securities of issuers
located outside of the U.S. will be held by their sub-custodians who will be
approved by the Trustees in accordance with such Rules. Such determination will
be made pursuant to such Rules following a consideration of a number of factors,
including, but not limited to, the reliability and financial stability of the
institution; the ability of the institution to perform custodial services for
the Trust; the reputation of the institution in its national market; the
political and economic stability of the country in which the institution is
located; and the risks of potential nationalization or expropriation of the
Portfolio's assets. However, no assurances can be given that the Trustees'
appraisal of the risks in connection with foreign custodial arrangements will
always be correct or that expropriation, nationalization, freezes (including
currency blockage), or confiscations of assets that would affect assets of the
Portfolios will not occur, and shareholders bear the risk of losses arising from
those or other similar events.
ADDITIONAL RISKS. Securities in which the Portfolios may invest are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors and shareholders, such as the federal Bankruptcy Code,
and laws, if any, which may be enacted by Congress or the state legislatures
extending the time for payment of principal or interest, or both or imposing
other constraints upon enforcement of such obligations.
RATINGS OF CORPORATE AND MUNICIPAL DEBT OBLIGATIONS. Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and Fitch
Municipal Division ("Fitch") are private services that provide ratings of the
credit quality of debt obligations, including issues of corporate and municipal
securities. A description of the range of ratings assigned to corporate and
municipal securities by Moody's, S&P and Fitch is included in Appendix A to this
Statement of Additional Information. The Investment Quality Bond Portfolio and
the Municipal Bond Portfolio may use these ratings in determining whether to
purchase, sell or hold a security. These ratings represent Moody's, S&P's and
Fitch's opinions as to the quality of the securities that they undertake to
rate. It should be emphasized, however, that 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. Subsequent to its
purchase by the Investment Quality Bond Portfolio or the Municipal Bond
Portfolio, an issue of securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Portfolio. The
advisers to the Municipal Bond Portfolio and the Investment Quality Bond
Portfolio will consider such an event in determining whether the Portfolio
should continue to hold the obligation but will dispose of such securities in
order to limit the holdings of debt securities rated below investment grade to
less than 5% of the assets of the respective Portfolio.
Opinions relating to the validity of municipal securities and to the
exemption of interest thereon from federal income tax (and also, when available,
from the federal alternative minimum tax) are rendered by bond counsel to the
issuing authorities at the time of issuance. Neither the Municipal Bond
Portfolio nor the Portfolio's Advisor will review the proceedings relating to
the issuance of municipal securities or the basis for such opinions. An issuer's
obligations under its municipal securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors (such as the federal bankruptcy laws) and federal, state and local
laws that may be enacted to extend the time for payment of principal or
interest, or both, or to impose other constraints upon enforcement of such
obligations. There also is the possibility that, as a result of litigation or
other conditions, the power or ability of issuers to meet their obligations for
the payment of principal of and interest on their municipal securities may be
materially adversely affected.
MUNICIPAL NOTES. For liquidity purposes, pending investment in municipal
bonds, or on a temporary or defensive basis due to market conditions, the
Municipal Bond Portfolio may invest in tax-exempt short-term debt obligations
(maturing in one year or less). These obligations, known as "municipal notes,"
include tax, revenue and bond anticipation notes, construction loan notes and
tax-exempt commercial paper which are issued to obtain funds for various public
purposes; the interest from these Notes is also exempt from federal income
taxes. The Municipal Bond Portfolio will limit its investments in municipal
notes to those which are rated, at the time of purchase, within the two highest
grades assigned by Moody's or the two highest grades assigned by S&P or Fitch,
or if unrated, which are of comparable quality in the opinion of the Advisor.
MUNICIPAL BONDS. Municipal bonds include debt obligations of a state, a
territory, or a possession of the United States, or any political subdivision
thereof (e.g., counties, cities, towns, villages, districts, authorities) or the
District of Columbia issued to obtain funds for various purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which municipal bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses and the obtaining of funds to loan to public or private
institutions for the construction of facilities such as education, hospital and
housing facilities. In addition, certain types of private activity bonds may be
issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port or parking facilities, air or water
pollution control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Such obligations are included
within the term municipal bonds if the interest paid thereon is at the time of
issuance, in the opinion of the issuer's bond counsel, exempt from federal
income tax. The current federal tax laws, however, substantially limit the
amount of such obligations that can be issued in each state.
The two principal classifications of municipal bonds are "general
obligation" and limited obligation or "revenue" bonds. General obligation bonds
are secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest, whereas revenue bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source. Private activity bonds that are municipal bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit of the
issuer of such bonds. The credit quality of private activity revenue bonds is
usually directly related to the credit standing of the industrial user involved.
There are, in addition, a variety of hybrid and special types of municipal
obligations as well as numerous differences in the collateral security of
municipal bonds, both within and between the two principal classifications
described above.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES. The Trust's significant investment restrictions
applicable to each Portfolio are described in the Prospectus. The following are
also fundamental policies and, together with the restrictions and other
fundamental policies described in the Prospectus, cannot be changed without the
vote of a majority of the outstanding voting securities of that Portfolio, as
defined in the Act. Such a majority is defined as the lesser of (a) 67% or more
of the shares of the Portfolio present at a meeting of shareholders of the
Trust, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy or (b) more than 50% of the
outstanding shares of the Portfolio. For purposes of the following restrictions
and those contained in the Prospectus: (i) all percentage limitations apply
immediately after a purchase or initial investment; and (ii) any subsequent
change in any applicable percentage resulting from market fluctuations or other
changes in the amount of total assets does not require elimination of any
security from a Portfolio.
Under these additional restrictions, each Portfolio cannot: (a) Invest in
physical commodities or physical commodity contracts or speculate in financial
commodity contracts, but all Portfolios are authorized to purchase and sell
financial futures contracts and options on such futures contracts exclusively
for hedging and other non-speculative purposes to the extent specified in the
Prospectus; (b) Invest in real estate or real estate limited partnerships
(direct participation programs); however, each Portfolio may purchase securities
of issuers which engage in real estate operations and securities which are
secured by real estate or interests therein; (c) Underwrite securities of other
companies except in so far as the Portfolio may be deemed to be an underwriter
under the Securities Act of 1933 in disposing of a security; (d) Purchase
warrants if as a result the Portfolio would then have either more than 5% of its
total assets (determined at the time of investment) invested in warrants or more
than 2% of its total assets invested in warrants not listed on the New York or
American Stock Exchange; (e) Pledge its assets or assign or otherwise encumber
its assets in excess of 33 1/3% of its net assets (taken at market value at the
time of pledging) and then only to secure borrowings effected within the
limitations set forth in the Prospectus; (f) Issue senior securities as defined
in the Act except insofar as the Portfolio may be deemed to have issued a senior
security by reason of: (i) entering into any repurchase agreement; (ii)
borrowing money in accordance with restrictions described above; or (iii)
lending Portfolio securities; and (g) make loans to any person or individual
except that Portfolio securities may be loaned by all Portfolios within the
limitations set forth in the Prospectus.
In addition each Portfolio may not with respect to 75% of its assets,
invest more than 5% of the value of its total assets in the securities of any
one issuer.
NON-FUNDAMENTAL POLICIES. The following policies may be changed by the
Board of Trustees without shareholder approval. Each portfolio cannot: (a)
Purchase securities on margin (except for such short-term loans as are necessary
for the clearance of purchases of Portfolio securities) or make short sales of
securities except "against the box" (collateral arrangements in connection with
transactions in futures and options are not deemed to be margin transactions);
(b) Invest for the purpose of exercising control or management of another
company.
PRINCIPAL HOLDERS OF
SECURITIES AND CONTROL PERSONS OF THE PORTFOLIOS
To the knowledge of the Trust, the only person who as of September 30,
1997, had beneficial ownership of five percent or more of the shares of any
Portfolio is the American Medical Association Pension Trust, 515 North State
Street, Chicago, Illinois 60610-4320 which held 37% of the Small Capitalization
Portfolio.
TRUSTEES AND OFFICERS
The trustees and officers of the Trust, and their principal occupations
during the past five years, are set forth below. Trustees who are "interested
persons," as defined in the Act, are denoted by an asterisk. As of September 30,
1997, the trustees and officers of the Trust as a group owned less than 1% of
the outstanding shares of each Portfolio.
Bruce E. Ventimiglia, President, CEO, and Chairman of the Board of Trustees*
1501 Franklin Avenue
Mineola, NY 11501
Age 42
Chairman, President and Chief Executive Officer of Saratoga Capital Management;
prior thereto, Senior Vice President of Oppenheimer Capital and OpCap Advisors;
Senior Vice President of Prudential Securities, Inc.
Patrick H. McCollough, Trustee
One Michigan Avenue Building
120 North Washington Square
Lansing, Michigan 48933
Age 55
Partner with the law firm of Cawthorne, McCollough & Cavanagh since 1987;
Michigan State Senator from 1971 to 1978 and 1982 to 1986.
Udo W. Koopmann, Trustee
11500 Governors's Drive
Chapel Hill, NC 27514
Age 55
President, The CapCo Group, LLC; prior thereto, Chief Financial and
Administrative Executive of the North American subsidiary of Klockner and
Company AG, a multi-national company; member of National Committee of Steel
Service Centre Institute.
<PAGE>
Floyd E. Seal, Trustee
7565 Industrial Ct.
Alpharetta, GA 30004
Age 47
Chief Executive Officer and 50% owner of TARAHILL, INC., d.b.a. Pet Goods
Manufacturing & Imports, Alpharetta, GA; Partner of S&W Management, Gwinnet, GA.
Scott Kane, Vice President and Secretary
1501 Franklin Avenue
Mineola, NY 11501
Age 38
Managing Director and Chief Sales and Marketing Officer of Saratoga Capital
Management; prior thereto, he was Vice President of Prudential Securities, Inc.
Stephen Ventimiglia, Vice President
1501 Franklin Avenue
Mineola, NY 11501
Age 41
Vice Chairman and Chief Investment Officer of Saratoga Capital Management; prior
thereto, he was First Vice President and Senior Portfolio Manager of Prudential
Securities, Inc.
William Marra, Treasurer
1501 Franlin Avenue
Mineola, NY 11501
Age 46
Chief Financial Officer of Saratoga Capital Management since 1997; prior
thereto, he was an account Representative at MetLife, 1995-1997; various
positions held at Prudential Securities from 1978-1994.
Bruce Ventimiglia and Stephen Ventimiglia are brothers.
REMUNERATION OF OFFICERS AND TRUSTEES. All officers of the Trust are
officers of Saratoga Capital Management and receive no salary or fee from the
Trust. Until a Portfolio has net assets of $25 million, no trustees fees will be
paid by that Portfolio. When a Portfolio has net assets of at least $25 million
but not more than $50 million, the Trustees, other than Mr. Ventimiglia, will be
paid an annual fee of $1,750 plus $250 for each trustees' meeting attended and
$100 for each committee meeting attended. When a Portfolio has net assets in
excess of $50 million, the Trustees, other than Mr. Ventimiglia, will be paid an
annual fee of $3,500 plus $500 for each trustees' meeting attended and $100 for
each committee meeting attended. The following table sets forth the aggregate
compensation paid by the Trust to each of the Trustees for the year ended August
31, 1997.
<PAGE>
Name of Trustee Aggregate Compensation
From the Trust
Lacy Herrmann* 688
Joseph La Motta* 0
George Loft* 688
Bruce Ventimiglia 0
Patrick McCollough 4251
Udo Koopmann 3653
Floyd Seal 3653
*These individuals no longer serve as Trustees of the Trust.
MANAGEMENT AND OTHER SERVICES
The manager of the Trust is Saratoga Capital Management ("Saratoga" or the
"Manager"), 1501 Franklin Avenue, Mineola, New York 11501. See "Management of
the Trust" in the Prospectus.
Pursuant to the Management Agreement with the Trust (the "Management
Agreement"), Saratoga, subject to the supervision of the Trustees and in
conformity with the stated policies of the Trust, manages the operations of the
Trust and reviews the performance of the Advisors, and makes recommendations to
the Trustees with respect to the retention and renewal of contracts.
The following table sets forth the annual management fee rates payable
by each Portfolio to Saratoga pursuant to the Management Agreement, expressed as
a percentage of the Portfolio's average daily net assets:
Total Amount
Management Retained by
Portfolio Fee Manager
- --------- --- -------
Large Capitalization Growth Portfolio 0.65% 0.35%
Large Capitalization Value Portfolio 0.65% 0.35%
Small Capitalization Portfolio 0.65% 0.35%
International Equity Portfolio 0.75% 0.35%
Investment Quality Bond Portfolio 0.55% 0.35%
Municipal Bond Portfolio 0.55% 0.35%
U.S. Government Money Market Portfolio 0.475% 0.35%
The fee is computed daily and payable monthly. Currently, the Manager is
voluntarily limiting expenses of the Portfolios as follows: 1.125% with respect
to U.S. Government Money Market Portfolio, 1.20% with respect to Investment
Quality Bond Portfolio, 1.20% with respect to Municipal Bond Portfolio, 1.30%
with respect to Large Capitalization Value Portfolio, 1.30% with respect to
Large Capitalization Growth Portfolio, 1.30% with respect to Small
Capitalization Portfolio and 1.40% with respect to International Equity
Portfolio. During the period September 2, 1994 (commencement of operations) to
August 31,1995, the Manager voluntarily waived its management fees and assumed
$109,897, $110,359, $104,700, $126,245, $130,628, $164,025 and $114,661 in other
operating expenses for the U.S. Government Money Market, Investment Quality
Bond, Municipal Bond, Large Capitalization Value, Large Capitalization Growth,
Small Capitalization and International Equity Portfolios, respectively. For the
year ended August 31, 1996, the Manager voluntarily waived all or a portion of
its management fees and assumed $26,822, $28,600, $108,803, $30,550 and $75,530
in other operating expenses for U.S. Government Money Market, Investment Quality
Bond, Municipal Bond, Large Capitalization Value and International Equity,
respectively. For the year ended August 31, 1997, the Manager voluntarily waived
its management fees and assumed $73,464 and $31,195 in other operating expenses
for Municipal Bond and International Equity Portfolios, respectively. The
Manager also voluntarily waived $57,918; $48,882; $59,602; and $80,307 in
management fees for U.S. Government Money Market, Investment Quality Bond, Large
Capitalization Value, and Small Capitalization, respectively.
Expenses not expressly assumed by Saratoga under the Management Agreement
or by Unified Advisers, Inc. under the Administration Agreement are paid by the
Trust. The fees payable to each Advisor pursuant to the Investment Advisory
Agreements between each Advisor and Saratoga with respect to the Portfolios are
paid by Saratoga. Under the terms of the Management Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees payable to
the Manager, (b) the fees and expenses of Trustees who are not affiliated
persons of the Manager or the Trust's Advisors, (c) the fees and certain
expenses of the Custodian and Transfer and Dividend Disbursing Agent, including
the cost of maintaining certain required records of the Trust and of pricing the
Trust's shares, (d) the charges and expenses of legal counsel and independent
accountants for the Trust, (e) brokerage commissions and any issue or transfer
taxes chargeable to the Trust in connection with its securities transactions,
(f) all taxes and corporate fees payable by the Trust to governmental agencies,
(g) the fees of any trade association of which the Trust may be a member, (h)
the cost of share certificates representing shares of the Trust, (i) the cost of
fidelity and liability insurance, (j) the fees and expenses involved in
registering and maintaining registration of the Trust and of its shares with the
SEC, qualifying its shares under state securities laws, including the
preparation and printing of the Trust's registration statements and prospectuses
for such purposes, (k) all expenses of shareholders and Trustees meetings
(including travel expenses of trustees and officers of the Trust who are
directors, officers or employees of the Manager or Advisors) and of preparing,
printing and mailing reports, proxy statements and prospectuses to shareholders
in the amount necessary for distribution to the shareholders and (j) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the Trust's business.
The Management Agreement provides that Saratoga will not be liable for any
error of judgment or for any loss suffered by the Trust in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Act. The
Management Agreement was approved by the Trustees of the Trust including all of
the Trustees who are not parties to the contract or interested persons of any
such party as defined in the Act on February 3, 1997 and by the Shareholders of
the Trust on April 11, 1997.
ADMINISTRATION AGREEMENT. Unified Advisers, Inc. acts as the Trust's
Administrator pursuant to an Administration Agreement which was approved by the
Trust's trustees on February 3, 1997. The Administration Agreement will remain
in effect for one year from the date of its effectiveness, April 14, 1997, and
may be continued annually thereafter if approved in accordance with the
requirements of the Act. Prior to the Administration Agreement currently in
effect, OpCap Advisors served as the Trust's Adminstrator. For the period
September 2, 1994 (commencement of operations) to August 31, 1995 each Portfolio
accrued $42,000 in administrative fees. For the year ended August 31, 1996, each
portfolio accrued $42,000 in administrative fees. For the year ended August 31,
1997, each portfolio accrued the following amounts in adminstrative fees: U.S.
Government Money Market, $39,242; Investment Quality Bond, $36,802; Municipal
Bond, $30,728; Large Capitalization Value, $38,957; Large Capitalization Growth,
$46,248; Small Capitalization, $37,893; and International Equity, $31,899.
INVESTMENT ADVISORY SERVICES
As noted in the Prospectus, subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Advisor manages the securities held
by the Portfolio it serves in accordance with the Portfolio's stated investment
objectives and policies, makes investment decisions for the Portfolio and places
orders to purchase and sell securities on behalf of the Portfolio.
The Advisory Agreements were approved by the Trustees including a majority
of the Trustees who are not parties to such contract or interested persons of
any such parties, on February 3, 1997 and were approved by the Shareholders of
the Trust on April 11, 1997.
Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the Act). Each Advisory Agreement may be terminated by
the Trust, Saratoga, or by vote of a majority of the outstanding voting
securities of the Trust, upon written notice to the Advisor, or by the Advisor
upon at least 100 days' written notice. Each Advisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
(April 14, 1997) only so long as such continuance is specifically approved at
least annually in accordance with the requirements of the Act.
ADVISORS. The Advisors have agreed to the following fees, which are
generally lower than the fees they charge to institutional accounts for which
they serve as investment adviser.
<PAGE>
PORTION
PAID BY
TOTAL MANAGER
MANAGEMENT TO THE
PORTFOLIO FEE ADVISOR
- --------- --- -------
Large Capitalization Growth Portfolio 0.65% 0.30%
Large Capitalization Value Portfolio 0.65% 0.30%
Small Capitalization Portfolio 0.65% 0.30%
International Equity Portfolio 0.75% 0.40%
Investment Quality Bond Portfolio 0.55% 0.20%
Municipal Bond Portfolio 0.55% 0.20%
U.S. Government Money Market Portfolio 0.475% 0.125%
For the period September 2, 1994 (commencement of operations) to June 30,
1995, the Advisors waived their fees. For the period July 1, 1995 to August 31,
1995, the Manager paid advisory fees to the Advisors but the Manager waived its
fees from the Portfolios. For the year ended August 31, 1996, the Manager waived
all of its management fees for each Portfolio except Large Capitalization Growth
and Small Capitalization for which the Manager waived $75,686 of $149,335 in
fees and $106,549 of $118,415, respectively. For the year ended August 31, 1996,
the Manager paid advisory fees to the Advisors as follows: $18,350, $21,723,
$6,135, $34,934, $68,924, $54,653 and $20,077 for U.S. Government Money Market,
Investment Quality Bond, Municipal Bond, Large Capitalization Value, Large
Capitalization Growth, Small Capitalization and International Equity,
respectively. For the year ended August 31, 1997, the Manager waived all of its
management fees for Municipal Bond and International Equity Portfolios. The
manager also waived $57,918 of $124,468, $48,881 of $112,373, $59,601 of
$159137, and $80,307 of $150753 in fees for U.S. Government Money Market,
Investment Quality Bond, Large Capitalization Value, and Small Capitalization
Portfolios, respectively. For the year ended August 31, 1997, the Manager paid
advisory fees to the Advisors as follows: $32,755; $40,863, $12,586; $73,448;
$124,637; $69,578, and $34,266 for U.S. Government Money Market, Investment
Quality Bond, Municipal Bond, Large Capitalization Value, Large Capitalization
Growth, Small Capitalization, and International Equity Portfolios, respectively.
For the period September 2, 1994 (commencement of operations) to August 31,
1995, for the year ended August 31, 1996, and for the period September 1, 1996
to April 16, 1997, Axe-Houghton served as Advisor to the Small Capitalization
Portfolio.
Subject to the supervision and direction of the Manager and, ultimately,
the Trustees, each Adviser's responsibilities are limited to managing the
securities held by the Portfolio it serves in accordance with the Portfolio's
stated investment objective and policies, making investment decisions for the
Portfolio and placing orders to purchase and sell securities on behalf of the
Portfolio.
PORTFOLIO TRANSACTIONS. Each Advisor is responsible for decisions to buy
and sell securities, futures contracts and options thereon, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions, if any. As most, if not all, purchases
made by the Income Portfolios are principal transactions at net prices, those
Portfolios pay no brokerage commissions; however, prices of debt obligations
reflect mark-ups and mark-downs which constitute compensation to the executing
dealer. Each Portfolio will pay brokerage commissions on transactions in listed
options and equity securities. Prices of portfolio securities purchased from
underwriters of new issues include a commission or concession paid by the issuer
to the underwriter, and prices of debt securities purchased from dealers include
a spread between the bid and asked prices. Each Advisor seeks to obtain prompt
execution of orders at the most favorable net price. Transactions may be
directed to dealers during the course of an underwriting in return for their
brokerage and research services, which are intangible and on which no dollar
value can be placed. There is no formula for such allocation. The research
information may or may not be useful to one or more of the Portfolios and/or
other accounts of the Advisors; information received in connection with directed
orders of other accounts managed by the Advisors or its affiliates may or may
not be useful to one or more of the Portfolios. Such information may be in
written or oral form and includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of the
Advisors, to make available additional views for consideration and comparison,
and to enable the Advisors to obtain market information for the valuation of
securities held in a Portfolio's assets.
Sales of shares of each Portfolio, subject to applicable rules covering the
Distributor's activities in this area, will also be considered as a factor in
the direction of portfolio transactions to dealers, but only in conformity with
the price, execution and other considerations and practices discussed above. A
Portfolio will not purchase any securities from or sell any securities to a
broker that is affiliated with any of the Advisors (an "affiliated broker") that
is acting as principal for its own account. Each of the Advisors currently
serves as investment manager to a number of clients, including other investment
companies, and may in the future act as investment manager or advisor to others.
It is the practice of each Advisor to cause purchase or sale transactions to be
allocated among the Portfolios and others whose assets it manages in such manner
as it deems equitable. In making such allocations among the Portfolios and other
client accounts, the main factors considered are the respective investment
objectives, the relative size of Portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held and the opinions of the persons responsible for
managing the Portfolios of each Portfolio and other client accounts. When orders
to purchase or sell the same security on identical terms are placed by more than
one of the Portfolios and/or other advisory accounts managed by an Advisor or
its affiliates, the transactions are generally executed as received, although a
Portfolio or advisory account that does not direct trades to a specific broker
("free trades") usually will have its order executed first. Purchases are
combined where possible for the purpose of negotiating brokerage commissions,
which in some cases might have a detrimental effect on the price or volume of
the security in a particular transaction as far as the Portfolio is concerned.
Orders placed by accounts that direct trades to a specific broker will generally
be executed after the free trades. All orders placed on behalf of the Portfolio
are considered free trades. However, having an order placed first in the market
does not necessarily guarantee the most favorable price.
Subject to the above considerations, an affiliated broker may act as a
securities broker or futures commission merchant for the Trust. In order for an
affiliate of an Advisor or Saratoga to effect any Portfolio transactions for the
Trust, the commissions, fees or other remuneration received by an affiliated
broker must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold during a comparable period
of time. This standard would allow an affiliated broker to receive no more than
the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. Furthermore, the Trustees,
including a majority of the Trustees who are not "interested" persons, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to an affiliated broker are
consistent with the foregoing standard.
The following tables present information as to the allocation of
brokerage commissions by the Portfolios of the Trust during the period September
2, 1994 (commencement of operations) to August 31, 1995, for the year ended
August 31, 1996, and for the year ended August 31, 1997 to Hoenig & Co, Inc.
("Hoenig"), which is an affiliated person of Axe-Houghton Associates, Inc., and
Oppenheimer & Co., Inc. ("Opco"), which is an affiliated person of OpCap
Advisors.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Commissions Paid % of total % of total dollar
Portfolio Period to Hoenig commissions paid amount of transactions
- --------- ------ --------- ---------------- ----------------------
Small Capitalization 9/2/94 - 8/31/95 $5,860 40.5% 41.4%
Year ended $40 0.2% 0.4%
8/31/96
Year ended $3,300 3.7% 1.4%
8/31/97
Investment Quality 9/2/94 - 8/31/95 $188 33.2% 53.5%
Bond
Year ended $500 51.8% 54.1%
8/31/96
Year ended $0 0.0% 0.0%
8/31/97
* Most transactions for the Investment Quality Bond Portfolio are on a
principal basis; however transactions with Hoenig & Co, Inc. are on an agency
basis since principal transactions between the Portfolio and an affiliated
broker are restricted by the Investment Company Act of 1940.
Commissions Paid % of total % of total dollar
Portfolio Period to Hoenig commissions paid amount of transactions
- --------- ------ --------- ---------------- ----------------------
Large Capitalization 9/2/94 - 8/31/95 $5,953 73.6% 77.3%
Value
Year ended $6,138 38.4% 42.5%
8/31/96
Year ended $275 1.8% 0.3%
8/31/97
Small Capitalization 9/2/94 - 8/31/95 $578 4.0% 2.3%
Year ended $180 1.0% 1.3%
8/31/96
Year ended $0 0.0% 0.0%
8/31/97
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined each day the
New York Stock Exchange (the "Exchange") is open, as of the close of the regular
trading session of the Exchange that day (currently 4:00 p.m. Eastern Time), by
dividing the value of a Portfolio's net assets by the number of its shares
outstanding.
The Exchange's most recent annual announcement (which is subject to change)
states that it will close on New Year's Day, President's Day, Good Friday,
Memorial Day, July 4, Labor Day, Thanksgiving and Christmas Day. It may also
close on other days.
Securities listed on a national securities exchange or designated national
market system securities are valued at the last reported sale price on that day,
or, if there has been no sale on such day or on the previous day on which the
Exchange was open (if a week has not elapsed between such days), then the value
of such security is taken to be the reported bid price at the time as of which
the value is being ascertained. Securities actively traded in the
over-the-counter market but not designated as national market system securities
are valued at the last quoted bid price. Any securities or other assets for
which current market quotations are not readily available are valued at their
fair value as determined in good faith under procedures established by and under
the general supervision and responsibility of the Trust's Board of Trustees. The
value of a foreign security is determined in its national currency and that
value is then converted into its US dollar equivalent at the foreign exchange
rate in effect on the date of valuation.
The Trust's Board of Trustees has approved the use of nationally recognized
bond pricing services for the valuation of each Portfolio's debt securities. The
services selected create and maintain price matrices of U.S. Government and
other securities from which individual holdings are valued shortly after the
close of business each trading day. Debt securities not covered by the pricing
services are valued upon bid prices obtained from dealers who maintain an active
market therein or, if no readily available market quotations are available from
dealers, such securities (including restricted securities and OTC options) are
valued at fair value under the Board's procedures. Short-term (having a maturity
of 60 days or less) debt securities are valued at amortized cost.
Puts and calls are valued at the last sales price therefor, or, if there
are no transactions, at the last reported sales price that is within the spread
between the closing bid and asked prices on the valuation date. Futures are
valued based on their daily settlement value. When a Portfolio writes a call, an
amount equal to the premium received is included in the Portfolio's Statement of
Assets and Liabilities as an asset, and an equivalent deferred credit is
included in the liability section. The deferred credit is adjusted
("marked-to-market") to reflect the current market value of the call. If a call
written by a Portfolio is exercised, the proceeds on the sale of the underlying
securities are increased by the premium received. If a call or put written by a
Portfolio expires on its stipulated expiration date or if a Portfolio enters
into a closing transaction, it will realize a gain or loss depending on whether
thepremium was more or less than the transaction costs, without regard to
unrealized appreciation or depreciation on the underlying securities. If a put
held by a Portfolio is exercised by it, the amount the Portfolio receives on its
sale of the underlying investment is reduced by the amount of the premium paid
by the Portfolio.
The U.S. Government Money Market Portfolio utilizes the amortized cost
method in valuing its portfolio securities for purposes of determining the net
asset value of the shares of the Portfolio. The Portfolio utilizes the amortized
cost method in valuing its portfolio securities even though the portfolio
securities may increase or decrease in market value, generally, in connection
with changes in interest rates. The amortized cost method of valuation involves
valuing a security at its cost adjusted by a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the instrument. During such periods, the yield to
investors in the Portfolio may differ somewhat from that obtained in a similar
company which uses mark to market values from all its portfolio securities. For
example, if the use of amortized cost resulted in a lower (higher) aggregate
portfolio value on a particular day, a prospective investor in the Portfolio
would be able to obtain a somewhat higher (lower) yield than would result from
investment in such a similar company and existing investors would receive less
(more) investment income. The purpose of this method of calculation is to
facilitate the maintenance of a constant net asset value per share of $1.00.
The Portfolio's use of the amortized cost method to value its portfolio
securities and the maintenance of the per share net asset value of $1.00 is
permitted pursuant to Rule 2a-7 of the Act (the "Rule"), and is conditioned on
its compliance with various conditions including: (a) the Trustees are
obligated, as a particular responsibility within the overall duty of care owed
to the Portfolio's shareholders, to establish procedures reasonably designed,
taking into account current market conditions and the Portfolio's investment
objectives, to stabilize the net asset value per share as computed for the
purpose of distribution and redemption at $1.00 per share; (b) the procedures
include (i) calculation, at such intervals as the Trustees determine are
appropriate and as are reasonable in light of current market conditions, of the
deviation, if any, between net asset value per share using amortized cost to
value portfolio securities and net asset value per share based upon available
market quotations with respect to such portfolio securities; (ii) periodic
review by the Trustees of the amount of deviation as well as methods used to
calculate it; and (iii) maintenance of written records of the procedures, the
Trustees' considerations made pursuant to them and any actions taken upon such
considerations; (c) the Trustees should consider what steps should be taken, if
any, in the event of a difference of more than 2 of 1% between the two methods
of valuation; and (d) the Trustees should take such action as they deem
appropriate (such as shortening the average portfolio maturity, realizing gains
or losses or as provided by the Agreement and Declaration of Trust, reducing the
number of the outstanding shares of the Portfolio to eliminate or reduce to the
extent reasonably practicable material dilution or other unfair results to
investors or existing shareholders). Any reduction of outstanding shares will be
effected by having each shareholder proportionately contribute to the
Portfolio's capital the necessary shares that represent the amount of excess
upon such determination. Each shareholder will be deemed to have agreed to such
contribution in these circumstances by investment in the Portfolio.
The Rule further requires that the Portfolio limit its investments to U.S.
dollar-denominated instruments which the Trustees determine present minimal
credit risks and which are Eligible Securities (as defined below). The Rule also
requires the Portfolio to maintain a dollar-weighted average portfolio maturity
(not more than 90 days) appropriate to its objective of maintaining a stable net
asset value of $1.00 per share and precludes the purchase of any instrument with
remaining maturity of more than thirteen months. Should the disposition of a
portfolio security result in a dollar-weighted average portfolio maturity of
more than 90 days, the Portfolio would be required to invest its available cash
in such a manner as to reduce such maturity to 90 days or less as soon as
reasonably practicable.
Generally, for purposes of the procedures adopted under the Rule, the
maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the Portfolio's
interest in the instrument is subject to market action) until the date noted on
the face of the instrument as the date on which the principal amount must be
paid, or in the case of an instrument called for redemption, the date on which
the redemption payment must be made.
A variable rate obligation that is subject to a demand feature is deemed to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand. A floating rate instrument that is
subject to a demand feature is deemed to have a maturity equal to the period
remaining until the principal amount can be recovered through demand.
An Eligible Security is defined in the Rule to mean a security which: (a)
has a remaining maturity of thirteen months or less; (b) (i) is rated in the two
highest short-term rating categories by any two nationally recognized
statistical rating organizations ("NRSROs") that have issued a short-term rating
with respect to the security or class of debt obligations of the issuer, or (ii)
if only one NRSRO has issued a short-term rating with respect to the security,
then by that NRSRO; (c) was a long-term security at the time of issuance whose
issuer has outstanding a short-term debt obligation which is comparable in
priority and security and has a rating as specified in clause (b) above; or (d)
if no rating is assigned by any NRSRO as provided in clauses (b) and (c) above,
the unrated security is determined by the Board to be of comparable quality to
any such rated security.
As permitted by the Rule, the Trustees have delegated to the Portfolio's
Advisor, subject to the Trustees' oversight pursuant to guidelines and
procedures adopted by the Trustees, the authority to determine which securities
present minimal credit risks and which unrated securities are comparable in
quality to rated securities.
If the Trustees determine that it is no longer in the best interests of the
Portfolio and its shareholders to maintain a stable price of $1.00 per share, or
if the Trustees believe that maintaining such price no longer reflects a
market-based net asset value per share, the Trustees have the right to change
from an amortized cost basis of valuation to valuation based on market
quotations. The Trust will notify shareholders of any such change.
The Portfolio will manage its portfolio in an effort to maintain a constant
$1.00 per share price, but it cannot assure that the value of its shares will
never deviate from this price. Since dividends from net investment income are
declared and reinvested on a daily basis, the net asset value per share, under
ordinary circumstances, is likely to remain constant. Otherwise, realized and
unrealized gains and losses will not be distributed on a daily basis but will be
reflected in the Portfolio's net asset value. The amounts of such gains and
losses will be considered by the Trustees in determining the action to be taken
to maintain the Trust's $1.00 per share net asset value. Such action may include
distribution at any time of part or all of the then accumulated undistributed
net realized capital gains, or reduction or elimination of daily dividends by an
amount equal to part or all of the then accumulated net realized capital losses.
However, if realized losses should exceed the sum of net investment income plus
realized gains on any day, the net asset value per share on that day might
decline below $1.00 per share. In such circumstances, the Trust may reduce or
eliminate the payment of daily dividends for a period of time in an effort to
restore the Trust's $1.00 per share net asset value. A decline in prices of
securities could result in significant unrealized depreciation on a mark to
market basis. Under these circumstances the Portfolio may reduce or eliminate
the payment of dividends and utilize a net asset value per share as determined
by using available market quotations or reduce the number of its shares
outstanding.
PORTFOLIO YIELD AND TOTAL RETURN INFORMATION
PERFORMANCE INFORMATION
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
CURRENT YIELD AND EFFECTIVE YIELD. The Trust may from time to time
advertise the current yield and effective annual yield of the U.S. Government
Money Market Portfolio calculated over a 7-day period. The yield quoted will be
the simple annualized yield for an identified seven calendar day period. The
yield calculation will be based on a hypothetical account having a balance of
exactly one share at the beginning of the seven-day period. The base period
return will be the change in the value of the hypothetical account during the
seven-day period, including dividends declared on any shares purchased with
dividends on the share but excluding any capital changes. The yield will vary as
interest rates and other conditions affecting money market instruments change.
Yield also depends on the quality, length of maturity and type of instruments in
the Portfolio, and its operating expenses. The Portfolio may also prepare an
effective annual yield computed by compounding the unannualized seven-day period
return as follows: by adding 1 to the unannualized 7-day period return, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
Effective Yield = [(base period return +1)365/7]-1]
Other Portfolios
YIELDS. Yield information may be useful to investors in reviewing a
Portfolio's performance. However, a number of factors should be considered
before using yield information as a basis for comparison with other investments.
An investment in any of the Portfolios of the Trust is not insured; yield is not
guaranteed and normally will fluctuate on a daily basis. The yield for any given
past period is not an indication or representation of future yields or rates of
return. Yield is affected by Portfolio quality, Portfolio maturity, type of
instruments held and operating expenses. When comparing a Portfolio's yield with
that of other investments, investors should understand that certain other
investment alternatives such as money-market instruments or bank accounts
provide fixed yields and also that bank accounts may be insured.
The Trust may from time to time advertise the yield of a Portfolio as
calculated over a 30-day period. This yield will be computed by dividing the
Trust's net investment income per share earned during this 30-day period by the
maximum offering price per share on the last day of this period. The average
number of shares used in determining the net investment income per share will be
the average daily number of shares outstanding during the 30-day period that
were eligible to receive dividends. In accordance with regulations of the
Securities and Exchange Commission, income will be computed by totaling the
interest earned on all debt obligations during the 30-day period and subtracting
from that amount the total of all expenses incurred during the period, which
include management and distribution fees. The 30-day yield is then annualized on
a bond-equivalent basis assuming semi-annual reinvestment and compounding of net
investment income, as described in the Prospectus. Yield is calculated according
to the following formula:
--------------------------------
x 6
YIELD = 2(---- + 1) - 1
cd
--------------------------------
Where:
x= daily net investment income, based upon the subtraction of daily accrued
expenses from daily accrued income of the Portfolio. Income is accrued
daily for each day of the indicated period based upon yield-to-maturity of
each obligation held in the Portfolio as of the day before the beginning of
any thirty-day period or as of contractual settlement date for securities
acquired during the period. Mortgage and other receivables-backed
securities calculate income using coupon rate and outstanding principal
amount.
c= the average daily number of shares outstanding during the period that were
entitled to receive dividends.
d= the maximum offering price per share on the last day of the period.
Yield does not reflect capital gains or losses, non-recurring or irregular
income. Gain or loss attributable to actual monthly paydowns on mortgage or
other receivables-backed obligations purchased at a discount or premium is
reflected as an increase or decrease in interest income during the period.
TAX EQUIVALENT YIELD is computed by dividing that portion of the current
yield (computed as described above) which is tax exempt by 1 minus a stated tax
rate and adding the quotient to that portion, if any, of the yield of the
Portfolio that is not tax exempt.
- ---------------------------
E
TAX EQUIVALENT YIELD = ----- + t
1-P
- --------------------------- Where: E = tax exempt yield
P = stated income tax rate
t = taxable yield
The Municipal Bond Portfolio may advertise tax-equivalent yields at varying
assumed tax rates.
AVERAGE ANNUAL TOTAL RETURN
The Trust may from time to time advertise the average annual total return
of a Portfolio. Average annual total return is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
P (1+t)n = ERV
Where: P = a hypothetical initial investment of $1,000
t = average annual total return
n = number of years
ERV = ending redeemable value of P at the end of each period
Total return information may be useful to investors in reviewing a
Portfolio's performance. However, certain factors should be considered before
using this information as a basis for comparison with alternate investments. No
adjustment is made for taxes payable on distributions. The total return for any
given past period is not an indication or representation by the Portfolio of
future rates of return on its shares.
Total returns quoted in advertising reflect all aspects of a Portfolio's
return including the effect of reinvesting dividends and capital gain
distributions, and any change in a Portfolio's net asset value per share over
the period. Average annual returns are calculated by determining the growth or
decline in value of a hypothetical investment in a Portfolio 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. For example, a cumulative return of 100% over ten
years would produce an average annual return of 7.18%, which is the steady
annual return that would equal 100% growth on a compounded basis in ten years.
<PAGE>
AGGREGATE TOTAL RETURN
The Trust may from time to time advertise the aggregate total return of a
Portfolio. A Portfolio's aggregate total return figures represent the cumulative
change in the value of an investment in the Portfolio for the specified period
and are computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at
the beginning of the 1, 5, or 10 year period at the end of the 1, 5 or 10
year period (or fractional portion thereof).
Unaveraged or cumulative total returns reflect the simple change in value
of an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns and other performance
information may be quoted numerically or in a table, graph or similar
illustration.
The average annual total return on an investment made in shares of the
Portfolios for the year ended August 31, 1997 and for the period of inception
through year ended August 31, 1997 are as follows:
Average Annual Total Average Annual
Name of Portfolio Return for the year ended Total Return for
August 31, 1997* period of inception
through year ended
August 31, 1997*
Large Capitalization Value Portfolio 31.37% 24.81%
Large Capitalization Growth Portfolio 35.79% 21.49%
Small Capitalization Portfolio 18.07% 18.33%
International Equity Portfolio 14.39% 3.47%
Investment Quality Bond Portfolio 7.16% 5.82%
Municipal Bond Portfolio 7.67% 5.72%
* During the years ended August 31, 1995, August 31, 1996, and August 31, 1997,
the Manager waived the management fee, assumed certain expenses of and, during
the years ended August 31, 1996 and 1997, benefitted from expense offset
arrangements with respect to the Portfolios. Without such waivers, expense
assumptions and expense offsets, the returns would have been lower.
YIELD FOR 30-DAY PERIOD
Portfolio Ended August 31, 1996* Ended August 31,1997*
- --------- ----------------------- ----------------------
Investment Quality Bond Portfolio 5.40% 5.11%
Municipal Bond Portfolio 4.25% 4.53%
* Reflects the waiver of management fees, assumption of certain operating
expenses and, the benefit of expense offset arrangements by the Manager. Without
such waivers, assumptions and expense offsets, the yields would have been 5.31%
for the Investment Quality Bond Portfolio and 2.73% for the Municipal Bond
Portfolio for the period ended August 31, 1996 and 5.08% and 4.19%,
respectively, for the period ended August 31, 1997.
TAX EQUIVALENT YIELD FOR 30 DAY PERIOD
<TABLE>
<S> <C> <C> <C> <C> <C>
At Federal At Federal At Federal At Federal
30 Day Income Tax Income Tax Income Tax Income Tas
Period Rate of Rate of Rate of Rate of
Portfolio Ended 28% 31% 36% 39.6%
- --------- ----- --- --- --- -----
Municipal
Bond 8/31/96* 5.90% 6.16% 6.64% 7.04%
8/31/97* 6.29% 6.57% 7.08% 7.50%
</TABLE>
* During the 30 day periods ended August 31, 1996 and August 31, 1997, the
Manager waived the management fee, assumed certain expenses and, for period
ended August 31, 1996, benefitted from expense offset arrangements for the
Municipal Bond Portfolio. Without such waivers, expense assumptions and expense
offsets, the yields for the Municipal Bond Portfolio would have been 3.79% at
the 28% Federal income tax rate, 3.96% at the 31% Federal income tax rate, 4.27%
at the 36% Federal income tax rate and 4.52% at the 39.6% Federal income tax
rate for the period ended August 31, 1996 and 5.82%, 6.07%, 6.55%, and 6.94%,
respectively, for the period ended August 31, 1997.
YIELD FOR SEVEN DAY PERIOD*
Portfolio Period Ended Current Effective
- --------- ------------ ------- ---------
U.S. Government Money
Market Portfolio August 31, 1996 4.25% 4.34%
August 31, 1997 4.44% 4.53%
* During the seven day periods ended August 31, 1996 and August 31, 1997 the
Manager waived the entire management fee, assumed certain expenses, and
benefitted from an expense offset arrangement with respect to the U.S.
Government Money Market Portfolio. Without such waiver, expense assumptions and
expense offsets, the current yield and effective yield would have been 3.99% and
4.07%, respectively, for the seven day period ended August 31, 1996 and _____%
and _______, respectively, for the seven day period ended August 31, 1997.
From time to time the Portfolios may refer in advertisements to rankings
and performance statistics published by (1) recognized mutual fund performance
rating services including but not limited to Lipper Analytical Services, Inc.
and Morningstar, Inc., (2) recognized indexes including but not limited to the
Standard & Poors Composite Stock Price Index, Russell 2000 Index, Dow Jones
Industrial Average, Consumer Price Index, EAFE Index, Lehman Brothers
Government/Corporate Bond Index, the S & P Barra/ Growth Index, the S&P/Barra
Value Index, Lehman Municipal Bond Index and (3) Money Magazine and other
financial publications including but not limited to magazines, newspapers and
newsletters. Performance statistics may include yields, total returns, measures
of volatility, standard deviation or other methods of portraying performance
based on the method used by the publishers of the information. In addition,
comparisons may be made between yields on certificates of deposit and U.S.
government securities and corporate bonds, and between value stocks and growth
stocks, and may refer to current or historic financial or economic trends or
conditions.
The performance of the Portfolios may be compared to the performance of
other mutual funds in general, or to the performance of particular types of
mutual funds. These comparisons may be expressed as mutual fund rankings
prepared by Lipper Analytical Services, Inc. ("Lipper"), an independent service
located in Summit, New Jersey that monitors the performance of mutual funds.
Lipper generally ranks funds on the basis of total return, assuming reinvestment
of distributions, but does not take sales charges or redemption fees into
consideration, and is prepared without regard to tax consequences. In addition
to the mutual fund rankings, performance may be compared to mutual fund
performance indices prepared by Lipper.
From time to time, a Portfolio's performance also may be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Portfolio may quote Morningstar, Inc., in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance.
Saratoga Capital Management or Unified Management Corporation (the
"Distributor")(which replaced OCC Distributors as the Trust's distributor
effective April 14, 1997) may provide information designed to help individuals
understand their investment goals and explore various financial strategies such
as general principles of investing, such as asset allocation, diversification,
risk tolerance; goal setting; and a questionnaire designed to help create a
personal financial profile.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on CPI), and combinations of various capital markets. The
performance of these capital markets is based on the returns of different
indices.
Saratoga Capital Management or the Distributor may use the performance of
these capital markets in order to demonstrate general risk-versus-reward
investment scenarios. Performance comparisons may also include the value of a
hypothetical investment in any of these capital markets. The risks associated
with the security types in any capital market may or may not correspond directly
to those of the Portfolios. The Portfolios may also compare performance to that
of other compilations or indices that may be developed and made available in the
future.
In advertising materials, the Distributor may reference or discuss its
products and services, which may include: retirement investing; brokerage
products and services; the effects of dollar-cost averaging and saving for
college; and the risks of market timing. In addition, the Distributor may quote
financial or business publications and periodicals, including model portfolios
or allocations, as they relate to fund management, investment philosophy, and
investment techniques.
The Portfolios may present their fund number, Quotron number, CUSIP number,
and discuss or quote their current portfolio manager.
Volatility. The Portfolios may quote various measures of volatility and
benchmark correlation in advertising. In addition, the Portfolios may compare
these measures to those of other funds. Measures of volatility seek to compare a
fund's historical share price fluctuations or total returns to those of a
benchmark. Measures of benchmark correlation indicate how valid a comparative
benchmark may be. All measures of volatility and correlation are calculated
using averages of historical data.
Momentum Indicators indicate the Portfolios price movements over specific
periods of time. Each point on the momentum indicator represents the Portfolio's
percentage change in price movements over that period.
The Portfolios may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
The Portfolios may be available for purchase through retirement plans or
other programs offering deferral of or exemption from income taxes, which may
produce superior after-tax returns over time. For example, a $1,000 investment
earning a taxable return of 10% annually would have an after-tax value of $1,949
after ten years, assuming tax was deducted from the return each year at a 28%
rate. An equivalent tax-deferred investment would have an after-tax value of
$2,100 after ten years, assuming tax was deducted at a 31% rate from the
tax-deferred earnings at the end of the ten-year period.
<PAGE>
TAXES
THE MUNICIPAL BOND PORTFOLIO
Because the Municipal Bond Portfolio will distribute exempt-interest
dividends, interest on indebtedness incurred by a shareholder to purchase or
carry shares of the Municipal Bond Portfolio is not deductible for Federal
income tax purposes. If a shareholder of the Municipal Bond Portfolio receives
exempt-interest dividends with respect to any share and if such share is held by
the shareholder for six months or less, then any loss on the sale or exchange of
such share may, to the extent of such exempt-interest dividends, be disallowed.
In addition, the Code may require a shareholder, if he or she receives
exempt-interest dividends, to treat as taxable income a portion of certain
otherwise non-taxable social security and railroad retirement benefit payments.
Furthermore, that portion of any exempt-interest dividend paid by the Municipal
Bond Portfolio which represents income derived from private activity bonds held
by the Portfolio may not retain its tax-exempt status in the hands of a
shareholder who is a "substantial user" of a facility financed by such bonds, or
a "related person" thereof. Moreover, as noted in the Prospectus, some of the
Municipal Bond Portfolio's dividends may be a specific preference item or a
component of an adjustment item, for purposes of the Federal individual and
corporate alternative minimum taxes. In addition, the receipt of dividends and
distributions from the Municipal Bond Portfolio also may affect a foreign
corporate shareholder's Federal "branch profits" tax liability and a Subchapter
S corporate shareholder's Federal "excess net passive income" tax liability.
Shareholders should consult their own tax advisors as to whether they are (a)
substantial users with respect to a facility or related to such users within the
meaning of the Code or (b) subject to a Federal alternative minimum tax, the
Federal environmental tax, the Federal branch profits tax or the Federal excess
net passive income tax.
Each shareholder of the Municipal Bond Portfolio will receive after the
close of the calendar year an annual statement as to the Federal income tax
status of his or her dividends and distributions from the Portfolio for the
prior calendar year. These statements also will designate the amount of
exempt-interest dividends that is a specified preference item for purposes of
the Federal individual and corporate alternative minimum taxes. Each shareholder
of the Municipal Bond Portfolio will also receive a report of the percentage and
source on a state-by-state basis of interest income on municipal obligations
received by the Portfolio during the preceding year. Shareholders should consult
their tax advisors as to any other state and local taxes that may apply to these
dividends and distributions. In the event that the Municipal Bond Portfolio
derives taxable net investment income, it intends to designate as taxable
dividends the same percentage of each day's dividend as its actual taxable net
investment income bears to its total taxable net investment income earned on
that day. Therefore, the percentage of each day's dividend designated as
taxable, if any, may vary from day to day.
For the period September 2, 1994 (commencement of operations) to August 31,
1995, the International Equity Portfolio had capital loss carryforwards of $821,
which will be available, to the extent provided by regulations, to offset future
net capital gains realized through the fiscal year ending 2003 and reduce
amounts distributable to shareholders. At August 31, 1996, Municipal Bond and
Large Capitalization Growth had net capital loss carryforwards of $4,276 and
$93,316, respectively, which will be available to offset future net capital
gains through the year 2004. At August 31, 1997, U.S. Government Money Market,
Investment Quality Bond, and International Equity had net capital loss
carryforwards of $32, $6147, and $8875, respectively, which will be available to
offset future net capital gains through the year 2005. Capital and currency
losses incurred after October 31, within the portfolio's taxable year are deemed
to arise on the first business day of the portfolio's next taxable year. U.S.
Government Money Market, Investment Quality, Municipal Bond and Large
Capitalization Growth incurred and elected to defer $32; $6,147; $7,549 and
$859,468, respectively, in net capital losses, during the year ended August 31,
1996. Additionally, during the year ended August 31, 1996, International Equity
incurred and elected to defer $12,996 in currency losses. During the year ended
August 31, 1997, U.S. Government Money Market and Investment Quality Bond
incurred and elected to defer $101 and $24,908, respectively, in net capital
losses. Additionally, during the year ended August 31, 1997, International
Equity incurred and elected to defer $53,606 in currency losses.
ALL PORTFOLIOS
As described above and in the Prospectus, the Portfolios may invest in
futures contracts and options. Each Portfolio anticipates that these investment
activities will not prevent the Trust from qualifying as a regulated investment
company. As a general rule, these investment activities will increase or
decrease the amount of long-term and short-term capital gains or losses realized
by a Portfolio and, accordingly, will affect the amount of capital gains
distributed to the Portfolio's shareholders.
Any net long-term capital gains realized by a Portfolio will be distributed
annually as described in the Prospectus. Such distributions ("capital gain
dividends") will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held shares of the Portfolio and will
be designated as capital gain dividends in a written notice mailed by the
Portfolio to shareholders after the close of the Portfolio's taxable year. If a
shareholder receives a capital gain dividend with respect to any share and if
the share has been held by the shareholder for six months or less, then any loss
(to the extent not disallowed pursuant to the other six-month rule described
above relating to exempt-interest dividends) on the sale or exchange of such
share will be treated as a long-term capital loss to the extent of the capital
gain dividend. Short-term capital gains will be distributed annually as ordinary
income as required by the Internal Revenue Code.
If a shareholder fails to furnish a correct taxpayer identification number,
fails to fully report dividend or interest income or fails to certify that he or
she has provided a correct taxpayer identification number and that he or she is
not subject to backup withholding, then the shareholder may be subject to a 31%
"backup withholding tax," with respect to (a) taxable dividends and
distributions, and (b) the proceeds of any redemptions of shares of a Portfolio.
An individual's taxpayer identification number is his or her social security
number. The backup withholding tax is not an additional tax and will be credited
against a taxpayer's regular Federal income tax liability.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Municipal Bond Portfolio could be affected. In
that event the Board of Trustees of the Trust would reevaluate the investment
objections and policies of the Municipal Bond Portfolio.
The foregoing is only a summary of certain tax considerations generally
affecting the Portfolios, and is not intended as a substitute for careful tax
planning. Individuals are often exempt from state and local personal income
taxes on distributions of tax-exempt interest income derived from obligations of
issuers located in the state in which they reside when these distributions are
received directly from these issuers, but are usually subject to such taxes on
income derived from obligations of issuers located in other jurisdictions. The
discussion does not purport to deal with all of the Federal, state and local tax
consequences applicable to an investment in the Municipal Bond Portfolio, or to
all categories of investors, some of which may be subject to special rules.
Shareholders are urged to consult their tax advisors with specific reference to
their own tax situations.
ADDITIONAL INFORMATION
DESCRIPTION OF THE TRUST. The Trust was formed under the laws of Delaware
on April 8, 1994. It is not contemplated that regular annual meetings of
shareholders will be held. Shareholders of each Portfolio have the right, upon
the declaration in writing or vote by two-thirds of the outstanding shares of
the Portfolio, to remove a Trustee. The Trustees will call a meeting of
shareholders to vote on the removal of a Trustee upon the written request of the
record holders (for at least six months) of 10% of its outstanding shares. In
addition, 10 shareholders holding the lesser of $25,000 or 1% of a Portfolio's
outstanding shares may advise the Trustees in writing that they wish to
communicate with other shareholders of that Portfolio for the purpose of
requesting a meeting to remove a Trustee. The Trustees will then either give the
applicants access to the Portfolio's shareholder list or mail the applicants'
communication to all other shareholders at the applicants' expense.
When issued, shares of each class are fully paid and have no preemptive,
conversion or other subscription rights. Each class of shares represents
identical interests in the applicable Portfolio's investment Portfolio. As such,
they have the same rights, privileges and preferences, except with respect to:
(a) the designation of each class, (b) the effect of the respective sales
charges, if any, for each class, (c) the distribution fees borne by each class,
(d) the expenses allocable exclusively to each class, (e) voting rights on
matters exclusively affecting a single class and (f) the exchange privilege of
each class. Upon liquidation of the Trust or any Portfolio, shareholders of each
class of shares of a Portfolio are entitled to share pro rata in the net assets
of that class available for distribution to shareholders after all debts and
expenses have been paid. The shares do not have cumulative voting rights.
The assets received by the Trust on the sale of shares of each Portfolio
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, are allocated to each Portfolio, and constitute the assets
of such Portfolio. The assets of each Portfolio are required to be segregated on
the Trust's books of account. Expenses not otherwise identified with a
particular Portfolio will be allocated fairly among two or more Portfolios by
the Board of Trustees. The Trust's Board of Trustees has agreed to monitor the
Portfolio transactions and management of each of the Portfolios and to consider
and resolve any conflict that may arise.
The Agreement and Declaration of Trust contains an express disclaimer of
shareholder liability for each Portfolio's obligations, and provides that each
Portfolio shall indemnify any shareholder who is held personally liable for the
obligations of that Portfolio. It also provides that each Portfolio shall
assume, upon request, the defense of any claim made against any shareholder for
any act or obligation of that Portfolio and shall satisfy any judgment thereon.
POSSIBLE ADDITIONAL PORTFOLIO SERIES. If additional Portfolios are created
by the Board of Trustees, shares of each such Portfolio will be entitled to vote
as a group only to the extent permitted by the 1940 Act (see below) or as
permitted by the Board of Trustees.
Under Rule 18f-2 of the 1940 Act, any matter required to be submitted to a
vote of shareholders of any investment company which has two or more series
outstanding is not deemed to have been effectively acted upon unless approved by
the holders of a "majority" (as defined in that Rule) of the voting securities
of each series affected by the matter. Such separate voting requirements do not
apply to the election of trustees or the ratification of the selection of
accountants. Approval of an investment management or distribution plan and a
change in fundamental policies would be regarded as matters requiring separate
voting by each Portfolio. The Rule contains provisions for cases in which an
advisory contract is approved by one or more, but not all, series. A change in
investment policy may go into effect as to one or more series whose holders so
approve the change even though the required vote is not obtained as to the
holders of other affected series.
INDEPENDENT AUDITORS. For the fiscal year ending August 31, 1998, Ernst &
Young, LLP, 787 Seventh Avenue, New York, New York 10019, are the independent
auditors of the Trust and of each Portfolio; their services include auditing the
annual financial statements and financial highlights of each Portfolio as well
as other related services. For prior periods, services were provided by another
firm.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT. State Street
Bank and Trust Company acts as transfer agent, shareholder servicing agent and
custodian of the assets of the Trust.
DISTRIBUTION OPTIONS. Shareholders may change their distribution options
by giving the Transfer Agent three days prior notice in writing.
TAX INFORMATION. The Federal tax treatment of the Portfolios' dividends and
distributions is explained in the Prospectus under the heading "Tax Status." A
Portfolio will be subject to a nondeductible 4% excise tax to the extent that it
fails to distribute by the end of any calendar year substantially all its
ordinary income for that year and capital gains for the one year period ending
on October 31 of that year.
RETIREMENT PLANS. The Distributor may print advertisements and brochures
concerning retirement plans, lump sum distributions and 401-k plans. These
materials may include descriptions of tax rules, strategies for reducing risk
and descriptions of 401-k programs. From time to time hypothetical investment
programs illustrating various tax-deferred investment strategies will be used in
brochures, sales literature, and omitting prospectuses. The following examples
illustrate the general approaches that will be followed. These hypotheticals
will be modified with different investment amounts, reflecting the amounts that
can be invested in different types of retirement programs, different assumed tax
rates, and assumed rates of return. They should not be viewed as indicative of
past or future performance of any of the Distributor's products.
EXAMPLES
<TABLE>
<CAPTION>
- ---------------------------------------------------
- ---------------------------------------------------
Benefits of Long Term Tax-Free Compounding -
Single Sum
- ---------------------------------------------------
Amount of Contribution:$100,000
- ---------------------------------------------------
Rates of Return
-----------------------------------------
Years
8.00% 10.00% 12.00%
-----------------------------------------
Value at end
- ---------------------------------------------------
<S> <C> <C> <C>
5 $ 146,933 $ 161,051 $ 176,234
10 $ 215,892 $ 259,374 $ 310,585
15 $ 317,217 $ 417,725 $ 547,357
20 $ 466,096 $ 672,750 $ 964,629
25 $ 684,848 $1,083,471 $1,700,006
30 $1,006,266 $1,744,940 $2,995,992
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------
- ---------------------------------------------------
Benefits of Long Term Tax-Free Compounding -
Periodic Investment
- ---------------------------------------------------
Amount Invested Annually: $2,000
- ---------------------------------------------------
Rates of Return
---------------------------------------
Years
8.00% 10.00% 12.00%
---------------------------------------
Value at End
- ---------------------------------------------------
<S> <C> <C> <C>
5 $ 12,672 $ 13,431 $ 14,230
10 $ 31,291 $ 35,062 $ 39,309
15 $ 58,649 $ 69,899 $ 83,507
20 $ 98,846 $126,005 $161,397
25 $157,909 $216,364 $298,668
30 $244,692 $361,887 $540,585
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Comparison of Taxable and Tax-Free Investing -- Periodic Investments
(Assumed Tax Rate : 28%)
- -----------------------------------------------------------------------
Amount of Annual Contribution (Pre-Tax):$2,000
- -----------------------------------------------------------------------
-----------------------------------------------------------
Tax Deferred Rates of Return
Years -----------------------------------------------------------
8.00% 10.00% 12.00%
-----------------------------------------------------------
Value at end
- -----------------------------------------------------------------------
<S> <C> <C> <C>
5 $ 12,672 $ 13,431 $ 14,230
10 $ 31,291 $ 35,062 $ 39,309
15 $ 58,649 $ 69,899 $ 83,507
20 $ 98,846 $126,005 $161,397
25 $157,909 $216,364 $298,668
30 $244,692 $361,887 $540,585
- -----------------------------------------------------------------------
Annual Contribution (After Tax): $1,440
-----------------------------------------------------------
Fully Taxed Rates of Return
Years -----------------------------------------------------------
5.76% 7.20% 8.64%
-----------------------------------------------------------
Value at End
- -----------------------------------------------------------------------
5 $ 8,544 $ 8,913 $ 9,296
10 $ 19,849 $ 21,531 $ 23,364
15 $ 34,807 $ 39,394 $ 44,654
20 $ 54,598 $ 64,683 $ 76,874
25 $ 80,785 $100,485 $125,635
30 $115,435 $151,171 $199,429
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Comparison of Tax Deferred Investing
-- Deducting Taxes at End
(Assumed Tax Rate at End: 28%)
- -----------------------------------------------------------------------
Amount of Annual Contribution: $2,000
- -----------------------------------------------------------------------
Tax Deferred Rates of Return
-----------------------------------------------------------
8.00% 10.00% 12.00%
Years -----------------------------------------------------------
Value at End
- -----------------------------------------------------------------------
<S> <C> <C> <C>
5 $ 11,924 $ 12,470 $ 13,046
10 $ 28,130 $ 30,485 $ 33,903
15 $ 50,627 $ 58,728 $ 68,525
20 $ 82,369 $101,924 $127,406
25 $127,694 $169,782 $229,041
30 $192,978 $277,359 $406,021
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
FINANCIAL STATEMENTS
The financial statements and independent auditor's report required to be
included in this Statement of Additional Information are incorporated herein by
reference to the Trust's Annual Report to Shareholders for the year ended August
31, 1997. The Trust will provide the Annual Report without charge upon request
by calling the Trust at 1-800-807-FUND (800-807-3863).
<PAGE>
APPENDIX A -- RATINGS
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa. Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future payments cannot be considered as well assured. Often the protection of
interest and principal may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of 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.
Moody's applies the numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. They are rated lower than the Aaa 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 made
the long-term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A are judged to be upper medium grade obligations.
Security for principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
i.e.; they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judges to have speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack the characteristics of a desirable
investment. Assurance of interest and principal payments or of other terms of
the contract over long periods may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be elements of danger present with respect to principal
or interest.
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA. Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A. Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB AND B. Bonds rated BB and B are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB represents a lower degree of
speculation than B. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree. The AA
rating may be modified by the addition of a plus or minus sign to show relative
standing within the AA rating category.
A. Debt rated A is regarded as safe. This rating differs from the two
higher ratings because, with respect to general obligation bonds, there is some
weakness which, under certain adverse circumstances, might impair the ability of
the issuer to meet debt obligations at some future date. With respect to revenue
bonds, debt service coverage is good but not exceptional and stability of
pledged revenues could show some variations because of increased competition or
economic influences in revenues.
BBB. Bonds rated BBB are regarded as having adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
BB. Debt rated BB has less near-term vulnerability to default than other
speculative grade debt, however, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.
B. Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest and principal payments. Adverse business, financial or
economic conditions would likely impair capacity or willingness to pay interest
and repay principal.
CCC. Debt rated CCC has a current identifiable vulnerability to default and
is dependent upon favorable business, financial and economic conditions to meet
timely payments of principal. In the event of adverse business, financial or
economic conditions, it is not likely to have the capacity to pay interest and
repay principal.
DESCRIPTION OF FITCH'S MUNICIPAL BOND RATINGS.
Debt rated "AAA", the highest rating by Fitch, is considered to be of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
Debt rated "AA" is regarded as very high credit quality. The obligor's
ability to pay interest and repay principal is very strong.
Debt rated "A" is of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than debt
with higher ratings.
Debt rated "BBB" is of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is adequate, however a change in economic
conditions may adversely affect timely payment.
Debt rated "BB" is considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes, however, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
Debt rated "B" is considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
Debt rated "CCC" has certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA) to
indicate the relative position within the category.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS
Moody's ratings for state and municipal notes and other short-term loans are
designated "Moody's Investment Grade" ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. A short-term
rating designated VMIG may also be assigned on an issue having a demand feature.
Factors affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term borrowing. Symbols used will be as follows:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS
Standard & Poor's tax exempt note ratings are generally given to such notes
that mature in three years or less. The two higher rating categories are as
follows:
SP-1. Very strong or strong capacity to pay principal and interest. These
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated Prime-1 by Moody's are judged by Moody's to be of the
best quality. Their short-term debt obligations carry the smallest degree of
investment risk. Margins of support for current indebtedness are large or stable
with cash flow and asset protection well assured. Current liquidity provides
ample coverage of near-term liabilities and unused alternative financing
arrangements are generally available. While protective elements may change over
the intermediate or longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations.
Issuers (or related supporting institutions) rated Prime-2 have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Commercial paper rated A by S&P have the following characteristics.
Liquidity ratios are better than industry average. Long-term debt rating is A or
better. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow are in an upward trend. Typically, the issuer is a
strong company in a well-established industry and has superior management.
Issuers rated A are further refined by use of numbers 1, 2, and 3 to denote
relative strength within this highest classification. Those issuers rated A-1
that are determined by S&P to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
Fitch's commercial paper ratings represent Fitch's assessment of the
issuer's ability to meet its obligations in a timely manner. The assessment
places emphasis on the existence of liquidity. Ratings range from F-1+ which
represents exceptionally strong credit quality to F-4 which represents weak
credit quality.
Duff & Phelps' short-term ratings apply to all obligations with maturities
of under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit and current maturities of long-term
debt. Emphasis is placed on liquidity. Ratings range from Duff 1+ for the
highest quality to Duff 5 for the lowest, issuers in default. Issues rated Duff
1+ are regarded as having the highest certainty of timely payment. Issues rated
Duff 1 are regarded as having very high certainty of timely payment.
<PAGE>
Part C Other Information
Item 24. Financial Statements and Exhibits
Financial Statements:
Included in the Prospectus:
Financial Highlights
Included in Part B:
The financial statements and independent auditors' report
required to be included in part B are incorporated therein by
reference to the Registrant's Annual Report to Shareholders
for the year ended August 31, 1997.
Included in Part C:
None
Exhibits:
(1) (a) Agreement and Declaration of Trust.*
(b) Amendment No. 1 to the Agreement and Declaration
of Trust.*
(2) By-laws of Registrant.*
(3) Not Applicable.
(4) Not Applicable.
(5) (a) Form of Management Agreement.**
(b) (1) Form of Investment Advisory Agreement
between Saratoga Capital Management and Sterling
Capital Management Company with respect to the US
Government Money Market Portfolio.**
(b) (2) Form of Investment Advisory Agreement between
Saratoga Capital Management and Fox Asset Management,
Inc. with respect to the Investment Quality Bond
Portfolio. **
(b) (3) Form of Investment Advisory Agreement between
Saratoga Capital Management and OpCap Advisors with
respect to the Municipal Bond Portfolio. **
(b) (4) Form of Investment Advisory Agreement between
Saratoga Capital Management and OpCap Advisors with
respect to the Large Capitalization Value
Portfolio. **
(b) (5) Form of Investment Advisory Agreement between
Saratoga Capital Management and Harris Bretall
Sullivan & Smith Inc. with respect to the Large
Capitalization Growth Portfolio. **
(b) (6) Form of Investment Advisory Agreement between
Saratoga Capital Management and Thorsell, Parker
Partners with respect to the Small Capitalization
Portfolio. **
(b) (7) Form of Investment Advisory Agreement between
Saratoga Capital Management and Ivory & Sime
International, Inc. with respect to the Internationa
Equity Portfolio. **
(b) (8) Form of Sub-Investment Advisory Agreement
between Ivory & Sime International,Inc. and Ivory &
Sime plc with respect to the International Equity
Portfolio. **
(6) (a) General Distributor's Agreement.
(b) Soliciting Dealer Agreement. **
(7) Not Applicable.
(8) Custodian Contract.*
(9) Administration Agreement.
(10) Opinion and consent of counsel as to the legality of
the securities being registered, indicating whether
they will when sold be legally issued, fully paid and
non-assessable.*
(11) Consent of Independent Auditors`
(12) Not Applicable.
(13) Agreement relating to initial capital.*
(14) Not Applicable.
(15) Not Applicable.
(16) Schedule for Computation of Performance
Calculations.*
(17) Financial Data Schedules
(18) Not Applicable.
(19) Powers of Attorney
*Filed with Post-effective Amendment No. 1 to the Registrant's
Registration Statement, and hereby incorporated by reference
**Filed with Post-effective Amendment No. 4 to the Registrant's
Registration Statement, and hereby incorporated by reference
Item 25. Persons Controlled by or Under Common Control with Registrant
No person is presently controlled by or under common control
with the Registrant.
Item 26. Number of Holders of Securities
Number of Record
Holders as of
Title of Class September 30, 1997
-------------- ------------------
Shares of Beneficial Interest
U.S. Government Money Market Portfolio.......1,908
Investment Quality Bond Portfolio............1,419
Municipal Bond Portfolio.......................373
Large Capitalization Value Portfolio.........2,286
Large Capitalization Growth Portfolio........2,274
Small Capitalization Portfolio.............. 2,217
International Equity Portfolio...............1,982
Item 27. Indemnification
See Article VI of the Registrant's Agreement and Declaration
of Trust.
A determination that a trustee or officer is entitled to
indemnification may be made by a reasonable determination,
based upon a review of the facts, that the person was not
liable by reason of Disabling Conduct (as defined in the
Agreement and Declaration of Trust) by (a) a vote of a
majority of a quorum of Trustees who are neither interested
persons of the Trust (as defined under the Investment Company
Act of 1940) nor parties to the proceeding or (b) an
independent legal counsel in a written opinion. Expenses
including counsel and accountants fees (but excluding amounts
paid in satisfaction of judgments, in compromise or as fines
or penalties) may be advanced pending final disposition of the
proceeding provided that the officer or trustee shall have
undertaken to repay the amounts to the Trust if it is
ultimately determined that indemnification is not authorized
under the Agreement and Declaration of Trust and (i) such
person shall have provided security for such undertaking, (ii)
the Trust shall be insured against losses arising by reason of
any lawful advances or (iii) a majority of a quorum of
disinterested Trustees who are not party to the proceeding, or
an independent legal counsel in a written opinion, shall have
determined based on review of readily available facts that
there is reason to believe that the officer or trustee
ultimately will be found entitled to indemnification.
Item 28. Business and Other Connections of Investment Advisers
See "Management of the Trust" in the Prospectus and
"Investment Advisory Services" in the Additional Statement
regarding the business of the investment advisers. For
information as to the business, profession, vocation or
employment of a substantial nature of each of the officers and
directors of the investment advisers, reference is made to the
Form ADV of Sterling Capital Management Company, File No. 801-
8776, the Form ADV of Thorsell, Parker Partners, Inc, File No
801- 42814 , the Form ADV of Fox Asset Management, Inc., File.
801-26397, the Form ADV of Ivory & Sime International, Inc.,
File No. 801-13750, the Form ADV of Harris Bretall Sullivan &
Smith, Inc. File No. 801-7369 and the Form ADV of OpCap
Advisors (formerly Quest for Value Advisors), File No.
801-27180, filed under the Investment Advisers Act of 1940,
and Schedules D and F thereto, incorporated herein by
reference.
Item 29. Principal Underwriter
(a) Unified Management Corporation acts as principal
underwriter for the Registrant, The
Vintage Funds, and Star Select Funds.
(b) Information with respect to each director and officer
of Unified Management Corporation is incorporated by
reference to Schedule A of Form BD filed by it under
the Securities Exchange Act of 1934 (File No.
8-23508).
(c) Not Applicable.
Item 30. Location of Required Records -- Rule 31a-1
State Street Bank and Trust Company
One Heritage Drive
North Quincy, Mass. 01271
Will maintain records required by Rule 31a-1(b)(1), (b)(2),
(b)(3), (b)(5), (b)(6), (b)(7) and (b)(8).
OpCap Advisors
One World Financial Center
New York, NY 10281
Will maintain records required by Rule 31a-1(b)(4) and (b)(11)
and (b)(9) and (b)(10) with respect to the Municipal Bond and
the Large Capitalization Value Portfolio.
Records required by 31a-1(b)(9) and (b)(10) will be maintained
on behalf of the following portfolios by their respective
Advisors:
Investment Quality Bond Fox Asset Management, Inc.
Little Silver, NJ 07739
Large Capitalization Harris Bretall Sullivan & Smith, Inc
Growth Portfolio One Post Street
San Francisco, CA 94104
Small Capitalization Thorsell, Parker Partners, Inc.
Portfolio 265 Post Road West
Westport, CT 06880
U.S. Government Sterling Capital Management Company
Money Market Portfolio One First Union Center
301 S College Street
Suite 3200
Charlotte, NC 28202
International Equity Ivory & Sime plc
Portfolio 1 Charlotte Square
Edinburgh Scotland EH24 DZ
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to assist shareholder
communication in accordance with the provisions of
Section 16 of the Investment Company Act of 1940 and
to call a meeting of shareholders for the purpose of
voting upon the question of the removal of a Trustee
or Trustees when requested in writing to do so by the
holders of at least 10% of the Registrant's
outstanding shares of beneficial interest.
(d) Registrant hereby undertakes to furnish each person
to whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders,
upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Mineola, and State of New York, on the 3rd day
of November, 1997.
SARATOGA ADVANTAGE TRUST
By /s/ Bruce E. Ventimiglia
Bruce E. Ventimiglia
President
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registration Statement has been signed below by the following persons in the
capacities indicated on November 3, 1997.
Signature Title
/s/ Bruce E. Ventimiglia Trustee, Chairman of the Board
Bruce E. Ventimiglia and President
(principal executive officer)
/s/ William P. Marra Treasurer
William P. Marra (principal financial officer and
principal accounting Officer)
*
______________________ Trustee
Patrick H. McCollough
*
______________________ Trustee
Udo W. Koopmann
*
______________________ Trustee
Floyd E. Seal
*By /s/Stuart M. Strauss
Stuart Strauss
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
1. Consent of Peat Marwick LLP........................... Ex-99.B11
2. Financial Data Schedules.............................. Ex-27
3. Administration Agreement.............................. Ex-99.2K
4. Distribution Agreement................................ Ex-99.2H
5. Power of Attorney..................................... Ex-99.POA
Independent Auditors' Consent
-----------------------------
To the Shareholders and Board of Trustees
of The Saratoga Advantage Trust:
We consent to the use of our report dated October 28, 1997 incorporated herein
by reference, and to the reference to our Firm under the heading "Financial
Highlights" in the Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
November 3, 1997
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</TABLE>
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<NAME> INTERNATIONAL EQUITY
<S> <C>
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<INVESTMENTS-AT-VALUE> 9509953
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<OTHER-ITEMS-ASSETS> 0
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58626
<TOTAL-LIABILITIES> 58626
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9508048
<SHARES-COMMON-STOCK> 967065
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<ACCUMULATED-NII-CURRENT> (6422)
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<ACCUMULATED-NET-GAINS> (8875)
<OVERDISTRIBUTION-GAINS> 0
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<NET-INVESTMENT-INCOME> 30456
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<APPREC-INCREASE-CURRENT> 933958
<NET-CHANGE-FROM-OPS> 1018249
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 162685
<DISTRIBUTIONS-OF-GAINS> 164
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 456093
<NUMBER-OF-SHARES-REDEEMED> 219913
<SHARES-REINVESTED> 15919
<NET-CHANGE-IN-ASSETS> 3531969
<ACCUMULATED-NII-PRIOR> 11612
<ACCUMULATED-GAINS-PRIOR> (13965)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64249
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 235448
<AVERAGE-NET-ASSETS> 8539619
<PER-SHARE-NAV-BEGIN> 9.59
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 1.12
<PER-SHARE-DIVIDEND> 0.2
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.74
<EXPENSE-RATIO> 1.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
ADMINISTRATION AGREEMENT
This AGREEMENT made as of the 14th day of April, 1997 by and between THE
SARATOGA ADVANTAGE TRUST (hereinafter referred to as the "Fund"), and UNIFIED
ADVISERS, INC. (hereinafter referred to as the "Unified"), an Indiana
corporation.
WITNESSETH:
WHEREAS, the Fund is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "1940 Act") consisting of seven portfolios;
WHEREAS, the Fund desires to retain Unified to provide certain
administrative services with respect to the Fund;
WHEREAS, Unified desires to provide the Fund with certain administrative
services;
WHEREAS, for the purposes herein, since the Fund is a series company for
purposes of Rule 18f-2 under the Act, the term "Fund" as used in this
Agreement and Fee Schedule shall also be deemed to refer to each series
listed in Schedule A to this Agreement as a separate portfolio unless the
context otherwise requires;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
The Fund hereby appoints Unified as "Administrator", subject to the
supervision of the Board of Trustees. The Administrator accepts said appointment
and agrees to provide the services set forth herein. In the event that the Fund
establishes additional series with respect to which it decides to retain Unified
to act as administrator hereunder, the Fund shall notify Unified in writing. If
Unified is willing to render such services with respect to a new series, Unified
will so notify the Fund in writing along with a written amendments to Schedules
A and C, attached hereto, whereupon such series shall be subject to the
provisions of this Agreement to the same extent as the Fund, except to the
extent that said provisions (including those relating to compensation payable by
the Fund) may be modified with respect to such series in writing by the Fund and
Unified at the time of the addition of such new series.
2. DOCUMENTS.
The Fund shall promptly furnish to Unified copies, properly certified
or authenticated, of each of the following:
(a) Resolutions of the Board of Trustees authorizing the
appointment of Unified as Administrator to the Fund and approving this
Agreement;
(b) The Fund's Declaration of Trust;
(c) The Fund's Code of Regulations, or it equivalent;
(d) The Fund's current Notification of Registration on Form
N-8A under the 1940 Act, as filed with the Securities and Exchange
Commission (hereinafter referred to as the "SEC");
(e) The Fund's current Registration Statement on Form N-1A
(hereinafter referred to as the "Registration Statement") under the
Securities Act of 1933 and the 1940 Act, as filed with the SEC; and
(f) The Fund's most recent Prospectus and Statement of
Additional Information and all amendments and supplements thereto (such
Prospectus and Statement of Additional Information and supplements thereto,
as presently in effect and as from time to time hereafter amended and
supplemented, are referred to hereinafter as the "Prospectus").
The Fund will timely furnish the Administrator from time to time with
copies, properly certified or authenticated, of all amendments of or
supplements to the foregoing, if any.
3. SERVICES AND DUTIES.
Subject to the supervision and control of the Board of Trustees,
Unified hereby agrees to serve as the Fund's administrative services agent and
further agrees to perform the specific administrative duties and provide the
specific administrative service for the Fund which are outlined in Schedule B,
Administrative Fee Schedule and Additional Optional Services and Fees, attached
hereto as a part of this Agreement. Such duties to be performed and services to
be provided shall be done so pursuant to the terms and conditions of this
Agreement and pursuant to the terms and conditions of the Administrative Fee
Schedule and Additional Optional Services and Fees attached hereto as Schedule
B.
The Fund understands and agrees that neither Unified nor any
of its officers, employees or affiliates will serve or act as legal counsel
to the Fund or its affiliates.
4. COMPENSATION.
As compensation for the services rendered to the Fund hereunder,
Unified shall be paid a fee in accordance with the current fee schedule,
attached hereto as Schedule B. The Fund acknowledges having received the
attached fee schedule at the time of its execution of this Agreement. Unified
may amend the aforementioned fee schedule upon sixty (60) days advance written
notice. If such amendment is not acceptable to the Fund, the Fund may terminate
this Agreement pursuant to Section 8 of this Agreement.
5. EXPENSES.
The Fund will bear all expenses incurred in the operation of the Fund,
including, but not limited to, taxes, interest, brokerage fees and commissions,
salaries (if any) and fees of employees, officers and directors who are not
officers, directors, shareholders or employees of Unified, Securities and
Exchange Commission fees and state Blue Sky qualification fees, advisory and
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, fund accounting agents' fees, insurance premiums, outside auditor
and legal expenses, costs of maintenance of trust existence, costs of
independent pricing services, typesetting and printing of Prospectus for
regulatory purposes and for distribution to current Fund Shareholders, costs of
Unitholders' reports and corporate mailing costs, administrative services fees
for preparation, stuffing and distribution of literature other than those
required by federal or state regulatory authority, meetings and any other
routine or extraordinary expenses. Unified will bear all expenses incurred by it
in connection with the performance by Unified of the services hereunder this
Agreement, except that the Fund shall pay to or reimburse Unified any reasonable
and necessary out-of-pocket or pass-through expenses incurred by Unified on
behalf of the Fund. Unified agrees that such out-of-pocket or pass-through
expenses shall be acceptable and approved by the Fund. Such out-of-pocket or
pass-through expenses shall be paid by the Fund 30 days from the date of
invoice.
6. CONFIDENTIAL TREATMENT.
Unified agrees on behalf of its directors, officers, employees to keep
the information and data furnished by the Fund confidential. Said information
will not be disclosed to any other person or entity without the Fund's written
permission except as required to perform its duties and obligations hereunder
this Agreement and as required by law.
7. LIMITATION OF LIABILITY.
Unified will not be liable for any error of judgment or mistake of law
or for any loss or expense suffered by the Fund, in connection with the matters
to which this Agreement relates, except for a loss or expense resulting from
negligence on its part in the performance of its duties or provision of its
services under this Agreement.
8. TERM AND TERMINATION.
This Agreement shall become effective April 14, 1997 and shall
remain in effect until terminated by either party. Either the Fund or Unified
may terminate this Agreement, at any time, with one hundred twenty (120) days
prior written notice.
However, notwithstanding the foregoing, the Fund may terminate this
Agreement at any time with sixty (60) days written notice if the Trust objects
to a price increase amendment submitted by Unified. In the event of such price
increase amendment objection by the Trust, the existing fee schedule would
prevail until the sooner of: (a) the increase is agreed upon between the
parties; (b) this contract is terminated; or (c) 120 days. Notwithstanding the
foregoing, the total combined period of the Amendment notice and the termination
notice shall not exceed 120 days. No such termination shall apply if Unified's
amendment is based upon the Trust's addition of new portfolios or Unified's if
Unified's amendment has been agreed upon between the parties pursuant to this
Agreement or otherwise in writing.
All terminations shall take effect at the time agreed upon by the
parties. Obligations set forth in Sections 4, 5, 6, 7, 9, 10 and 12 shall
survive such termination, unless satisfied.
Any notice of termination given in connection with this Agreement shall
be in writing, and will be delivered by certified mail, return receipt
requested, or its equivalent to the address that follows and said notice will be
effective upon receipt:
If to the Fund: Saratoga Advantage Trust
Bruce Ventimiglia
33 Maiden Lane, 7th Floor
New York, N.Y. 10038
If to Unified: Unified Advisers, Inc.
Attention: Timothy L. Ashburn, Chief Executive Officer
429 North Pennsylvania Street
Indianapolis, Indiana 46204
9. GOVERNING LAW AND AGREEMENT TO ARBITRATION.
To the extent that state law is not preempted by the provisions of any
federal law, this Agreement shall be administered, construed and enforced in
accordance with the laws of the State of New York, without giving effect to its
choice of law or conflicts of law principles.
The Fund and Unified agree that if either party elects (except if
inconsistent with the provisions below), all controversies which may arise
between the parties concerning the provisions of the services provided under
this Agreement, or concerning the construction, performance or breach of this
Agreement, shall be determined by arbitration at New York, New York in
accordance with the rules of the American Arbitration Association, provided that
the matter is arbitrable. It is understood, however, that this agreement to
arbitrate does not constitute a waiver of the Fund's right to seek a judicial
forum if such waiver would be void under the federal securities laws.
10. SEVERABILITY.
Any term or provision of this agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms or provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction.
11. AMENDMENTS.
No provision of this Agreement may be changed, discharged, or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, discharge or termination is sought.
12. DELEGATION.
Unified may, with reasonable notice to and the written consent of the
Fund, such consent to not be unreasonably withheld, from time to time delegate
some or all of its duties hereunder to others, who shall perform such functions
as the agent of Unified. To the extent of such delegation, the term "Unified" in
this Agreement shall be deemed to refer to both Unified and to its designee or
to either of them, as the context may indicate. In each provision of this
Agreement fixing or limiting the liabilities of Unified, the term "Unified"
shall include Unified's designee.
13. EXECUTION.
This Agreement may be executed in two or more counterparts, each of
which when so executed shall be deemed to be an original, but such counterparts
shall together constitute but one and the same instrument which is only
effective if all signatures are executed.
14. ASSIGNMENT.
This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by the Fund without the written consent of
Unified or by Unified without the written consent of the Fund, authorized or
approved by a resolution of the Board of Trustees (or Directors as applicable).
15. MISCELLANEOUS.
This Agreement constitutes the full and complete agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements or understandings between the parties with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on behalf of each of them by their duly authorized officers on the date
and year first above written.
UNIFIED ADVISERS, INC. (UNIFIED) THE SARATOGA ADVANTAGE TRUST (FUND)
By: /s/ Timothy L. Ashburn By: /s/ Bruce E. Ventimiglia
Title:Chairman, CEO Title:President
By: /s/ Lynn E. Wood
Title: President, COO
<PAGE>
SCHEDULE A
U.S Government Money Market
Investment Quality Bond Portfolio
Municipal Bond Portfolio
Large Capitalization Value Portfolio
Large Capitalization Growth Portfolio
Small Capitalization Portfolio
International Equity Portfolio
IN WITNESS WHEREOF, the parties have caused this Schedule to this
Agreement to be executed on behalf of each of them by their duly authorized
officers on the date and year first above written.
UNIFIED ADVISERS, INC. (UNIFIED)
By: /s/ Timothy L. Ashburn
Title: Chairman, CEO
By: /s/ Lynn E. Wood
Title: President
THE SARATOGA ADVANTAGE TRUST (FUND)
By: /s/ Bruce E. Ventimiglia
Title: President
SCHEDULE B
ADMINISTRATIVE SERVICES FEE SCHEDULE
In accordance with Section 4 of the Administration and compliance
Service Agreement, as compensation for the services provided pursuant to the
aforementioned Agreement, Unified shall be paid the following basic fee:
Unified shall receive an annual fee equal to 0.12% of the average daily
net asset value of the Fund (Twelve Basis Points) or $234,000 ($19,500 per
month), whichever is the lesser amount for the basic services to be performed
under this Administrative Agreement. The fee will be billed on a monthly basis.
Further, upon termination of the Agreement, Unified reserves the right to assess
reasonable fees, to be agreed upon between the parties, to cover conversion
expenses incurred by it in effecting such conversion.
The aforementioned annual fee shall pertain only to the portfolios
listed in Schedule A, attached hereto, and shall not pertain to any portfolios
which may be added to Schedule A in the future. To the extent that additional
portfolios are added to Schedule A, the parties shall amend this Administrative
Services Fee Schedule to reflect such additions by such amounts to be mutually
agreed upon between the parties.
Unified, pursuant to and under the terms and conditions of the
Administration Agreement, hereby agrees to perform the following basic duties
and provide the following basic services consistent with the prices outlined in
this Schedule B, the Administrative Services Fee Schedule and Additional
Optional Services and Fees:
(a) Assist in the development of and provide monitoring of compliance
procedures for the Fund, including, without limitation, procedures to
monitor compliance with applicable law and regulations, the Fund's
investment objectives, policies and restrictions, its continued
qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended, and other tax matters. Monitoring is limited to
the supervision of activities for which Unified, or one of its affiliates,
assists in the preparation or maintenance of the Fund's books and records,
or which is specifically enumerated below;
(b) Determine, together with the Fund's Board of Trustees, the
jurisdictions in which the Fund's shares shall be registered or qualified
for sale and, in connection therewith, Unified shall be responsible for the
registration or qualification for sale and maintenance of the registrations
or qualifications of shares for sale under the securities laws of any
state. Payment of share registration fees for qualifying or continuing the
qualification of the Fund as a dealer or broker, if applicable, shall be
made by the Fund.
(c) Assist, to the extent reasonably requested by the Fund and its
legal counsel, with the preparation of the Fund's Registration Statement on
Form N-1A or any replacement therefore, limited to one filing per the
Fund's fiscal year;
(d) Assist, to the extent reasonably requested by the Fund and its
legal counsel, with the preparation of the Fund's Prospectus and Statement
of Additional Information, limited to one filing per the Fund's fiscal
year;
(e) Assist in the review of sales literature (advertisements, brochures
and Shareholder communications) for the Fund, including filing with the
NASD and state regulatory agencies, limited to one minimal NASD filing fee
per Fund's fiscal year;
(f) Monitor regulatory and legislative developments which may affect
the Fund and in response to such developments, counsel and assist the Fund
in routine regulatory examinations or routine investigations of the Fund,
and work with the Fund's legal counsel in connection with routine
regulatory matters or routine litigation involving the Fund; and
(g) Perform such other duties related to the administration of the
Fund's operations as reasonably requested by the Board of Trustees, from
time to time, for which an additional fee may be negotiated dependent on
the nature of such other duties. In performing the duties of administrator
to the Fund, Unified (i) will act in accordance with the Fund's Declaration
of Trust, Code of Regulations or its equivalent, Registration Statement,
Prospectus and the instructions and directions of the Board of Trustees and
will conform to, and comply with, the requirements of all applicable
Federal and state laws and the rules and regulations thereunder, and (ii)
will consult with the Fund's legal counsel as necessary or appropriate.
(h) Prepare, with assistance from the agents of the Trust, mutually
agreed upon reports and Board of Trustees materials such as unaudited financial
statements, distribution summaries, and deviations of mark-to-market valuation
and the amortized cost for money market funds;
(i) Report, with assistance from the agents of the Trust, Fund
performance to outside services as directed by Fund management;
(j) Prepare, coordinate and file, with assistance from the agents of
the Trust, the Fund's Semiannual and Annual Reports to Shareholders, including
all necessary financial statements;
(k) Monitor, with assistance from the agents of the Trust, each
Portfolio's compliance with investment restrictions (e.g., issuer or industry
diversification, etc.) listed in the current Prospectus and Statement of
Additional Information;
(l) Monitor, with assistance from the agents of the Trust, each Portfolio's
compliance with the requirements of Section 851 of the Code for qualification as
a Registered Investment Company (R.I.C.) (i.e. 90% Income, 30% Income-Short
Three, Diversification Tests);.
(m) Monitor, with assistance from the agents of the Trust, investment
managers' compliance with Board directives such as "Approved Issuers' Listings
for Repurchase Agreements", Rule 17a-7, and Rule 12d-3 procedures;
(n) Administer, with assistance from the agents of the Trust,
compliance by the Fund's Trustees, officers and "access persons" under the terms
of the Fund's Code of Ethics and SEC regulations;
(o) Prepare, with assistance from the agents of the Trust, Fund or
Portfolio expense projections, establish accruals and review on a periodic
basis, including expenses based on a percentage of Fund's average daily net
assets (advisory and administrative fees) and expenses based on actual charges
annualized and accrued daily (audit fees, registration fees, directors' fees,
etc.);
(p) Assist with and coordinate, with assistance from the agents of the
Trust, communications and data collections with regard to any regulatory
examinations, or investigations, and yearly audits by independent
accountants.
(q) Assist in the preparation of supplements to the Prospectus and
Statement of Additional Information. Limited to one filing per the Fund's
fiscal year.
(r) Assist in preparation, filing and mailing of Proxy Statement for
Annual Shareholders Meeting. (Assistance with Special Shareholders
Meetings, i.e. involving fund mergers subject to separate charge.)
(s) Perform NASD sales cap testing and other regulatory and compliance
reports as required.
(t) Review and file advertising material with the NASD and the
necessary states in compliance with state securities laws.
(u) Provide, with assistance from the agents for the Trust, the all
necessary tax compliance duties and services, including but not limited
to: 90% minimum distribution test; 50% assets test for tax-exempt funds;
50% asset test for foreign tax credit pass through; identification of
"private activity" tax exempt; identification of passive foreign
investment companies; and identification of foreign currency
transactions.
(v) Prepare, with assistance from the agents of the Trust, the
semi-annual and annual shareholders reports and coordinate the printing
of same.
(w) Prepare and file, with assistance from the agents of the Trust, the
semi-annual N-SAR.
(x) Perform the following legal duties and services: Prepare and file
annual and other amendments to registration statements; assist with the
preparation and file Forms N-SAR based upon financial information
provided by the agents of the Trust; prepare and file Rule 24f-2 Notices,
based upon financial information provided by the agents of the Trust;
prepare and file, with assistance from the agents of the Trust,
shareholder meeting materials; monitor fidelity bond and directors and
officers errors and omissions policies; review financial statements and
annual reports for legal disclosure requirement; advise on reasonable
routine banking, fiduciary, corporate and securities laws issues.
(y) Provide all necessary blue sky services, including but not limited
to: Track all sales per state to registered amounts; file all required
registration materials; and maintain fund registrations in accordance
with state securities laws.
(z) Perform, with assistance from the agents of the Trust, the
following compliance services: review and adopt compliance manuals and workshop
materials for advisory personnel; provide monthly tax qualification testing,
including 30% gross income test, 90% gross income test and 25% and 59% asset
diversification tests, based upon trial balances and portfolio holdings supplied
by the agents of the Trust; provide 1940 Acts testing, including
diversification, illiquid securities and investments in other investment
companies, based upon trial balances and portfolio holdings supplied by the
agents for the Trust; test fund prospectus limitations and restrictions, based
upon trial balances and portfolio holdings supplied by the agents for the Trust;
consult and advise to remedy compliance issues; act as a liaison for SEC
examinations; issue monthly compliance reports for immediate notification.
(aa) Prepare, with assistance from the agents of the Trust,
quarterly meeting materials, including agenda, minutes, background materials to
meet annual approval requirements.
(bb) Assist the agents of the Trust in maintaining the general corporate
calendar.
(cc) Provide expertise in the selection of proxy vendors and
coordinate shareholder solicitation and vote tabulation process, with assistance
from the agents of the Trust.
(dd) Provide ICI mutual fund industry fee and performance
information or acceptable equivalents, for board materials, annual report
management's discussion and analysis. (Any charges for any equivalent service
acceptable to the Fund, other than ICI, shall be paid by the Fund).
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on behalf of each of them by their duly authorized officers on the date
and year first above written.
THE SARATOGA ADVANTAGE TRUST (FUND)
BY: /s/ Bruce E. Ventimiglia
ITS: President
UNIFIED ADVISERS, INC. (UNIFIED)
BY: /s/ Timothy L. Ashburn
ITS: Chairman, CEO
BY: /s/ Lynn E. Wood
ITS: President
<PAGE>
<TABLE>
ADDITIONAL OPTIONAL SERVICES AND FEES
<S> <C>
1. Assistance in preparation and filing for an exemptive order or no
action letter from the Securities and Exchange Commission $1,500 minimum
2. Assist in the preparation of additional Fund's Registration
Statement on Form N1-A or any replacement thereof $500 minimum
3. Assistance in preparation, filing and vote compilation of
Proxy Statement for Special Shareholders Meeting. $10,000 (minimum) per
Special Meeting
4. Assistance in Dissolution and Deregistration of the Fund
(including related Proxy Statement) $15,000 minimum
5. Reorganization/Merger of the Fund or portfolios (including
proxy statement and excluding tax opinion) $17,000 (minimum)
6. Assist in the review of sales literature in excess of ten pieces
per month. $35 per piece (minimum)
7. Qualification and initial registration of Fund securities
under Blue Sky Laws of selected states $750 per state (minimum)
8. Mailings to shareholders/investors Negotiable
9. Such other duties related to the administration of the Fund as agreed
to by Unified Negotiable
</TABLE>
(b) PAYMENT SCHEDULE.
The fee is to be computed daily and is due monthly. The fee is payable on the
first business day following the calendar month being billed. The fee will be
prorated for the portion of the month during which the Agreement become
effective.
(c) NET ASSET VALUE.
For the purpose of determining fees payable to Unified, the value of the Fund's
net assets shall be computed as required by the Fund's current prospectus,
generally accepted accounting principles and resolutions of the Board of
Trustees of the Fund.
(d) AMENDMENT TO FEE SCHEDULE.
Unified may amend the aforementioned fee pursuant to the terms and conditions of
the Agreement.
IN WITNESS WHEREOF, the parties have caused this Schedule to this
Agreement to be executed on behalf of each of them by their duly authorized
officers on the date and year first above written.
UNIFIED ADVISERS, INC. (UNIFIED)
By: /s/ Timothy L. Ashburn
Title: Chairman, CEO
By: /s/ Lynn E. Wood
Title: President
THE SARATOGA ADVANTAGE TRUST (FUND)
By: /s/ Bruce E. Ventimiglia
Title: President
GENERAL DISTRIBUTION AGREEMENT
This AGREEMENT made as of this 14th day of April, 1997, by and between THE
SARATOGA ADVANTAGE TRUST, a Delaware trust (the "Trust"), and UNIFIED MANAGEMENT
CORPORATION, an Indiana corporation (the "Distributor").
WHEREAS, the Trust is an open-end, diversified management investment
company registered with the Securities and Exchange Commission (the
"Commission") pursuant to the Investment Company Act of 1940 (the "1940 Act")
and the Distributor is a broker/dealer registered with the Commission and the
National Association of Securities Dealers, Inc. ("NASD");
WHEREAS, the Trust's shares are issued in separately capitalized series
(the "Portfolios") pursuant to the Trust's registration statement and are
offered for sale to the public in a continuous public offering in accordance
with the terms and conditions set forth in the Prospectus included in the
registration statement as it may be amended from time to time;
WHEREAS, the Trust desires that the Distributor act as General
Distributor and as an Agent of the Trust for the sale and distribution of shares
which have been registered as described above and of any additional shares which
may become registered during the term of this Agreement. Distributor has advised
the Trust that Distributor is willing to act as such General Distributor and
Agent;
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Trust and Distributor agree as follows:
1. The Trust hereby appoints the Distributor as the General Distributor
and as exclusive Agent for sale of the Trust's shares, pursuant to the aforesaid
continuous public offering of its shares, and the Trust further agrees from and
after the date of this Agreement, that it will not, without Distributor's
consent, such consent shall not be unreasonably withheld, sell or agree to sell
any shares otherwise than through Distributor, except the Trust may issue shares
in connection with a merger, consolidation or acquisition of assets on such
basis as may be authorized or permitted under the 1940 Act.
2. Distributor hereby accepts such appointment and agrees to use its
best efforts to perform its duties hereunder, including the maintenance of its
corporate existence, licenses and any other necessary status to perform its
duties hereunder. The Distributor's duties hereunder are described in Schedule
"C", attached hereto as a part of this Agreement. Distributor further agrees to
use its best efforts to sell the Trust's shares, provided however, that when
reasonably requested by the Trust, at any time, Distributor will suspend such
efforts, provided that such request is consistent with and does not violate any
applicable law or securities law. The Trust may also withdraw the offering of
the shares at any time when required by the provisions of any statute, order,
rule or regulation of any governmental body having jurisdiction. It is
understood that Distributor does not undertake to sell all or any specific
portion of the shares of the Trust.
<PAGE>
3. As General Distributor, Distributor or Distributor's Designated
Agent, shall accept all reasonable, proper and typical orders for the purchase
of shares of the Trust. Notwithstanding the foregoing, however, Distributor,
after notification to the Trust, shall have the right to reject orders for the
purchase of the Trust's shares that, in its discretion, would be detrimental to
the Trust. Distributor agrees to notify the Trust in advance and seek the
Trust's approval to reject such order which Distributor deems to be detrimental
to the Trust, provided that such notice, approval process, activity or timing is
consistent with and does not violate any applicable law or securities law.
Distributor agrees to promptly issue confirmations of all accepted purchase
orders and to transmit a copy of such confirmations to the Trust or the duly
appointed transfer agent or shareholder servicing agent of the Trust, unless
instructed otherwise by the Trust, provided that such instruction is consistent
with and does not violate any law or securities law. Distributor shall not be
liable for incorrect computation of the net asset value of the shares by the
Agents of the Trust. Distributor shall be not be liable for any errors of
judgment or mistake of law or for any loss or expense suffered by the Trust, in
connection with the matters of which this Agreement relates, except for loss or
expense resulting from negligence on Distributor's part in the performance of
its duties and obligations under this Agreement. The Trust shall register or
cause to be registered all shares sold by the Distributor pursuant to the
provisions hereof. All shares of the Trust, when so issued and paid for, shall
be fully paid and non-assessable.
4. The Trust has delivered to the Distributor a copy of its current
Prospectus and Statement of Additional Information. The Trust agrees that it
will use its best efforts to continue the effectiveness of its Registration
Statement under the 1933 Act. The Trust further agrees to prepare and file any
amendments to its Registration Statement as may be necessary and any
supplemental data in order to comply with the 1933 Act. The Trust will furnish
Distributor, at Trust's expense, with a reasonable number of copies of the
Prospectus and any amended Prospectus for use in connection with the sale of
shares.
5. The Trust has registered under the 1940 Act as an investment
company, and it will use its best efforts to maintain such registration and to
comply with the requirements of the 1940 Act.
6. At the Trust's request, the Distributor will take such steps as may
be necessary and feasible to qualify the shares for sale in states, territories
or dependencies of the United States of American, in the District of Columbia
and in foreign countries, in accordance with the laws thereof, and to renew or
extend any such qualification.
7. Distributor agrees that:
(a) Neither Distributor nor any of its officers will take any
long or short position in the shares of the Trust, but this provision shall not
prevent Distributor or its officers from acquiring shares of the Trust for
investment purposes only;
(b) Distributor will furnish to the Trust any pertinent
information required to be inserted with respect to Distributor as General
Distributor within the perview of the 1933 Act in any reports or registration
required to be filed with any governmental authority; and
(c) Distributor will not make any representations inconsistent
with the information contained in the Registration Statement or Prospectus or
Statement of Additional Information of the Trust filed under the 1933 Act, as in
effect from time to time.
8. For as long as this Agreement shall remain in full force and affect,
Distributor agrees that it shall: (a) maintain any and all necessary licenses
with the NASD that may be required or appropriate to perform the Distributor's
duties and services outlined herein; (b) maintain any and all of the necessary
and sufficient net capital requirements as may be required by the NASD in order
to maintain any and all of Distributor's licenses necessary to honor its
obligations as Distributor hereunder; and (c) pay the membership fees associated
with maintaining FundServe; and (d) hold the licenses on behalf of all Saratoga
Capital Management employees and such other persons or entities which are listed
on and attached hereto as Schedule "A", provided, however, that such employee,
person or entity listed on Schedule "A" is acceptable to Distributor.
Distributor agrees to not unreasonably withhold such acceptance. Saratoga
Capital Management agrees to pay all expenses in connection with the duties
performed in Section 8(a).
The Trust agrees to pay all costs and expenses in connection with the
registration of Shares under any and all of the necessary, required and
pertinent securities acts and laws, including, but not limited to, the
Securities Acts of 1933 and 1934, as amended, and the Investment Company Act of
1940, and all expenses in connection with maintaining facilities for the issue
and transfer of Shares and for supplying information, prices and other data to
be furnished by the Trust hereunder, and all expenses in connection with the
preparation and printing of the Trust's Prospectuses and Statements of
Additional Information for regulatory purposes and for distribution to
shareholders; provided however, that neither the Trust nor the Distributor shall
not pay any of the costs of advertising or promotion for the sale of Shares.
All reasonable and acceptable out of pocket expenses and/or
pass-through expenses incurred by the Distributor shall be paid by the Trust
within 30 days of invoice, provided that such are approved in advance by the
Trust.
9. Unless earlier terminated pursuant to paragraph 10 hereof, this
Agreement shall remain in effect until two years from the date hereof. This
Agreement shall continue in effect from year to year thereafter provided that
such continuance shall be specifically approved at least annually (a) by the
Trust's Board of Trustees, including a vote of a majority of the Trustees who
are not parties to this Agreement or "interested persons" (as defined in the
1940 Act) of any such persons, cast in person at a meeting called for the
purpose of voting on such approval or (b) by the vote of the holders of a
majority of the outstanding voting securities of the respective Portfolios of
the Trust and by such a vote of the Trustees.
10. This Agreement may be terminated (a) by the General Distributor at
any time without penalty by giving one hundred twenty (120) days' written notice
(which notice may be waived by the Trust); (b) by the Trust at any time without
penalty upon sixty days' written notice to the General Distributor (which notice
may be waived by the General Distributor), provided that such termination by the
Trust shall be directed or approved by the Trustees or by the vote of the
holders of a majority of the outstanding voting securities of the Portfolios
with respect to which notice of termination has been given to the Trust; or (c)
by mutual written agreement between the parties should unusual or force majeure
circumstances arise from which the timeframes outlined in (a) and (b) would
result in a material negative adverse affect on the one or more of the parties.
11. This Agreement may not be amended or changed except in writing as
provided for herein and shall be binding upon and shall enure to the benefits of
the parties hereto and their respective successors, but this Agreement shall not
be assigned by either party without the written permission of the other party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on behalf of each of them by their duly authorized officers on the date
and year first above written.
THE SARATOGA ADVANTAGE TRUST (TRUST)
BY: /s/ Bruce E. Ventimiglia
ITS: President
UNIFIED MANAGEMENT CORPORATION (DISTRIBUTOR)
BY: /s/ Lynn E. Wood
ITS: President
BY: /s/ Timothy L. Ashburn
ITS: Chairman, CEO
SCHEDULE A
COST AND EXPENSES TO BE BORNE BY DISTRIBUTOR
(other than those described in Paragraph 8 (a) (b) (c) and (d)
of the Agreement
IN WITNESS WHEREOF, the parties have caused this Schedule to this
Agreement to be executed on behalf of each of them by their duly authorized
officers on the date and year first above written.
THE SARATOGA ADVANTAGE TRUST (TRUST)
BY: /s/ Bruce E. Ventimiglia
ITS: President
UNIFIED MANAGEMENT CORPORATION (DISTRIBUTOR)
BY: /s/ Lynn E. Wood
ITS: President
BY: /s/ Timothy L. Ashburn
ITS: Chairman, CEO
<PAGE>
SCHEDULE B
DISTRIBUTORS DUTIES AND SERVICES
Distributor agrees to perform the following duties and provide the
following services for the Trust, subject to and under the terms and conditions
of the General Distribution Agreement, which are in addition to those duties and
services described in the General Distribution Agreement:
Distributor hereby agrees to:
1. Provide selling and dealer agreement execution services, as directed by the
Trust or its agents, including initial adoption or short-form assignment of
existing dealer agreements associated with conversion. Such selling and dealer
agreements shall only be in the form attached hereto as Schedule D.
2. When necessary, assist the transfer agent in the development of quality
delivery standards and procedures to ensure timely and accurate tracking.
3. Consult with the Trust and its agents on fulfillment provider selection,
supervision, inventory coordination and conversion ratio tracking.
4. Assist the transfer agent or applicable third party vendors to develop
on-line production and ad hoc sales reporting and shareholder profiling
capabilities.
5. Assist the Trust and its agents in the development of automated approaches to
generating incremental assets, such as DDA sweep, trust sweep, 401(k), NSCC
FundServe, etc..
6. Assist the Trust and its agents in the design, selection and production of
customer statements, confirmations and fulfillment materials.
IN WITNESS WHEREOF, the parties have caused this Schedule to this
Agreement to be executed on behalf of each of them by their duly authorized
officers on the date and year first above written.
THE SARATOGA ADVANTAGE TRUST (TRUST)
BY: /s/ Bruce E. Ventimiglia
ITS: President
UNIFIED MANAGEMENT CORPORATION (DISTRIBUTOR)
BY: /s/ Lynn E. Wood
ITS: President
BY: /s/ Timothy L. Ashburn
ITS: Chairman, CEO
SCHEDULE C
SELLING AGREEMENT
DEALER AGREEMENT
POWER OF ATTORNEY
The undersigned members of the Board of Trustees of Saratoga Advantage
Trust (the "Trust") hereby each appoint Stuart M. Strauss as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all documents in connection with the Trust's registration with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/Patrick H. McCollough Trustee June 20, 1997
/s/Floyd E. Seal Trustee June 20, 1997
/s/Udo W. Koopmann Trustee June 20, 1997
