<PAGE> 1
Rule 497(c)
File Nos. 33-82366
and 811-08690
PROSPECTUS
April 30, 1999
THE DLB FUND GROUP
This Prospectus offers shares of the following Funds:
The DLB FIXED INCOME FUND seeks to achieve a high level of current
income consistent with preservation of capital through investment in a
portfolio of fixed income securities. The Fund invests primarily in
investment grade securities, or their equivalents, and seeks to sustain an
average dollar weighted portfolio maturity ranging from 5 to 12 years and a
duration ranging from 3.5 to 7 years.
The DLB VALUE FUND seeks long-term capital appreciation primarily
through investment in a portfolio of common stocks of established
companies. The Fund looks for stocks that its investment manager considers
undervalued at the time of purchase.
The DLB GROWTH FUND seeks long-term capital and income growth through
investment primarily in common stocks. The Fund focuses on companies that
have demonstrated, and are anticipated to continue demonstrating,
above-average growth and that the Fund's investment manager believes are
attractively valued.
The DLB DISCIPLINED GROWTH FUND seeks long-term growth of capital. It
uses a proprietary analysis of market factors to guide investment primarily
in common stocks of companies with medium and large capitalizations. The
Fund seeks to invest in securities of companies with strongly rising
earnings prospects and that the Fund's investment manager believes are
underpriced relative to their peers.
The DLB MID CAPITALIZATION FUND seeks long-term capital appreciation
primarily through investment in small to medium-size companies. The Fund
focuses on undervalued companies that have a market capitalization between
$400 million and $2 billion at the time of purchase.
The DLB MICRO CAPITALIZATION FUND seeks long-term capital growth
through investment primarily in common stocks of smaller, faster-growing
companies whose securities at the time of purchase are considered by the
Fund's investment manager to be realistically valued.
The DLB GLOBAL SMALL CAPITALIZATION FUND seeks long-term capital
appreciation through investment primarily in common stocks of foreign and
domestic companies with market capitalizations at the time of investment by
the Fund of up to $1.5 billion. The Fund focuses on value in its domestic
investments and growth in its foreign investments. The Fund normally
expects to invest approximately 40% to 60% of its assets outside the United
States.
These Funds are intended primarily to serve as investment vehicles for
institutional investors and high net worth individuals. The minimum initial
investment in a Fund is $100,000, and the minimum for each subsequent investment
in a Fund is $10,000. David L. Babson and Company Incorporated is the Funds'
investment manager (the "Manager"). Babson-Stewart Ivory International serves as
the subadvisor (the "Subadvisor") for the Global Small Capitalization Fund and
is responsible for the Fund's international investments.
This Prospectus describes important information about the Funds. Please read it
carefully and keep it for future reference.
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THE SHARES OF THE FUNDS OR PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ABOUT THE FUNDS 1
DLB Fixed Income Fund 1
DLB Value Fund 4
DLB Growth Fund 7
DLB Disciplined Growth Fund 8
DLB Mid Capitalization Fund 10
DLB Micro Capitalization Fund 13
DLB Global Small Capitalization Fund 15
Fees and Expenses 18
Descriptions of Principal Investment Risks 20
Policies Applicable to the Funds 27
HOW THE FUNDS ARE MANAGED 29
The Manager 29
The Subadviser 29
Investment Advisory Fees 29
Portfolio Managers 30
Certain Performance Information 31
Related to other Accounts
Managed by the Manager
INVESTING IN THE FUNDS 33
How to Open an Account 33
How to Purchase Shares 34
How to Sell Shares 36
How Share Price Is Determined 37
Distribution and Service (Rule 12b-1) Plans 38
DISTRIBUTIONS 39
TAXES 40
FINANCIAL HIGHLIGHTS 41
APPENDIX 49
ADDITIONAL INVESTMENT TECHNIQUES AND PRACTICES 49
</TABLE>
<PAGE> 3
ABOUT THE FUNDS
DLB FIXED INCOME FUND
INVESTMENT OBJECTIVE
The investment objective of the DLB Fixed Income Fund (the "Fixed
Income Fund") is to achieve a high level of current income consistent
with preservation of capital through investment in a portfolio of fixed
income securities.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund will invest substantially all of
its total assets in fixed income securities. The Fund invests primarily
in publicly traded, domestic fixed income securities, including U.S.
Treasury and agency obligations, mortgage- and asset-backed securities,
U.S. dollar-denominated bonds of foreign issuers and corporate debt
securities. The Fund may invest in other fixed income securities, such
as Rule 144A private placements and collateralized mortgage
obligations.
Maturity & Duration The Fund generally will have an average dollar
weighted portfolio maturity ranging from 5 to 12
years. The Fund generally will have a duration
ranging from 3.5 to 7 years. The Fund's portfolio
may include securities with maturities and
durations outside these ranges.
Portfolio Quality The Fund will invest primarily in investment grade
fixed income securities or their equivalents as
determined by the Manager. An investment grade
security is any security that is rated investment
grade at the time of purchase (i.e., at least Baa
as determined by Moody's Investors Service, Inc.,
or BBB as determined by Standard & Poor's Corp.).
Sector Allocation The Manager allocates the Fund's assets among the
wide array of market sectors noted above based on
its assessment of the relative value between the
sectors.
Security Selection In picking individual fixed income securities of
non-governmental issuers, the Manager prefers
companies that possess one or more of the
following characteristics:
* Market share leader
* Strong discretionary cash flow
* Stable to growing earnings
* Conservative accounting
* Established management team
* Favorable capital structure
* Higher levels of tangible
fixed assets
The Manager will also use economic analysis,
interest rate trends, supply and demand trends,
and sector based credit quality ratios as factors
when picking individual securities.
-1-
<PAGE> 4
PRINCIPAL INVESTMENT RISKS
Interest Rate Risk
Credit Risk
Allocation Risk
Company Risk
Market Risk
Restricted Securities Risk
Mortgage- and Asset-Backed Securities Risk
Foreign Issuer Risk
Non-Diversification Risk
You will find a discussion of these risks, and others that may affect
your investment in the Funds, in the section entitled "Description of
Principal Investment Risks," beginning on page 20.
There is no guarantee that the Fund will achieve its objective, and you
could lose money on your investment. Furthermore, the Manager, despite
using various investment and risk analysis techniques, may not achieve
the results expected from an investment in the Fund.
PAST PERFORMANCE
The bar chart below provides an indication of the risks of investing in
the Fund by showing you how the Fund's performance, measured in terms
of the total return for each full calendar year since the Fund's
inception, has varied from year to year. The table following the bar
chart compares the Fund's average annual total returns over time to
those of a broad-based securities market index. As with all mutual
funds, past performance is not a prediction of future performance.
[BAR CHART]
1996 - 3.70%
1997 - 9.03%
1998 - 8.04%
BEST QUARTER: 3RD QUARTER 1998, +4.04% WORST QUARTER: 1ST QUARTER 1996, -0.88%
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR (July 25, 1995)
------ ---------------
<S> <C> <C>
FIXED INCOME FUND +8.04% +7.80%
LEHMAN BROTHERS AGGREGATE BOND INDEX +8.68% +8.20%
</TABLE>
DLB Fixed Income Fund -2-
<PAGE> 5
PAST PERFORMANCE (continued)
The LEHMAN BROTHERS AGGREGATE BOND INDEX, a broad-based index composed of
securities from the Lehman Brothers Government/Corporate Bond Index, Lehman
Brothers Mortgage-Backed Securities Index and Lehman Brothers Asset-Backed
Securities Index, represents an index of securities comparable to those in which
the Fund invests.
Both the chart and table assume reinvestment of dividends and distributions. The
performance results in the chart and table reflect the effects of voluntary
expense limitations in effect during the relevant periods. Without these
limitations, the Fund's returns would have been lower.
DLB Fixed Income Fund - 3
<PAGE> 6
DLB VALUE FUND
INVESTMENT OBJECTIVE
The investment objective of the DLB Value Fund (the "Value Fund") is
long-term capital appreciation primarily through investment in a
portfolio of common stocks of established companies.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund will invest substantially all of
its total assets in common stocks.
The Fund invests primarily in undervalued stocks of established
companies. Ordinarily, these will be companies with large market
capitalizations (generally $5 billion or greater), although the Fund
may invest in companies with market capitalizations at the time of
purchase of only $1 billion or greater. Securities purchased by the
Fund ordinarily are listed on national securities exchanges or on the
NASDAQ.
The Manager will select securities for investment based on its
assessment of whether the securities are likely to provide favorable
capital appreciation over the long term. The Manager will invest in
common stocks of companies with an earnings and dividend ranking of
"B-" or better by Standard & Poor's, or a financial strength rating of
"B" or better by Value Line, measured at the time of initial
investment. (For a description of these ratings, see "Appendix
Description of Stock Ratings" in the Fund's Statement of Additional
Information.) The Fund may continue to hold, and even increase its
investment in, securities that drop below these ratings after their
initial purchase by the Fund.
When investing the Fund's assets, the Manager strongly considers common
stocks whose current prices do not adequately reflect, in its opinion,
the true value of the underlying company in relation to earnings,
dividends and/or assets. To find suitable investments, the Manager
screens a broad universe of potential stocks using quantitative
measures of valuation and earnings growth. After identifying
inexpensive securities (determined on a relative, rather than an
absolute, basis) that show signs of financial strength, the Manager
concentrates on basic valuation measures, including price-to-earnings
ratios, price-to-book ratios and current yields, to further narrow the
field. The Manager then uses fundamental analysis, emphasizing an
issuer's historic financial performance, balance sheet strength,
management capability and competitive position. In addition, the
Manager may employ company visits and interviews with competitors and
suppliers.
The Fund's valuation characteristics are expected under normal
circumstances to be more favorable than those of the S&P 500 Index
(i.e., lower price-to-earnings ratio, lower price-to-book ratio and
higher gross yield).
PRINCIPAL INVESTMENT RISKS
* Company Risk
* Out-of-Favor Risk
* Market Risk
* Equity Securities Risk
* Non-Diversification Risk
* Allocation Risk
-3-
<PAGE> 7
PRINCIPAL INVESTMENT RISK (Continued)
You will find a discussion of these risks, and others that may affect
your investment in the Funds, in the section entitled "Description of
Principal Investment Risks," beginning on page 20.
There is no guarantee that the Fund will achieve its objective, and you
could lose money on your investment. Furthermore, the Manager, despite
using various investment and risk analysis techniques, may not achieve
the results expected from an investment in the Fund.
PAST PERFORMANCE
The bar chart below provides an indication of the risks of investing in
the Fund by showing you how the Fund's performance, measured in terms
of the total return for each full calendar year since the Fund's
inception, has varied from year to year. The table following the bar
chart compares the Fund's average annual total returns over time to
those of a broad-based securities market index and to those of an index
of securities comparable to those in which the Fund invest.
<PAGE> 8
As with all mutual funds, past performance is not a prediction of
future performance.
[BAR CHART]
1996 - 23.99%
1997 - 26.35%
1998 - 5.25%
BEST QUARTER: 1ST QUARTER 1998, +13.55% WORST QUARTER: 3RD QUARTER 1998, -17.78%
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR (July 25, 1995)
------ ---------------
<S> <C> <C>
VALUE FUND +5.25% +17.98%
S&P 500 INDEX +28.57% +28.29%
S&P BARRA LARGE CAP VALUE INDEX +14.67% +23.45%
</TABLE>
DLB Value Fund -5-
<PAGE> 9
PAST PERFORMANCE (Continued)
STANDARD & POOR'S 500 INDEX (S&P 500 INDEX) is a broad-based index of common
stocks frequently used as a general measure of stock market performance.
The S&P BARRA LARGE CAP VALUE INDEX is an unmanaged index of those common stocks
that have the lowest price-to-book ratios comprising half of the aggregate
market capitalization of the S&P 500 Index.
Both the chart and table assume reinvestment of dividends and distributions. The
performance results in the chart and table reflect the effects of voluntary
expense limitations in effect during the relevant periods. Without these
limitations, the Fund's returns would have been lower.
DLB Value Fund - 6
<PAGE> 10
DLB GROWTH FUND
INVESTMENT OBJECTIVE
The investment objective of the DLB Growth Fund (the "Growth Fund") is
long-term capital appreciation and income through investment primarily
in common stocks. Current yield is secondary to the long-term growth
objective.
PRINCIPAL INVESTMENT STRATEGIES
The Fund believes the true value of a company's stock is determined by
its earning power, its dividend-paying ability and, in many cases, its
assets. Consequently, the Fund will seek its objective by remaining
substantially fully invested in the common stocks of progressive, well
managed companies in growing industries that have demonstrated both a
consistent and an above-average ability to increase their earnings and
dividends and that have favorable prospects of sustaining such growth.
The Fund's investable universe includes medium-to large-size companies.
The Fund considers medium-size companies to be those with market
capitalizations ranging from $1 billion to $10 billion and large-size
companies to be those with market capitalizations over $10 billion.
To find suitable investments, the Manager first uses database screening
to narrow the Fund's investment universe, based on a company's historic
level of revenue, cash flow and earnings growth. Next, the Manager uses
a quantitative model to sort stocks based on revision to analysts'
earnings estimates and valuation analysis, to identify, within this
narrowed universe, companies with the strongest signs of earnings
growth and the most attractive valuation. The Manager believes that
revisions to analysts' earning estimates form trends that affect a
stock's price. For example, rising earnings estimates generally reflect
a potential share price increase. Valuation analysis helps to identify
stocks with low relative price-to-earnings ratios, which, on average,
tend to outperform stocks with higher price-to-earnings ratios. In the
third and most important step of the process, the Manager conducts
fundamental analysis on the top companies from the output of the
earlier analyses, researching the companies and their managements,
competitors and suppliers. As a result of this analysis, the Manager
selects what it believes to be the best companies for the Fund's
portfolio.
PRINCIPAL INVESTMENT RISKS
* Company Risk
* Market Risk
* Equity Securities Risk
* Non-Diversification Risk
* Allocation Risk
You will find a discussion of these risks, and others that may affect
your investment in the Funds, in the section entitled "Description of
Principal Investment Risks," beginning on page 20.
There is no guarantee that the Fund will achieve its objective, and you
could lose money on your investment. Furthermore, the Manager, despite
using various investment and risk analysis techniques, may not achieve
the results expected from an investment in the Fund.
PAST PERFORMANCE
Because the Fund is new, information on the Fund's performance is not
provided in this section.
-7-
<PAGE> 11
DLB DISCIPLINED GROWTH FUND
INVESTMENT OBJECTIVE
The investment objective of the DLB Disciplined Growth Fund (the
"Disciplined Growth Fund") is long-term capital appreciation. It uses a
proprietary analysis of market factors to guide investment primarily in
common stocks of companies with medium and large capitalizations. The
DLB Disciplined Growth Fund was formerly known as the DLB Quantitative
Equity Fund.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund will invest substantially all
of its total assets in common stocks and other equity securities.
The Manager believes that a disciplined investment strategy based
predominately on quantitative factors can exploit systematic
mispricings in the securities markets. The Manager seeks to exploit
these mispricings by constructing a portfolio using a proprietary
analytical model. This analytical model uses a two-part quantitative
analysis, involving revisions to analysts' earnings estimates and
valuation analysis, to identify, within this narrowed universe,
companies with the strongest signs of earnings growth and the most
attractive valuation. The Manager believes that revisions to analysts'
earnings estimates form trends that affect a stock's price. For
example, rising earnings estimates generally reflect a potential share
price increase. Valuation analysis helps to identify stocks with low
relative price-to-earnings ratios, which, on average, tend to
outperform stocks with higher price-to-earnings ratios. The Manager
then selects securities for the Fund based on these analyses, with
weight also given to the impact of transaction costs and the
portfolio's overall characteristics, including sector weightings, beta
(volatility), market capitalization, yield and liquidity. The Fund's
characteristics, such as capitalization, yield, sector weight and beta
(volatility), are expected, under normal circumstances, to approximate
those of the Russell 1000 Growth Index.
PRINCIPAL INVESTMENT RISKS
* Company Risk
* Small Company Risk
* Market Risk
* Equity Securities Risk
* Non-Diversification Risk
* Allocation Risk
You will find a discussion of these risks, and others that may affect
your investment in the Funds, in the section entitled "Description of
Principal Investment Risks," beginning on page 20.
There is no guarantee that the Fund will achieve its objective, and you
could lose money on your investment. Furthermore, the Manager, despite
using various investment and risk analysis techniques, may not achieve
the results expected from an investment in the Fund.
-8-
<PAGE> 12
PAST PERFORMANCE
The bar chart below provides an indication of the risks of investing in
the Fund by showing you how the Fund's performance, measured in terms
of the total return for each full calendar year since the Fund's
inception, has varied from year to year. The table following the bar
chart compares the Fund's average annual total returns over time to
those of a broad-based securities market index and to those of an index
of securities comparable to those in which the Fund invests. As with
all mutual funds, past performance is not a prediction of future
performance.
[BAR CHART:]
1997 - 32.23%
1998 - 25.71%
BEST QUARTER: 4TH QUARTER 1998, +23.80% WORST QUARTER: 3RD QUARTER 1998, -15.77%
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR (August 26, 1996)
------ -----------------
<S> <C> <C>
DISCIPLINED GROWTH FUND +25.71% +32.39%
S&P 500 INDEX +28.57% +30.96%
RUSSELL 1000 GROWTH INDEX +38.71% +34.96%
</TABLE>
STANDARD & POOR'S 500 INDEX (S&P 500 INDEX) is a broad-based unmanaged index of
common stocks frequently used as a general measure of stock market performance.
The RUSSELL 1000 GROWTH INDEX is an unmanaged index that contains those stocks
with a greater than average growth orientation among the stocks of the 1,000
largest U.S. companies based on total market capitalization. Securities in this
index tend to exhibit higher price-to-book ratios and higher forecasted growth
than the value universe.
Both the chart and table assume reinvestment of dividends and distributions. The
performance results in the chart and table reflect the effects of voluntary
expense limitations in effect during the relevant periods. Without these
limitations, the Fund's returns would have been lower.
DLB Disciplined Growth Fund - 9
<PAGE> 13
DLB MID CAPITALIZATION FUND
INVESTMENT OBJECTIVE
The investment objective of the DLB Mid Capitalization Fund (the "Mid
Cap Fund") is long-term capital appreciation primarily through
investment in small to medium-size companies. At the time of investment
by the Fund, each of these companies will have a market capitalization
between $400 million and $2 billion.
PRINCIPAL INVESTMENT STRATEGIES
Market Capitalization: Under normal circumstances, the Fund will invest
substantially all of its total assets in the common stocks of companies
that have a market capitalization between $400 million and $2 billion
at the time of investment. These companies are at the smaller end of
the market capitalization spectrum for what the mutual fund industry
typically considers to be mid cap companies. This spectrum generally
extends up to $5 billion in market capitalization.
Security Selection: In selecting securities for investment, the Manager
strongly considers common stocks of those companies that satisfy the
Fund's market capitalization criteria and whose current prices do not
adequately reflect, in the Manager's opinion, the ongoing business
value of the underlying companies.
Using a core value investment strategy, the Manager finds companies
that are out of favor with investors. The Fund's investment strategy
focuses on bottom-up stock-picking using fundamental analysis, rather
than market or economic forecasts. More specifically, the Fund invests
in companies that the Manager believes possess the following
characteristics:
* Strong financials
* Proven products or services
* Dominant market share
* Sustainable competitive advantage
* Attractive valuation
* Potential for improving margins
* Potential for accelerating earnings
PRINCIPAL INVESTMENT RISKS
* Company Risk
* Small Company Risk
* Market Risk
* Out-of-Favor Risk
* Equity Securities Risk
* Non-Diversification Risk
* Allocation Risk
You will find a discussion of these risks, and others that may affect
your investment in the Funds, in the section entitled "Description of
Principal Investment Risks," beginning on page 20.
There is no guarantee that the Fund will achieve its objective, and you
could lose money on your investment. Furthermore, the Manager, despite
using various investment and risk analysis techniques, may not achieve
the results expected from an investment in the Fund.
-10-
<PAGE> 14
PAST PERFORMANCE
The bar chart below provides an indication of the risks of investing in
the Fund by showing you how the Fund's performance, measured in terms
of the total return for each full calendar year since the Fund's
inception, has varied from year to year. The table following the bar
chart compares the Fund's average annual returns over time to those of
two broad-based securities market indices. As with all mutual funds,
past performance is not a prediction of future performance.
[BAR CHART:]
1996 - 14.75%
1997 - 32.95%
1998 - 8.63%
BEST QUARTER: 2ND QUARTER 1997, +14.69% WORST QUARTER: 3RD QUARTER 1998, -18.30%
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR (July 25, 1995)
------ ---------------
<S> <C> <C>
MID CAP FUND -8.63% +12.79%
RUSSELL 2500 INDEX +0.39% +14.67%
RUSSELL 2000 INDEX -2.55% +12.43%
</TABLE>
The RUSSELL 2500 INDEX is a broad-based index that consists of the bottom 500
securities in the Russell 1000 Index and all 2000 securities in the Russell 2000
Index, representing approximately 22% of the Russell 3000 total market
capitalization. This index is a commonly used measure of the stock performance
of small and medium-size companies in the United States.
The RUSSELL 2000 INDEX is a broad-based index that consists of the bottom 2000
securities in the Russell 3000 Index, representing approximately 11% of the
Russell 3000 total market capitalization. This index is a commonly used measure
of the stock performance of small and medium-size companies in the United
States.
Both the chart and table assume reinvestment of dividends and distributions. The
performance results in the chart and table reflect the effects of voluntary
expense limitations in effect during the relevant periods. Without these
limitations, the Fund's returns would have been lower.
DLB Mid Capitalization Fund -11-
<PAGE> 15
DLB MICRO CAPITALIZATION FUND
INVESTMENT OBJECTIVE
The investment objective of the DLB Micro Capitalization Fund (the
"Micro Cap Fund") is long-term capital appreciation through investment
primarily in common stocks of smaller, faster-growing companies whose
securities at the time of purchase are considered by the Manager to be
realistically valued.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund will invest substantially all of
its total assets in common stocks. The Fund generally intends to invest
in stocks of smaller companies with market capitalizations of $10
million to $250 million ("micro cap companies") at the time of purchase
which are listed on a national or regional exchange or traded
over-the-counter with prices quoted daily in the financial press. The
Manager will select investments for the Fund based on its assessment of
whether the securities are likely to provide favorable capital
appreciation over the long term.
The Manager believes that there are persistent stock price
inefficiencies in the market for stocks of smaller companies. As a
result of limited coverage and ownership, smaller company stocks
frequently trade at significant discounts from their intrinsic value.
The Manager will seek to identify companies that are mispriced as
compared with their expected earnings stream.
Although the Fund's investment process emphasizes fundamental analysis,
the Manager first uses computer screening and industry sources to
narrow the Fund's investment universe. The Manager screens these
candidates by looking for further signs of quality and growth, such as
revenue and earnings per share growth. The Manager then makes decisions
using fundamental analysis on stocks that come through its initial
screens, emphasizing an issuer's historic financial performance,
balance sheet strength, management capability, profitability and
competitive position. Specifically, the Manager looks for the following
characteristics:
* Sustainable competitive advantage
* Strong management
* Long product cycles
* Pricing flexibility
* Small size as a competitive advantage
* High sustained return on investment
* Attractive valuation
* Above-average earnings per share growth
Out of this analysis, the Manager selects what it believes to be the
best companies for the Fund's portfolio.
The Fund is designed to be an investment vehicle for that part of an
investor's capital which can appropriately be exposed to above-average
risk.
-12-
<PAGE> 16
PRINCIPAL INVESTMENT RISKS
* Company Risk
* Small Company Risk
* Emerging Growth Companies Risk
* Market Risk
* Equity Securities Risk
* Non-Diversification Risk
* Allocation Risk
You will find a discussion of these risks, and others that may affect
your investment in the Funds, in the section entitled "Description of
Principal Investment Risks," beginning on page 20.
There is no guarantee that the Fund will achieve its objective, and you
could lose money on your investment. Furthermore, the Manager, despite
using various investment and risk analysis techniques, may not achieve
the results expected from an investment in the Fund.
PAST PERFORMANCE
Because the Fund is new, information on the Fund's performance is not
provided in this section.
DLB Micro Capitalization Fund -13-
<PAGE> 17
DLB GLOBAL SMALL CAPITALIZATION FUND
INVESTMENT OBJECTIVE
The investment objective of the DLB Global Small Capitalization Fund
(the "Global Small Cap Fund") is long-term capital appreciation through
investment primarily in common stocks of foreign and domestic companies
with market capitalizations at the time of purchase of up to $1.5
billion ("small cap companies").
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the Fund will invest substantially all of
its total assets in common stocks of domestic and foreign small cap
companies. The Fund normally expects to invest approximately 40% to 60%
of its assets outside of the United States and the remaining 60% to 40%
of its assets inside the United States.
The Manager is responsible for the Fund's domestic investments, while
the Subadvisor, Babson-Stewart, Ivory International, is responsible for
the Fund's international investments. The Fund will invest only in
exchange-traded securities and securities traded through established
over-the-counter trading systems that the Manager or the Subadvisor
believes provide comparable liquidity to exchange-traded securities.
The Fund may invest up to 15% of its assets in the emerging markets in
Asia, Latin America, the Middle East, Southern Europe, Eastern Europe
(including the former Soviet Union) and Africa.
The Manager selects domestic investments for the Fund generally based
on value factors, while the Subadvisor selects foreign investments for
the Fund generally based on growth factors.
Domestic Investments: To select domestic stocks for the Fund, the
Manager seeks small cap companies that are
out of favor with investors. The Fund's
domestic investment strategy focuses on
bottom-up stock-picking, using fundamental
analysis rather than making market or
economic forecasts. More specifically, the
Fund invests in companies that the Manager
believes possess the following
characteristics:
* Strong financials
* Proven track record
* Dominant market share
* Sustainable competitive advantage
* Attractive valuation
* Potential for improving margins
* Potential for accelerating earnings
Foreign Investments: For the Fund's overseas investments, the
Subadvisor, using a bottom-up stock
selection strategy, focuses on companies
with high growth potential. Fundamental
analysis identifies companies with above-
average earnings growth, high profitability
and cash flow and strong management. To find
attractive prospects, the Subadvisor uses
in-depth financial analysis and on-site
visits, in addition to evaluating currency
and political issues that might impact a
company's profitability. While growth is the
primary focus of the Fund's international
investments, the Subadvisor also looks to
valuation measures, such as
price-to-earnings and price-to-book ratios,
to make sure that a stock is reasonably
priced before buying it for the Fund.
-14-
<PAGE> 18
PRINCIPAL INVESTMENT RISKS
* Company Risk
* Small Company Risk
* Emerging Growth Companies Risk
* Foreign Issuer Risk
* Foreign Currency Risk
* Foreign Emerging Markets Risk
* Out-of-Favor Risk
* Market Risk
* Equity Securities Risk
* Non-Diversification Risk
* Allocation Risk
You will find a discussion of these risks, and others that may affect
your investment in the Funds, in the section entitled "Description of
Principal Investment Risks," beginning on page 20.
There is no guarantee that the Fund will achieve its objective, and you
could lose money on your investment. Furthermore, the Manager and
Subadvisor, despite using various investment and risk analysis
techniques, may not achieve the results expected from an investment in
the Fund.
PAST PERFORMANCE
The bar chart below provides an indication of the risks of investing in
the Fund by showing you how the Fund's performance, measured in terms
of the total return for each full calendar year since the Fund's
inception, has varied from year to year. The table following the bar
chart compares the Fund's average annual total returns over time to
those of two broad-based securities market indices and to those of an
index of securities comparable to those in which the Fund invests. As
with all mutual funds, past performance is not a prediction of future
performance.
[BARCHART:]
1996 - 9.85%
1997 - 4.66%
1998 - 3.73%
BEST QUARTER: 4TH QUARTER 1998, +13.28% WORST QUARTER: 3RD QUARTER 1998, -17.24%
DLB Global Small Capitalization Fund -15-
<PAGE> 19
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR (July 19, 1995)
<S> <C> <C>
GLOBAL SMALL CAP FUND +3.73% +6.35%
SALOMON BROTHERS EMI, EX-U.S. +12.15% +3.18%
RUSSELL 2500 INDEX +0.39% +14.66%
COMBINED INDEX +6.53% +11.62%
</TABLE>
The SALOMON BROTHERS EXTENDED MARKET INDEX (EMI), EX-U.S., is a broad-based
index that represents the bottom 20% of the cumulative available market capital
of the Salomon Brothers Broad Market Index outside the United States. The
Salomon Brothers Broad Market Index fully represents the universe of
institutionally available global stocks. All companies with an available market
capitalization of greater than US $100 million are included in the index.
The RUSSELL 2500 INDEX is a broad-based index that consists of the bottom 500
securities in the Russell 1000 Index and all 2000 securities in the Russell 2000
Index, representing approximately 22% of the Russell 3000 total market
capitalization. This index is a commonly used measure of medium and small stock
performance in the United States.
The COMBINED INDEX is a composite of the Salomon Brothers EMI, ex-U.S. Index,
and the Russell 2500 Index, weighted in each (monthly) period to reflect the
proportions of the Fund's assets invested in international and domestic
securities, respectively, during the period. The Fund calculates the Combined
Index solely for the purpose of presenting an "index" that resembles the Fund's
mix of domestic and foreign investments.
Both the chart and table assume reinvestment of dividends and distributions. The
performance results in the chart and table reflect the effects of voluntary
expense limitations in effect during the relevant periods. Without these
limitations, the Fund's returns would have been lower.
DLB Global Small Capitalization Fund -16-
<PAGE> 20
FEES AND EXPENSES
As an investor, you pay certain fees and expenses in connection with your
investment. These fees and expenses will vary depending on the Fund in which you
invest. The fee table shown below is meant to assist you in understanding these
fees and expenses.
Annual Fund Operating Expenses Expressed as a Percentage of Average
Daily Net Assets (Expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
FIXED DISCIPLINED MICRO GLOBAL
INCOME VALUE GROWTH GROWTH MID CAP CAP SMALL
FUND FUND FUND FUND FUND FUND CAP FUND
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.40% 0.55% 0.55% 0.75% 0.60% 1.00% 1.00%
Distribution and/or Service None None None None None None None
(12b-1) Fees (a)
Other Expenses (b) 0.40% 0.20% 0.40% 0.39% 0.42% 1.06% (d) 1.00%
TOTAL ANNUAL FUND
OPERATING EXPENSES 0.80% 0.75% 0.95% 1.14% 1.02% 2.06% 2.00%
Fee Waiver 0.25% None(e) 0.15% 0.24% 0.12% 0.76% 0.50%
Net Expenses(c) 0.55% 0.80% 0.80% 0.90% 0.90% 1.30% 1.50%
</TABLE>
(a) The Funds have adopted distribution and services plans pursuant to
Rule 12b-1 that permit payments by each Fund at an annual rate of up
to 0.50% of the Fund's average daily net assets. The Trustees,
however, have no intention of implementing the plans during the Funds'
current fiscal year. See "Investing in the Funds --Distribution and
Service (12b-1) Plans."
(b) "Other Expenses" include accounting and audit fees, custodian fees,
transfer agent fees, legal fees, registration fees, printing fees and
fees paid to the DLB Fund Group's independent Trustees.
(c) The Manager has contractually agreed with each Fund to bear certain
expenses for the current fiscal year to the extent that the Fund's
Total Annual Fund Operating Expenses--, other than brokerage
commissions, hedging transaction fees and other investment related
costs, extraordinary, non-recurring and certain other unusual
expenses, such as litigation and other extraordinary legal expenses,
securities lending fees and expenses, and transfer taxes--, would
otherwise exceed the percentages of the Fund's average daily net
assets noted in the bottom line of the chart. Therefore, Net Expenses
represents, for each Fund, the highest fee that you will pay on an
investment in that Fund. The Manager's fee waiver and expense
limitation agreement with the Funds cannot be unilaterally terminated
by the Manager during the Funds 1999 fiscal year.
(d) "Other Expenses" for the Micro Cap Fund are based on estimated amounts
for the current fiscal year.
(e) Note that the actual Total Annual Fund Operating
Expenses of the Value Fund for fiscal year 1998 (0.75%) were less than
the Net Expenses (0.80%) allowable under the fee waiver and expense
limitation reimbursement agreement between the Manager and the Fund as
currently in effect.
EXAMPLES. These examples are intended to help you compare the cost of investing
in the Funds with the cost of investing in other mutual funds. The examples
assume that you invest $10,000 in each of the Funds for the time periods
indicated, that your investment earns a 5% return each year and that each Fund's
operating expenses remain the same. Since the Funds do not impose any
shareholder fees, the figures shown would be the same whether or not you
redeemed your shares at the end of a period. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Fixed Income Fund $ 56 $231 $ 421 $ 969
Value Fund $ 77 $241 $ 418 $ 933
Growth Fund $ 82 $289 $ 513 $1,157
Disciplined Growth Fund $ 92 $340 $ 607 $1,370
Mid Cap Fund $ 92 $314 $ 554 $1,242
Micro Cap Fund $133 $577 (a) (a)
Global Small Cap Fund $154 $584 $1,040 $2,304
</TABLE>
(a) Because the Micro Cap Fund is new, information on the cost of
investing in the Micro Cap Fund is provided only for periods of 1
and 3 years.
Fees and Expenses -17-
DESCRIPTIONS OF PRINCIPAL INVESTMENT RISKS
This section explains the principal investment risks associated with
investments in the Funds. These risks are the primary reasons for possible
decreases in the value of investments in the Funds. The Fund summaries, on pages
1 to 17, identify which of these risks apply to each Fund. The types of risks
and the extent to which they affect the value of investments in the Funds may
change over time, particularly as the types of investments made by the Funds
change.
ALLOCATION RISK
The Manager will use its judgment when allocating the Fixed Income
Fund's investments among various segments of the fixed income markets. The
Manager may miss attractive investment opportunities by underweighting markets
where there are significant returns. The Fixed Income Fund could lose value if
the Manager overweights markets where there are significant declines.
With regard to all of the Funds, the Manager - and, in the case of the
Global Small Cap Fund, the Subadvisor - has discretion to determine the
investments made by a Fund. The Past Performance sections in the Fund summaries
present index performance results for purposes of comparison, but no Fund is
managed with the goal of mirroring the securities of any particular index. A
Fund's investment style (e.g., value or growth) may result in that Fund being
overweighted or underweighted compared with industry sectors in the index and
may result in that Fund holding securities within a particular sector that are
different from the securities included in the index for that sector. Thus, a
Fund's returns may vary substantially from the performance of the index with
which it is compared.
Applies to: All Funds
COMPANY RISK
A company's economic condition influences the prices of its securities.
The price of any security held by any Fund may rise or fall for a number of
reasons, including but not limited to the following:
* management decisions
* changes in management
* changing demand for the company's goods or services
* changes in or differences between actual and anticipated
earnings
* the potential for takeovers and acquisitions
* increased production costs
* stricter government regulation
* a rating agency downgrade
Applies to: All Funds
CREDIT RISK
The issuer of a fixed income security may not be able to pay principal
and/or interest when due. The value of a fixed income security generally will
fall if the issuer fails to pay principal or interest when due, a rating agency
downgrades the issuer or other information negatively influences the market's
perceptions of the issuer's credit risk.
Certain lower-rated investment grade fixed income securities and
comparable unrated securities in which a Fund may invest have speculative
characteristics. Changes in economic conditions or adverse developments
affecting particular companies or industries are more likely to lead to a
weakened capacity to make principal and interest payments on such obligations
than in the case of higher-rated securities.
As explained in the section entitled "Policies Applicable to the
Funds," the Fixed Income Fund may hold up to 5% of its assets in
non-investment grade securities. Lower quality debt instruments involve greater
volatility of price and yield, and greater risk of loss of principal and
interest, and generally reflect a greater possibility of an adverse change in
financial condition which would affect the ability of the issuer to make
payments of principal and interest. The market price for lower quality
securities generally responds to short-term corporate and market developments
to a greater extent than higher-rated securities because these developments are
perceived to have a more direct relationship to the ability of an issuer of
lower quality securities to meet its ongoing debt obligations.
Applies to: Fixed Income Fund
EMERGING GROWTH COMPANIES RISK
Investments in emerging growth companies may exhibit more abrupt or
erratic market movements because they may have the following characteristics:
* limited product lines, markets and financial resources,
including access to capital
* management by one or a few key individuals
* securities that are less liquid and fewer in number
* securities that trade less frequently and in limited volume
* shorter operating histories
* less experienced management
These characteristics may cause the securities of emerging growth companies to
suffer steeper than average price declines after disappointing earnings reports
and to be more difficult to sell at satisfactory prices.
Applies to: Micro Cap Fund, Global Small Cap Fund
<PAGE> 21
EQUITY SECURITIES RISK
All of the Funds except the Fixed Income Fund invest primarily in
common stocks. Common stocks are securities that represent an ownership interest
(or the right to acquire an ownership interest) in a company. Although these
types of securities offer greater potential for long-term growth, they are more
volatile and more risky than some other forms of investment. Therefore, the
value of your investment in a Fund may sometimes decrease.
Applies to: All Funds Except Fixed Income Fund
FOREIGN CURRENCY RISK
Investments in securities denominated in foreign currencies are at
times more volatile than investments in securities denominated in U.S. dollars.
These securities involve the risk that their values, in terms of U.S. dollars,
may fluctuate without any change in the inherent value of the securities due to
changes in the currency exchange rate. In addition, certain foreign countries
present the risk that they may impose currency exchange controls.
As of January 1, 1999, many European countries adopted a single
European currency, the "euro." At this time, the consequences of the adoption of
the new currency on foreign exchange rates, interest rates and the values of
European securities remain unclear. The consequences of adopting the euro may
adversely impact the value and/or volatility of securities held by the Global
Small Cap Fund.
Applies to: Global Small Cap Fund
FOREIGN ISSUER RISK
Investments in the securities of foreign companies and securities
traded primarily in foreign markets are generally less liquid and at times more
volatile than investments in the securities of domestic companies and securities
traded in domestic markets. They also involve a variety of special risks,
including risks of:
* less rigorous accounting, auditing and financial reporting
standards than are customary in the United States
* adverse political or regulatory developments
* higher trading and settlement costs
* limited public information
* limited, slower or more costly legal remedies
* special tax considerations
If a Fund concentrates a substantial amount of its assets in issuers
located in a single country or a limited number of countries, it assumes the
risk that economic, political and social conditions in that country or those
countries will have a significant impact on its investment performance.
FOREIGN EMERGING MARKETS RISK
In addition, beyond the general risks associated with any foreign
investment, certain foreign countries present the following risks:
* expropriation of assets
* imposition of currency exchange controls
* confiscatory taxation
* limitations on investments in certain issuers in those
countries
* limitations on expatriation of cash and/or assets
* political or financial instability
* adverse diplomatic developments
This set of risks represents the risks generally associated with "emerging
markets." Emerging markets are those countries in the initial stages of their
industrialization cycles with low per capita income. Emerging markets have
demonstrated greater volatility than the markets of developed countries with
economies that are more mature.
If a Fund concentrates a substantial amount of its assets in issuers
located in a single country or a limited number of countries, it assumes the
risk that economic, political and social conditions in that country or those
countries will have a significant impact on its investment performance.
Investment in certain foreign countries or emerging markets may exacerbate this
risk.
Applies to: Global Small Cap Fund
Description of Principal Investment Risks -18-
<PAGE> 22
INTEREST RATE RISK
The values of fixed income securities, such as bonds, notes and
asset-backed securities, generally vary inversely to changes in prevailing
interest rates. For example, when interest rates rise, the values of fixed
income securities tend to fall. This risk is generally greater for securities
with longer maturities and durations. Fluctuations in the values of fixed income
securities held by a Fund will not affect the income paid by the Fund but will
affect the value of the Fund's shares.
Interest rate risk will have a greater influence on the price of a
fixed income security if the security has a longer maturity or duration. Fixed
income securities with longer maturities or durations therefore are more
volatile than fixed income securities with shorter maturities or durations. The
average maturity of a Fund's fixed income investments will affect the volatility
of the Fund's share price.
Applies to: Fixed Income Fund
MARKET RISK
The value of the securities held by the Funds may fall due to changing
economic, political or market conditions, the general outlook for corporate
earnings, changing interest rates, investor sentiment or disappointing earnings
results.
Applies to: All Funds
MORTGAGE- AND ASSET-BACKED SECURITIES RISK
CREDIT RISK
As with fixed income securities generally, mortgage- and asset-backed
securities present the risk that the issuer will default on principal and
interest payments. The U.S. Government or its agencies guarantees the payment of
principal and interest on some mortgage-backed securities, but in other cases it
may be difficult to enforce rights against the assets underlying other mortgage-
and asset-backed securities when an issuer defaults. Nevertheless, insurance or
other forms of guarantee may support mortgage- and asset-backed securities
issued by private lending institutions or other financial intermediaries.
MATURITY RISK
Mortgage-Backed Securities: A mortgage-backed security matures when all
the mortgages in the pool mature or are prepaid. Therefore, mortgage-backed
securities do not have a fixed maturity, and their expected maturities may vary
when interest rates change.
* When interest rates fall, homeowners are more likely to
prepay their mortgage loans. An increased prepayment rate
on a Fund's mortgage-backed securities will result in an
unforeseen loss of interest income to the Fund. In
addition, because prepayments increase when interest rates
fall, the prices of mortgage-backed securities do not
increase as much as those of other fixed income securities
when interest rates fall. Furthermore, increased
prepayments may need to be reinvested, in turn, at lower
interest rates.
* When interest rates rise, homeowners are less likely to
prepay their mortgage loans. A decreased prepayment rate
lengthens the expected maturity of a mortgage-backed
security. Therefore, the prices of mortgage-backed
securities may decrease more than prices of other fixed
income securities when interest rates rise.
Collateralized Mortgage Obligations: Collateralized mortgage
obligations (CMOs) are a type of mortgage-backed security. CMOs are issued in
separate classes with different expected maturities. As its underlying mortgage
pool experiences prepayments, a CMO pays off investors in classes in accordance
with the CMO's governing instrument (generally, the CMO first pays investors who
have purchased classes with shorter expected maturities). By investing in CMOs,
a Fund may better manage the prepayment risk of mortgage-backed securities.
However, unanticipated prepayments may cause the actual maturity of a CMO to be
substantially shorter than its expected maturity, and prepayments at levels
lower than expected may cause the actual maturity of a CMO to be longer than its
expected maturity. These changes in a CMO's maturity could result in declines in
the CMO's value.
Asset-Backed Securities: Asset-backed securities are securities that
are backed by pools of obligations, such as pools of automobile loans,
educational loans and credit card receivables, both secured and unsecured.
Asset-backed securities have prepayment risks similar to those of
mortgage-backed securities. However, the levels of principal
Description of Principal Investment Risks -19-
<PAGE> 23
prepayment tend not to vary much with interest rates, and the short-term nature
of the assets underlying asset-backed securities tends to dampen the impact of
changes in the levels of prepayment. In addition, the following may cause
holders of asset-backed securities to experience delays in payment on the
securities, which may result in losses to a Fund holding the securities:
* unanticipated legal or administrative costs of enforcing the
contracts on the assets
* depreciation of the collateral securing the contracts
* damage to or destruction of the collateral securing the
contracts
Applies to: Fixed Income Fund
NON-DIVERSIFICATION RISK
Each Fund is non-diversified, which means that it may invest a
relatively high percentage of its assets in the securities of relatively few
issuers. Investment in the securities of a limited number of issuers may
increase the risk of loss to a Fund should there be a decline in the market
value of any one portfolio security. Investment in a non-diversified fund
therefore entails greater risks than investment in a diversified fund. Given
that the Funds are not diversified, no Fund is intended to be a complete
investment program.
Applies to: All Funds
OUT-OF-FAVOR RISK
There are risks in investing in unpopular stocks. The factors causing a
stock's unpopularity may continue longer than expected or may worsen. These
factors may range from a drop in earnings expectations to a major business
problem. As a result, the stock's value may drop, or it may not appreciate as
the Manager expected.
Furthermore, unpopular stocks involve the risk that the financial
markets do not follow the company. Therefore, even if a company experiences
improved performance, the price of the company's stock may not rise in
conjunction with the improvement in performance. Thus, the stock's value may not
appreciate as the Manager expects.
Applies to: Value Fund, Mid Cap Fund, Global Small Cap Fund
RESTRICTED SECURITIES RISK
Securities that are not registered under the Securities Act of 1933, as
amended (the "1933 Act"), including securities issued in accordance with Rule
144A under the 1933 Act ("Rule 144A securities"), present certain risks.
Investments in Rule 144A securities could cause the liquidity of a Fund to
decrease if the market's interest for those securities decreases, particularly
because this market is limited to investors known as "qualified institutional
buyers." Under such conditions, a Fund may not be able to sell those securities
when it wants to, and a Fund may have to sell those securities at an
unsatisfactory price. Market quotations may be less readily available for Rule
144A securities, and thus judgment may play a greater role in the valuation of
these securities than it would in the valuation of unrestricted securities.
Applies to: Fixed Income Fund
SMALL COMPANY RISK
The securities of mid cap, small cap and micro cap companies may change
in value more than those of larger, more established companies because mid cap,
small cap and micro cap companies are more likely to:
* depend upon a single proprietary product or market niche,
* have limited product lines, markets or financial resources,
* depend on a limited management group,
* have fewer, less liquid securities outstanding, and
* have securities that trade less frequently and in limited
volume.
In general, the securities of mid cap, small cap and micro cap companies are
more sensitive to purchase and sale transactions. Therefore, the prices of those
securities tend to be more volatile than the prices of securities of larger
companies.
In many instances, the securities of mid cap, small cap and micro cap
companies are traded only over-the-counter or on a regional securities exchange.
Furthermore, the frequency and volume of their trading are substantially
less than is typical of larger companies. Therefore, the securities of smaller
companies may be subject to wider price fluctuations. When disposing of these
securities, a Fund may have to sell at discounts from quoted prices, settle for
a less than satisfactory price, or make a series of small sales over an extended
period of time.
Applies to: Disciplined Growth Fund, Mid Cap Fund, Micro Cap Fund, Global
Small Cap Fund
Description of Principal Investment Risks -20-
<PAGE> 24
POLICIES APPLICABLE TO THE FUNDS
CASH RESERVES. Each Fund generally intends to stay fully invested in
the types of securities that represent its principal investment strategies.
However, each Fund may hold a portion of its assets in cash, money market
instruments or other high-quality short-term debt obligations readily changeable
to cash, such as treasury bills, commercial paper or repurchase agreements, at
the discretion of the Manager and/or Subadvisor to provide for expenses and
anticipated redemption payments and to carry out an orderly investment program
in accordance with the Fund's investment policies.
CHANGE IN CAPITALIZATION/CHANGE IN CREDIT RATING. At the time of making
an investment, the principal investment strategies of the Value Fund, the Mid
Cap Fund, the Micro Cap Fund and the Global Small Cap Fund limit investments by
those Funds to issuers that meet certain market capitalization requirements. For
example, the Micro Cap Fund may invest only in companies that have market
capitalizations at the time of investment between $10 million and $250 million.
However, once the initial investment has complied with the market capitalization
requirements, the Fund may continue to hold, and may even add to its holdings
of, securities of companies whose market capitalizations later transgress the
specified maximum (or minimum) capitalization. Thus, for instance, the Micro Cap
Fund does not have to sell, and may hold or add to its holdings of, the
securities of an issuer even if that issuer's market capitalization increases
above $250 million after the Fund makes its investment in the issuer.
Similarly, the Fixed Income Fund may hold securities that lose
investment grade quality after the Fund's investment in those securities if, in
the opinion of the Manager, the investment remains appropriate under the
circumstances. If at any time, however, more than 5% of the Fixed Income Fund's
assets are below investment grade quality, the Manager will dispose of such
securities as are necessary to reduce the holdings to 5% or less.
CHANGES TO INVESTMENT OBJECTIVES. Except for policies identified as
"fundamental" in this Prospectus or the Statement of Additional Information, the
Trustees may change the investment objective and policies of each Fund without
shareholder approval. Any such change may result in a Fund having an investment
objective and policies different from the objective and policies which you
considered appropriate when you invested in the Fund. A Fund will notify you of
any changes in its investment objective or policies through a revised prospectus
or other written communication.
<PAGE> 25
PRIMARY INVESTMENTS
Under normal circumstances, each Fund will invest not less than 65% of
its assets in the types of securities listed below:
Name of Fund Type of Securities
- ------------ ------------------
Fixed Income Fund Fixed income securities
Value Fund Common stocks
Growth Fund Common stocks
Disciplined Growth Fund Common stocks and other equity securities
MidCap Fund Common stocks of companies that have a
market capitalization between $400 million
and $2 billion at the time of purchase
MicroCap Fund Common stocks
Global Small Cap Fund Common stocks of domestic and foreign
companies with market capitalization at
the time of investment by the Fund of up
to $1.5 billion.
TEMPORARY DEFENSIVE POSITION. The Growth Fund may from time to time,
take temporary defensive positions in securities convertible into common stock,
preferred stock, high grade bonds or other defensive issues in attempting to
respond to adverse market, economic, political, or other conditions. Keep in
mind that a temporary defensive strategy still has the possibility of losing
money and may prevent the Fund from achieving its investment objective.
YEAR 2000 ISSUE. Like other businesses and governments around the
world, the Funds could be adversely affected if the computer systems used by
their service providers, the companies with which they do business, and the
companies in which they invest have problems processing date-related information
from and after January 1, 2000. This is commonly known as the "Year 2000 issue."
The Funds, which have no application systems of their own, are working
diligently with their service providers (including the Manager, the Subadvisor
and Investors Bank & Trust Company, the Funds' custodian and transfer agent) to
identify and remedy any Year 2000 issues. Furthermore, the Manager and
Subadvisor consider a company's efforts to address the Year 2000 issue as a
factor when making investment decisions for the Funds. The Funds do not
anticipate that the Year 2000 issue will have a significant negative effect on
an investment in any Fund. However, the Funds can give no assurance that their
actions and those of their service providers will preclude all significant
negative effects.
Policies Applicable to the Funds -21-
<PAGE> 26
HOW THE FUNDS ARE MANAGED
THE MANAGER
Each Fund is advised and managed by its Manager, David L. Babson and Company
Incorporated. Founded in 1940, the Manager provides investment advisory services
to a substantial number of institutional and other investors, including other
registered investment companies. As of December 31, 1998, the Manager had over
$21 billion in assets under management. The Manager is located at One Memorial
Drive, Cambridge, Massachusetts 02142.
Under separate Management Contracts relating to each Fund, the Manager selects
and reviews each Fund's investments and provides executive and other personnel
for the management of The DLB Fund Group. The Manager carries out its duties
subject to the policies adopted by The DLB Fund Group's Board of Trustees.
THE SUBADVISOR
The Manager employs at its own expense the Subadvisor, Babson-Stewart Ivory
International, to manage the international component of the Global Small Cap
Fund's portfolio. The Subadvisor was established in 1987 and is a general
partnership owned 50% by the Manager and 50% by Stewart-Ivory & Company
(International) Limited ("Stewart Ivory"), an indirect wholly owned subsidiary
of Stewart Ivory (Holdings) Ltd., which is controlled by its executives. Stewart
Ivory and its predecessor organizations have been managing investments
internationally from Edinburgh since 1873. The Subadvisor provides investment
advisory services to a substantial number of institutional and other investors,
including other registered investment companies. The Subadvisor is located at
One Memorial Drive, Cambridge, Massachusetts 02142.
INVESTMENT ADVISORY FEES
For the fiscal year ended December 31, 1998, each Fund paid the Manager an
investment management fee as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEE
(AS A % OF AVERAGE
NAME OF FUND DAILY NET ASSETS)
<S> <C>
Fixed Income Fund 0.40%
Value Fund 0.55
Growth Fund (annualized) 0.55
Disciplined Growth Fund 0.75
Mid Cap Fund 0.60
Micro Cap Fund (annualized) 1.00
Global Small Cap Fund 1.00
</TABLE>
The fees shown above do not reflect the Manager's partial waiver of its
management fee in 1998, as the Manager does not intend to waive any of its
management fees in 1999. However, the Manager has contractually agreed to limit
each Fund's total expenses for the current fiscal year as described in the
section entitled "Fees and Expenses."
-24-
<PAGE> 27
PORTFOLIO MANAGERS
FUND PORTFOLIO MANAGER
FIXED INCOME Edward L. Martin, Executive Vice President and Director
FUND of the Manager, is primarily responsible for the
day-to-day management of the Fixed Income Fund. Mr.
Martin, who has 23 years of investment experience, has
been employed by the Manager in portfolio management for
over 14 years. He has managed the Fund since its
inception. Mr. Martin is assisted in the day-to-day
management of the Fund by a team of investment
professionals at the Manager.
Value Fund Roland W. Whitridge, Senior Vice President and Director
of the Manager, is primarily responsible for the
day-to-day management of the Value Fund. Mr. Whitridge,
who has 33 years of investment experience, has been
employed by the Manager in portfolio management for over
24 years. He has managed the Fund since its inception.
Mr. Whitridge is assisted in the day-to day management of
the Fund by a team of investment professionals at the
Manager.
GROWTH FUND James B. Gribbell, Senior Vice President of the Manager,
is primarily responsible for the day-to-day management of
the Growth Fund. Mr. Gribbell, a Chartered Financial
Analyst with 10 years of investment experience, has been
employed by the Manager in portfolio management for over
5 years. He has managed the Fund since its inception. Mr.
Gribbell is assisted in the day-to-day management of the
Fund by Mathews Cherian.
Disciplined Michael Caplan, Senior Vice President of the Manager, is
Growth Fund primarily responsible for the day-to-day management of
the Disciplined Growth Fund. Mr. Caplan, who has 13 years
of investment experience, has managed the Fund since its
inception. Mr. Caplan has been employed by the Manager
(and a company which merged into the Manager) since 1995,
prior to which he was employed as a portfolio manager by
State Street Global Advisors. Mr. Caplan is assisted in
the day- to-day management of the Fund by Kathleen
Golden.
MID CAP FUND Dennis J. Scannell, Senior Vice President of the Manager,
is primarily responsible for the day-to-day management of
the Mid Cap Fund. Mr. Scannell, who has 14 years of
investment experience, has been employed by the Manager
in portfolio management for over 5 years. He has managed
the Fund since August 1998. Mr. Scannell is assisted in
the day-to-day management of the Fund by a team of
investment professionals at the Manager.
MICRO CAP FUND PAUL S. SZCZYGIEL, Senior Vice President of the Manager,
is primarily responsible for the day-to-day management of
the Micro Cap Fund. Mr. Szczygiel, a Chartered Financial
Analyst with over 14 years of investment experience, has
managed the Fund since its inception. Mr. Szczygiel has
been employed by the Manager (and a company which merged
into the Manager) in portfolio management since 1994,
prior to which he was an Associate Director at Bear
Stearns. Mr. Szczygiel is assisted in the day-to-day
management of the Fund by a team of investment
professionals at the Manager.
GLOBAL SMALL DENNIS J. SCANNELL, Senior Vice President of the Manager,
CAP FUND and JAMES W. BURNS and JOHN G.L. WRIGHT, each Managing
Directors of the Subadvisor, are primarily responsible
for the day-to-day management of the Global Small Cap
Fund. Mr. Scannell, who has 14 years of investment
experience, has been employed by the Manager in portfolio
management for over 5 years. He has managed the Fund's
domestic investments since August 1998. Mr. Scannell is
assisted in the day-to- day management of the Fund's
domestic investments by a team of investment
professionals at the Manager.
Mr. Wright, who has been employed by the Subadviser for
over 27 years, and Mr. Burns, who has been employed by
the Subadviser for over 8 years, have each been
responsible for management of the Fund's international
investments since its inception. They are assisted by a
team of investment professionals who have
responsibilities for specific countries.
-25-
<PAGE> 28
CERTAIN PERFORMANCE INFORMATION RELATED TO OTHER ACCOUNTS MANAGED BY THE MANAGER
The information presented below provides related performance information which
may be useful to consider before investing in the Growth Fund or the Micro Cap
Fund. THE QUOTED PERFORMANCE DATA BELOW DOES NOT REPRESENT THE HISTORICAL
PERFORMANCE OF THE GROWTH FUND OR THE MICRO CAP FUND AND SHOULD NOT BE
INTERPRETED AS BEING INDICATIVE OF THE PAST OR FUTURE PERFORMANCE OF THOSE
FUNDS. The expenses, timing of purchase and sales of portfolio securities,
availability of cash flows, brokerage commissions, portfolio composition and
investment policies of the Growth and Micro Cap Funds, as well as any changes in
market conditions, are all reasons that the performance results of those Funds
may vary from the related performance results shown below.
GROWTH
In addition to serving as investment advisor to The DLB Fund Group, the Manager
has also served as the investment subadvisor to the Babson Growth Fund, a
registered investment company, since its inception. The performance information
presented below represents the average annual total returns (after deduction of
expenses) of the Babson Growth Fund for the one-, three-, five- and ten-year
periods ended December 31, 1998.
James B. Gribbell, the individual primarily responsible for the day-to-day
management of the Growth Fund, has been the individual primarily responsible for
the day-to-day management of the Babson Growth Fund since January 1, 1996. From
1993 to 1995, Mr. Gribbell was the assistant portfolio manager of the Babson
Growth Fund.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Babson Growth Fund* 32.24% 27.27% 21.92% 16.28%
Russell 1000 Growth Index** 38.71% 30.62% 25.70% 20.57%
------- ------- ------ ------
</TABLE>
* As of December 31, 1998, the Babson Growth Fund had $512 million in assets.
** The RUSSELL 1000 GROWTH INDEX is an unmanaged index that contains those
Russell 1000 Index securities with a greater-than-average growth orientation.
Securities in this index tend to exhibit higher price-to-book and
price-to-earnings ratios, lower dividend yields and higher forecasted growth
than the value universe.
MICRO CAP In addition to serving as investment advisor to The DLB Fund Group,
the Manager has also served since May 1, 1994, as the investment manager of
other private accounts that have investment objectives, policies and strategies
that are substantially similar (although not necessarily identical) to those of
the Micro Cap Fund (collectively, the "Micro Cap Accounts"). The performance
information shown below, which represents the average annual total returns for
the one- and three-year and since inception periods ended December 31, 1998, is
based on a composite of the Micro Cap Accounts, which has been adjusted to give
effect to the estimated fees and expenses of the Micro Cap Fund (without giving
effect to any expense waivers or reimbursements) during the 1999 fiscal year.
The performance of the composite shown below has been calculated in accordance
with standards established by the Association for Investment Management and
Research. The performance represents total return, which includes capital
appreciation and income.
Unlike the Micro Cap Fund, the Micro Cap Accounts include accounts that were not
registered under the Investment Company Act of 1940 and therefore were not
subject to certain investment limitations, diversification requirements, and
other restrictions imposed by that Act. In addition, the Micro Cap Accounts
include accounts that were not subject to Subchapter M of the Internal Revenue
Code, which imposes certain limitations on the investment operations of the
Fund. If the Micro Cap Accounts had all been registered under the 1940 Act, and
subject to Subchapter M of the Code, their performance might have been adversely
affected.
Paul S. Szczygiel, the individual primarily responsible for the day-to-day
management of the Micro Cap Fund, has been the individual primarily responsible
for the day-to-day management of the Micro Cap Accounts since the inception of
those accounts on May 1, 1994.
<TABLE>
<CAPTION>
Since
Inception
1 Year 3 Years (5/1/94)
------ ------- ---------
<S> <C> <C> <C>
Micro Cap Accounts* -3.74% 30.38% 28.41%
Russell 2000 Index** -2.55% 11.58% 18.27%
</TABLE>
* As of December 31, 1998, the composite had 4 accounts totaling $28.5 million
in assets.
** THE RUSSELL 2000 INDEX is an unmanaged index that consists of the bottom
2,000 securities in the Russell 3000 Index, representing approximately 11% of
the Russell 3000 total market capitalization. This index is a commonly used
measure of the stock performance of small and medium-size companies in the
United States.
-26-
<PAGE> 29
INVESTING IN THE FUNDS
HOW TO OPEN AN ACCOUNT
Before investing in a Fund you will need to open an account with The DLB Fund
Group. You can open an account by completing and returning to The DLB Fund Group
a signed account application. Account applications are available from The DLB
Fund Group, whose address and toll free number are provided on the back of this
Prospectus.
When completing the application, please be sure to provide your social security
number or taxpayer identification number on the application and designate the
account(s) to which funds or securities may be transferred upon redemption.
Designation of additional accounts or any change in the accounts originally
designated must be made by you in writing, with the signature medallion
guaranteed by a commercial bank, a member firm of a domestic securities exchange
or one of certain other financial institutions.
-27-
<PAGE> 30
HOW TO PURCHASE SHARES
You may purchase shares of each Fund directly from The DLB Fund Group on any day
when the NYSE is open for business. The NYSE is closed on weekend days, national
holidays and Good Friday. Before placing an order for Fund shares, you should
call the Manager at 1-888-722-2766, Attn:
Maureen M. Bates.
The purchase price of a share of the Fund is the net asset value next determined
after your purchase order is received in good order. In most cases, if the
Funds' Transfer Agent, Investors Bank & Trust Company ("IBT"), does not receive
the consideration before the relevant deadline, The DLB Fund Group will not
consider the purchase to be in good order. This means that you must resubmit the
purchase order and consideration on the following business day, unless IBT can
credit the consideration to the account of a specific Fund. The Funds do not
impose a sales charge on purchases.
MINIMUM INVESTMENT. The minimum initial investment in a Fund is $100,000, and
the minimum for each subsequent investment is $10,000. If you open multiple
accounts with The DLB Fund Group, you may aggregate your investments in the
Funds to satisfy the minimum investment requirement. You may also satisfy the
minimum initial investment requirement by making an initial investment of at
least $25,000 in a Fund and investing the remainder of the $100,000 minimum
initial investment within 12 months.
PURCHASES. You may purchase shares of a Fund utilizing the following methods:
-> CASH (by wire transfer only). You must transmit all federal
funds to IBT to Account No. 777777722 for the account of the
specific Fund. ("Federal funds" are monies credited to IBT's
account with the Federal Reserve Bank of Boston.) The deadline
for wiring federal funds is 2:00 p.m. Eastern time.
-> SECURITIES (only by transferring common stocks on deposit at
The Depository Trust Company ("DTC") or appropriate fixed
income securities, which the Manager has determined are
acceptable). In the case of an investment in-kind, you must
place your securities on deposit at DTC by 4:00 p.m. Eastern
time, the deadline for transferring those securities to the
account designated by the custodian for the Funds (IBT).
The Manager will not accept securities, in exchange for Fund
shares, unless:
-> the Manager, in its sole discretion, believes the
securities are appropriate investments for the Fund.
(The Manager will accept securities, in exchange for
Fund shares, for investment only and not for
resale.);
-> you represent and agree that all securities offered
to the Fund are not subject to any restrictions upon
their sale by the Fund under the Securities Act of
1933, or otherwise; and
-> the securities may be acquired under the investment
restrictions applicable to the relevant Fund.
The Manager will value securities it accepts in exchange for
Fund shares in accordance with the relevant Fund's procedures
for valuation described under "How Share Price Is Determined"
as of the time of the next determination of net asset value
after acceptance. All dividends, interest, subscription or
other rights that are reflected in the market price of
accepted securities at the time of valuation become the
property of the relevant Fund and must be delivered to The DLB
Fund Group upon receipt by you from the issuer. If you
purchase Fund shares in exchange for securities, you may, if
you are subject to Federal income taxation, recognize a gain
or loss for federal income tax purposes, depending upon your
basis in the securities tendered. In all cases, the Manager
reserves the right to reject any particular investment.
-> CASH AND SECURITIES. You will need to follow the above
instructions for purchases made with a combination of cash and
securities.
Purchases will be made in full and fractional shares of each Fund calculated to
three decimal places. The DLB Fund Group will send to shareholders written
confirmation (including a statement of shares owned) at the time of each
transaction.
The DLB Fund Group reserves the right at any time to reject an order.
-28-
<PAGE> 31
HOW TO SELL SHARES
You may redeem Fund shares on any day when the NYSE is open for business.
The Funds will redeem their shares at a price equal to their net asset value per
share next determined after IBT receives the redemption request in good order. A
redemption request is in good order if it:
-> includes the correct name in which shares are registered, your
account number and the number of shares or the dollar amount
of shares to be redeemed; and
-> is signed correctly in accordance with the form of
registration. (Persons acting in a fiduciary capacity, or on
behalf of a corporation, partnership or trust, must specify,
in full, the capacity in which they are acting.)
There is no redemption fee for any of the Funds.
REDEMPTION REQUESTS. You should send redemption requests to The DLB Fund Group.
In order to help facilitate the timely payment of redemption proceeds, you
should telephone the Manager at 1-888-722-2766, Attn: Maureen M. Bates, at least
two days before submitting a request.
PAYMENT OF REDEMPTION PROCEEDS. The DLB Fund Group will make payment on
redemption as promptly as possible and in any event within seven days after IBT
receives your redemption request in good order.
-> CASH PAYMENTS. The DLB Fund Group will make cash payments
generally by transfer of Federal funds for payment into your
account the next business day following the redemption
request.
-> IN KIND. If the Manager determines, in its sole discretion,
that it would be detrimental to the best interests of the
remaining shareholders of a Fund to make payment wholly or
partly in cash, the Fund may instead pay the redemption price
in whole or in part by a distribution in kind of readily
marketable securities held by the Fund. The DLB Fund Group
will transfer and deliver in-kind redemptions as you direct.
The DLB Fund Group will value securities used to redeem Fund
shares in kind in accordance with the relevant Fund's
procedures for valuation described under "How Share Price Is
Determined." You generally will incur brokerage charges on the
sale of any securities that you receive in payment of
redemptions.
Each Fund may suspend the right of redemption and may postpone payment for more
than seven days when the NYSE is closed for other than weekends or holidays, or
if permitted by the rules of the Securities and Exchange Commission during
periods when trading on the NYSE is restricted or during an emergency which
makes it reasonably impracticable for the Fund to dispose of its securities or
fairly to determine the value of the net assets of the Fund, or during any other
period permitted by the Securities and Exchange Commission for the protection of
investors.
-29-
<PAGE> 32
HOW SHARE PRICE IS DETERMINED
The DLB Fund Group determines the net asset value of a share of each Fund
at 4:15 p.m., Eastern time, on each day that the NYSE is open. The DLB Fund
Group does not accept orders or compute a Fund's their net asset value on days
when the NYSE is closed.
The DLB Fund Group determines the net asset value per share for a Fund by
dividing the total value of the Fund's portfolio investments and other assets,
less any liabilities, by the total outstanding shares of the Fund.
The DLB Fund Group values portfolio securities based on market value or, where
market quotations are not readily available, based on fair value. More
specifically, The DLB Fund Group values portfolio securities (including options
and futures contracts) for which market quotations are available at the last
quoted sale price, or, if there is no reported sale, at the closing bid price.
The DLB Fund Group values securities traded in the over-the-counter market at
the most recent bid price as obtained from one or more dealers that make markets
in the securities. For portfolio securities that are traded both in the
over-the-counter market and on one or more stock exchanges, The DLB Fund Group
will value the securities according to the broadest and most representative
market. The DLB Fund Group values unlisted securities for which market
quotations are not readily available at the most recent quoted bid price.
Short-term debt securities with a remaining maturity of 60 days or less will be
valued at amortized cost, unless conditions dictate otherwise. Illiquid
securities or restricted securities will be valued at fair value based on
information supplied by one or more brokers. Other assets for which no
quotations are readily available are valued at fair value as determined in good
faith in accordance with procedures adopted by The DLB Fund Group's Board of
Trustees. Determination of fair value will be based upon those factors as are
deemed relevant under the circumstances, including the financial condition and
operating results of the issuer, recent third party transactions (actual or
proposed) relating to such securities and, in extreme cases, the liquidation
value of the issuer.
FOREIGN SECURITIES. Because of time zone differences, foreign exchanges and
securities markets will usually be closed before the closing of the NYSE.
Therefore, The DLB Fund Group will determine the value of foreign securities as
of the closing of those exchanges and securities markets. Events affecting the
values of foreign securities, however, may occasionally occur between the
closings of such exchanges and securities markets and the time a Fund determines
its net asset value. If an event materially affecting the value of foreign
securities occurs during this period, then The DLB Fund Group will value such
securities at fair value as determined in good faith in accordance with
procedures adopted by the Trustees. In addition, certain foreign markets may be
open on days when the Funds do not accept orders or price their shares.
The prices of foreign securities are quoted in foreign currencies. The DLB Fund
Group converts the values of foreign currencies into U.S. dollars at the rate of
exchange prevailing at the time it determines net asset value. Changes in the
exchange rate, therefore, will affect the net asset value of shares of a Fund
even when there has been no change in the values of the foreign securities
measured in terms of the currency in which they are denominated.
-30-
<PAGE> 33
DISTRIBUTION AND SERVICE (RULE 12B-1) PLANS
The DLB Fund Group has adopted a distribution and services plan for each
Fund (each, a "Plan") under Rule 12b-1 of the Investment Company Act of 1940.
The Trustees, however, have no intention of implementing any Plan during The DLB
Fund Group's current fiscal year. The purposes of a Plan, if implemented, would
be to compensate and/or reimburse investment dealers and other persons for
services provided and expenses incurred in promoting sales of shares, reducing
redemptions or improving services provided to shareholders by such dealers and
other persons. Each Plan would permit a Fund to pay an annual asset-based charge
of up to 0.50% for these purposes, subject to the authority of the Trustees to
reduce the amount of payments or to suspend the Plan for such periods as they
may determine. Subject to these limitations, the Trustees would determine the
amount of payments under each Plan, and the specific purposes for which they are
made.
DISTRIBUTIONS
Each Fund intends to pay out as dividends substantially all of its net
investment income (which comes from dividends and any interest it receives from
its investments and net short-term capital gains). Each Fund also intends to
distribute substantially all of its net long-term capital gains, if any, after
giving effect to any available capital loss carryovers. The Fixed Income Fund's
policy is to declare and pay distributions of its net investment income monthly.
The policy of each other Fund is to declare and pay distributions of its net
investment income at least annually. Each Fund also intends to distribute net
short-term capital gains and net long-term capital gains at least annually.
Each Fund will pay all dividends and/or distributions in shares of the relevant
Fund, at net asset value, unless you elect to receive cash. You may make this
election by marking the appropriate box on the application form or by writing to
The DLB Fund Group.
-31-
<PAGE> 34
TAXES
The following is a general summary of the federal income tax consequences for
the Funds and shareholders who are U.S. citizens or residents or domestic
corporations. You should consult your own tax advisors about the tax
consequences of investments in a Fund in light of your particular tax
situations. You should also consult your own tax advisors about consequences
under foreign, state, local or other applicable tax laws.
Each Fund is treated as a separate taxable entity for federal income tax
purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. By
so qualifying, a Fund itself will not pay federal income tax on the income and
gain distributed annually to its shareholders. Distributions of ordinary income
and short-term capital gains, whether received in cash or reinvested shares,
will be taxable as ordinary income to shareholders subject to federal income
tax. Designated distributions of long-term capital gains are taxable as such,
regardless of how long a shareholder may have owned shares in the Fund or
whether the distributions are received in cash or in reinvested shares.
The sale, exchange or redemption of Fund shares may give rise to a gain or loss.
In general, any gain realized upon a taxable disposition of shares will be
treated as long-term capital gain if the shares have been held for more than 12
months. Otherwise, the gain on the sale, exchange or redemption of Fund shares
will be treated as short-term capital gain. In general, any loss realized upon a
taxable disposition of shares will be treated as long-term capital loss if the
shares have been held for more than 12 months, and otherwise as short-term
capital loss. Any loss recognized on the sale or disposition of shares of the
Fund held for six months or less will be treated as long-term capital loss to
the extent of any long-term capital gain distributions received by a shareholder
with respect to those shares of the Fund. All or a portion of any loss realized
upon a taxable disposition of a Fund's shares will be disallowed if other shares
of the same Fund are purchased within 30 days before or after the disposition.
In such a case, the basis of the newly purchased shares will be adjusted to
reflect the disallowed loss.
Distributions are taxable to a shareholder of a Fund even if they are paid
from income or gains earned by the Fund prior to the shareholder's investment
(and thus were included in the price paid by the shareholder). The DLB Fund
Group will provide federal tax information annually, including information about
dividends and distributions paid during the preceding year.
FOREIGN WITHHOLDING TAXES. The Global Small Cap Fund's investments in foreign
securities may be subject to foreign withholding taxes. In that case, the Fund's
yield on those securities would be decreased. Shareholders may be entitled to
claim a credit or deduction with respect to foreign taxes. In addition, the
Fund's investments in foreign securities or foreign currencies may increase or
accelerate the Fund's recognition of ordinary income and may affect the timing
or amount of the Fund's distributions.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund's
financial performance for the period of the Fund's operations (since each Fund
is less than 5 years old). Certain information reflects financial results for a
single Fund share. The total returns in each table represent the rate that an
investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by Deloitte & Touche LLP, whose report, along with each Fund's financial
statements, is included in each Fund's Annual Report. All Annual Reports are
available upon request as indicated on the back cover page of this Prospectus.
-32-
<PAGE> 35
DLB FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
Years Ended December 31, December 31,
1998 1997 1996 1995**
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value- beginning of period $ 10.61 $ 10.11 $ 10.26 $10.00
------- ------- ------- ------
Income from investment operations:
Net investment income .63 .42 .53 .28
Net realized and unrealized gain (loss) on investments .20 .49 (.15) .37
------- ------- ------- ------
.83 .91 .38 .65
------- ------- ------- ------
Less distributions to shareholders:
From net investment income (1) (.63) (.41) (.53) (.28)
From net realized gain on investments (.09) -- -- (.11)
------- ------- ------- ------
(.72) (.41) (.53) (.39)
------- ------- ------- ------
Net asset value- end of period $ 10.72 $ 10.61 $ 10.11 $10.26
======= ======= ======= ======
Total return 8.04% 9.03% 3.70% 14.75%*
Ratios and Supplemental Data:
Ratio of expenses to average net assets .55% .55% .55% .55%*
Ratio of net investment income to average net assets 5.71% 5.74% 6.36% 6.24%*
Portfolio turnover 50% 44% 65% 42%
Net assets at end of period (000 omitted) $33,858 $32,155 $15,261 $5,325
</TABLE>
The Manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .55% of
average daily net assets. Without such agreement and had the 1995 expenses been
limited to that permitted by state securities law, the investment income per
share and ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net investment income $ .60 $ .38 $ .44 $ .19
Ratios (to average net assets):
Expenses .80% 1.06% 1.66% 2.50%*
Net investment income 5.45% 5.22% 5.25% 4.33%*
</TABLE>
* Annualized
* * For the period from July 25, 1995 (commencement of operations) to
December 31, 1995.
(1) Distributions in excess of net investment income for the year ended
December 31, 1996 were less than $.01 per share.
<PAGE> 36
DLB VALUE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
Years Ended December 31, December 31,
1998 1997 1996 1995**
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value- beginning of period $ 14.91 $ 12.53 $ 10.58 $ 10.00
--------- -------- -------- --------
Income from investment operations:
Net investment income .27 .15 .16 .09
Net realized and unrealized gain on investments .50 3.15 2.38 .73
--------- -------- -------- --------
0.77 3.30 2.54 .82
--------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.27) (.15) (.16) (.09)
From net realized gain on investments (0.93) (.70) (.41) (.15)
In excess of net realized gain on investment -- (.07) (.02) --
--------- -------- -------- --------
(1.20) (.92) (.59) (.24)
--------- -------- -------- --------
Net asset value- end of period $ 14.48 $ 14.91 $ 12.53 $ 10.58
========= ======== ======== ========
Total Return 5.25% 26.35% 23.99% 18.64% *
Ratios and Supplemental Data:
Ratio of expenses to average net assets .60% .71% .80% .80% *
Ratio of net investment income to average net assets 1.85% 1.40% 1.56% 2.02% *
Portfolio turnover 21% 25% 23% 7%
Net assets at end of period (000 omitted) $ 71,911 $ 56,449 $ 19,228 $ 10,818
</TABLE>
The Manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .80% of
average daily net assets. Without such agreement, the investment income per
share and ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income $ .25 $ .13 $ .09 $ .02
Ratios (to average net assets):
Expenses .75% .92% 1.50% 2.43% *
Net investment income 1.69% 1.19% .86% 0.40% *
</TABLE>
* Annualized
** For the period from July 25, 1995 (commencement of operations) to December
31, 1995.
<PAGE> 37
DLB GROWTH FUND
FINANCIAL HIGHLIGHTS
PERIOD FROM JANUARY 20, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Per share data (for a share outstanding throughout
the period):
Net asset value- beginning of period $ 10.00
--------
Income from investment operations:
Net investment income .05
Net realized and unrealized gain on investments 3.09
--------
3.14
========
Less distributions to shareholders:
From net investment income (.05)
From net gain on investments (0.27)
--------
(0.32)
--------
Net asset value- end of period $ 12.82
========
Total return 31.33%
Ratios and Supplemental Data:
Ratio of expenses to average net assets .80% *
Ratio of net investment income to average net assets .48% *
Portfolio turnover 34%
Net assets at end of period (000 omitted) $ 33,054
</TABLE>
The Manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .80% of
average daily net assets. Without such agreement, the investment income per
share and ratios would have been:
<TABLE>
<S> <C>
Net investment income $ .03
Ratios (to average net assets):
Expenses .95% *
Net investment income .32% *
</TABLE>
* Annualized
<PAGE> 38
DLB DISCIPLINED GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------- Period Ended
December 31,
1998 1997 1996 **
---------- ---------- ------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value- beginning of period $ 14.55 $ 11.66 $ 10.00
---------- ---------- ----------
Income from investment operations:
Net investment income 0.01 .03 .01
Net realized and unrealized gain on investments 3.72 3.73 1.84
---------- ---------- ----------
3.73 3.76 1.85
---------- ---------- ----------
Less distributions to shareholders:
From net investment income (.01) (.03) (.01)
From net realized gain on investments (2.38) (.83) (.18)
In excess of net realized gain on investment -- (.01) --
---------- ---------- ----------
(2.39) (.87) (.19)
---------- ---------- ----------
Net asset value- end of period $ 15.89 $ 14.55 $ 11.66
========== ========== ==========
Total Return 25.71% 32.23% 18.51%
Ratios and Supplemental Data:
Ratio of expenses to average net assets .90% .90% .90% *
Ratio of net investment income to average net assets .08% .23% .43% *
Portfolio turnover 81% 46% 10%
Net assets at end of period (000 omitted) $ 35,308 $ 25,069 $ 13,897
</TABLE>
The Manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .90% of
average daily net assets. Without such agreement, the investment loss per share
and ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment loss $ (.02) $ (.06) $ (.01)
Ratios (to average net assets):
Expenses 1.14% 1.55% 1.82% *
Net investment loss (.17%) (.43%) (.50%)*
</TABLE>
* Annualized
** For the period from August 26, 1996 (commencement of operations) to
December 31, 1996.
<PAGE> 39
DLB MID CAPITALIZATION FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, Period Ended
------------------------ December 31,
1998 1997 1996 1995**
---- ---- ---- ------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value- beginning of period $ 14.19 $ 11.51 $ 10.75 $ 10.00
------- ------- ------- -------
Income from investment operations:
Net investment income .10 .08 .15 .08
Net realized and unrealized gain (loss) on investments (1.36) 3.72 1.44 .84
------- ------- ------- -------
(1.26) 3.80 1.59 .92
------- ------- ------- -------
Less distributions to shareholders:
From net investment income (1) (.10) (.08) (.15) (.08)
From net realized gain on investments (2) (.93) (1.04) (.68) (.09)
------- ------- ------- -------
(1.03) (1.12) (.83) (.17)
------- ------- ------- -------
Net asset value-end of period $ 11.90 $ 14.19 $ 11.51 $10.75
======= ======= ======= ======
Total Return (8.63%) 32.95% 14.75% 21.17% *
Ratios and Supplemental Data:
Ratio of expenses to average net assets .76% .90% .90% .90% *
Ratio of net investment income to average net assets .77% .78% 1.28% 1.90% *
Portfolio turnover 28% 32% 25% 6%
Net assets at end of period (000 omitted) $ 29,940 $27,358 $ 13,690 $ 10,929
</TABLE>
The Manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .90% of
average daily net assets. Without such agreement and had the 1995 expenses been
limited to that permitted by state securities law, the investment income per
share and ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net investment income $ .06 $ .04 $ .05 $ .01
Ratios (to average net assets):
Expenses 1.02% 1.33% 1.77% 2.50% *
Net investment income .51% .36% .41% .32% *
</TABLE>
* Annualized
** For the period from July 25, 1995 (commencement of operations) to
December 31, 1995.
(1) Distributions in excess of net investment income for the year ended
December 31, 1996 were less than $.01 per share.
(2) Distributions in excess of net realized gain on investments for the
year ended December 31, 1996 were less than $.01 per share.
<PAGE> 40
DLB MICRO CAPITALIZATION FUND
FINANCIAL HIGHLIGHTS
PERIOD FROM JULY 20, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Per share data (for a share outstanding throughout
the period):
Net asset value- beginning of period $ 10.00
--------
Loss from investment operations:
Net investment loss (.01)
Net realized and unrealized loss on investments (1.38)
--------
(1.39)
--------
Net asset value- end of period $ 8.61
========
Total return (13.90%)
Ratios and Supplemental Data:
Ratio of expenses to average net assets 1.30% *
Ratio of net investment loss to average net assets (.28%)*
Portfolio turnover 51%
Net assets at end of period (000 omitted) $ 19,910
</TABLE>
The Manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed 1.30% of
average daily net assets. Without such agreement, the investment loss per share
and ratios would have been:
<TABLE>
<S> <C>
Net investment loss $ (.03)
Ratios (to average net assets):
Expenses 1.77% *
Net investment loss (.76%)*
</TABLE>
* Annualized
<PAGE> 41
DLB GLOBAL SMALL CAPITALIZATION FUND
FINANCIAL HIGHLIGHTS
- ---------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, Period Ended
-------------------------------------- December 31,
1998 1997 1996 1995**
---- ---- ---- ------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value- beginning of period $ 11.27 $ 11.19 $ 10.33 $ 10.00
---------- ---------- ---------- -------
Income from investment operations:
Net investment income .01 .02 .01 .07
Net realized and unrealized gain on investments .40 .50 1.01 .33
--- --- ---- ---
.41 .52 1.02 .40
--- --- ---- ---
Less distributions to shareholders:
From net investment income (.01) (.01) (.01) (.07)
In excess of net investment income (.08) -- -- --
From net realized gain on investments (.81) (.02) (.11) --
In excess of net realized gain on investment -- (.01) (.04) --
Tax return of capital -- (.40) -- --
--- --- ---- ---
(.90) (.44) (.16) (.07)
---- ---- ---- ----
Net asset value- end of period $ 10.78 $ 11.27 $ 11.19 $ 10.33
========== ========== ========== =======
Total return 3.73% 4.66% 9.85% 4.07%
Ratios and Supplemental Data:
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.46% *
Ratio of net investment income to average net assets .10% .22% .09% 1.46% *
Portfolio turnover 36% 44% 22% 5%
Net assets at end of period (000 omitted) $ 14,310 $ 13,887 $ 12,586 $10,509
</TABLE>
The Manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed 1.50% of
average daily net assets. Without such agreement and had the 1995 expenses been
limited to that permitted by state securities law, the investment income (loss)
per share and ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) $ (.08) $ (.05) $ (.10) $ .02
Ratios (to average net assets):
Expenses 2.00% 2.14% 2.36% 2.50% *
Net investment income (loss) (.40%) (.42%) (.77%) .42% *
</TABLE>
* Annualized
* * For the period from July 19, 1995 (commencement of operations) to
December 31, 1995.
<PAGE> 42
APPENDIX
ADDITIONAL INVESTMENT TECHNIQUES AND PRACTICES
In addition to each Fund's principal investment strategies, which are described
in the section entitled "About the Funds," each Fund may, in pursuing its
investment objective, engage in other investment techniques and practices. The
chart below identifies those additional, non-principal investment techniques and
practices that are described in the SAI.
INVESTMENT TECHNIQUES/PRACTICES FUNDS
DEBT SECURITIES
Convertible Securities All Funds
Loans and Other Direct Indebtedness Fixed Income Fund
Money Market Instruments All Funds
Municipal Bonds Fixed Income Fund
Strips and Residuals Fixed Income Fund
Zero Coupon Securities Fixed Income Fund
Equity Securities
Preferred Stocks All Funds
REITs All Funds
Foreign Equity Exposure
American Depositary Receipts (ADRs) All Funds
Foreign Equity Securities All Funds
Futures Contracts Disciplined Growth Fund
Indexed Securities Fixed Income Fund
Lending of Portfolio Securities All Funds
Leverage Transactions
Dollar-Roll Transactions Fixed Income Fund
Reverse Repurchase Agreements Fixed Income Fund
Options Disciplined Growth Fund
Portfolio Turnover All Funds
Repurchase Agreements All Funds
Restricted/Illiquid Securities All Funds
Interest Rate Swaps and Related Instruments Fixed Income Fund
Warrants and Rights All Funds (Other than Fixed
Income Fund)
"When-Issued" Securities All Funds
<PAGE> 43
THE DLB FUND GROUP
One Memorial Drive
Cambridge, Massachusetts 02142
LEARNING MORE ABOUT THE FUNDS
You can learn more about the Funds in The DLB Fund Group by reading the
Funds' ANNUAL AND SEMIANNUAL REPORTS and the STATEMENT OF ADDITIONAL INFORMATION
(SAI). This information is available free upon request.
In the Annual and Semi-Annual Reports, you will find a listing of
portfolio securities and a discussion of market conditions and investment
strategies that significantly affected each Fund's performance during the period
covered by the Report. The SAI includes additional information about each Fund's
investment policies, risks and operations. The SAI is incorporated by reference
into this Prospectus (which means it is legally considered a part of this
Prospectus).
HOW TO OBTAIN MORE INFORMATION
FROM THE DLB FUND GROUP: You may request information about the Funds
(including the Annual and Semi-Annual Reports and the SAI) or make shareholder
inquiries by any of the following methods:
By regular mail or The DLB Fund Group
overnight courier c/o David L. Babson and Company Incorporated
Marketing Department
Attention: Maureen M. Bates
One Memorial Drive
Cambridge, Massachusetts 02142
By telephone 1-888-722-2766
Call for account or Fund information Monday
through Friday 9 a.m. to 5 p.m. (Eastern time).
By telefax 1-617-494-1511
FROM THE SEC: You may review and copy information about the Funds
(including the SAI) at the SEC's Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 for information regarding the operation of the SEC's public
reference room. You may obtain copies of this information, upon payment of a
copying fee, by writing to the SEC's Public Reference Section, Washington, DC
20549-6009. Alternatively, if you have access to the Internet, you may obtain
information about the Funds from the SEC's Internet site at http://www.sec.gov.
Investment Company Act File Number: 811-08690.
<PAGE> 44
THE DLB FUND GROUP
DLB FIXED INCOME FUND
DLB VALUE FUND
DLB GROWTH FUND
DLB DISCIPLINED GROWTH FUND
DLB MID CAPITALIZATION FUND
DLB MICRO CAPITALIZATION FUND
DLB GLOBAL SMALL CAPITALIZATION FUND
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1999
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the prospectuses of The DLB Fund Group dated
April 30, 1999, as amended from time to time, and should be read in conjunction
therewith. Each reference to the term "Prospectus" in this Statement of
Additional Information shall include the DLB Fund Group's prospectuses relating
to the DLB Fixed Income Fund, the DLB Value Fund, the DLB Growth Fund, the DLB
Disciplined Growth Fund, the DLB Mid Capitalization Fund, the DLB Micro
Capitalization Fund and the DLB Global Small Capitalization Fund (collectively,
the "Funds").
The DLB Fund Group's audited financial statements for the fiscal year ended
December 31, 1998 included in the Funds' Annual Reports are hereby incorporated
into this Statement of Additional Information by reference. A copy of the
Prospectus and each Fund's Annual Report may be obtained free of charge by
writing The DLB Fund Group, c/o David L. Babson and Company Incorporated,
Marketing Department, Attention: Maureen M. Bates, One Memorial Drive,
Cambridge, Massachusetts 02142, or by telephoning 1-888-722-2766.
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES AND ASSOCIATED RISKS 1
INVESTMENT RESTRICTIONS 1
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS 4
MANAGEMENT OF THE TRUST 7
INVESTMENT ADVISORY AND OTHER SERVICES 10
ADDITIONAL INVESTMENT PRACTICES OF THE FUNDS 13
ADDITIONAL INVESTMENT PRACTICES OF THE FIXED INCOME FUND 18
ADDITIONAL INVESTMENT PRACTICES OF THE DISCIPLINED GROWTH
FUND -- FUTURES AND OPTIONS 23
ADDITIONAL INVESTMENT PRACTICES OF THE GLOBAL SMALL
CAP FUND 28
PORTFOLIO TRANSACTIONS 29
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES 32
INVESTMENT PERFORMANCE 38
DETERMINATION OF NET ASSET VALUE 40
EXPERTS 40
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS 41
APPENDIX - DESCRIPTION OF STOCK RATINGS 42
</TABLE>
<PAGE> 46
INVESTMENT OBJECTIVES AND POLICIES AND ASSOCIATED RISKS
The investment objective and policies of each of the DLB Fixed Income
Fund (the "Fixed Income Fund"), the DLB Value Fund (the "Value Fund"), the DLB
Growth Fund (the "Growth Fund"), the DLB Disciplined Growth Fund, which was
formerly known as the DLB Quantitative Equity Fund (the "Disciplined Growth
Fund"), the DLB Mid Capitalization Fund (the "Mid Cap Fund"), the DLB Micro
Capitalization Fund (the "Micro Cap Fund") and the DLB Global Small
Capitalization Fund (the "Global Small Cap Fund") (each a "Fund," and
collectively the "Funds") of The DLB Fund Group (the "Trust") are set forth in
the Prospectus.
INVESTMENT RESTRICTIONS
Without a vote of the majority of the outstanding voting securities of
the relevant Fund, the Trust will not take any of the following actions with
respect to any Fund:
(1) Borrow money in excess of 10% (33% in the case of the
Growth and Micro Cap Funds) of the value (taken at the lower of cost or
current value) of the Fund's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks
for temporary, extraordinary or emergency purposes, except that the
Fund may borrow through reverse repurchase agreements or dollar rolls
up to 33% of the value of the Fund's total assets. Such borrowings
(other than borrowings relating to reverse repurchase agreements and
dollar rolls) will be repaid before any investments are purchased.
(2) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(3) Purchase or sell real estate (including real estate
limited partnerships), although it may purchase securities of issuers
which deal in real estate, including securities of real estate
investment trusts, securities which represent interests in real estate
and securities which are secured by interests in real estate, and the
Fund may acquire and dispose of real estate or interests in real estate
acquired through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein or for use as
office space for the Fund.
(4) Make loans, except by purchase of debt obligations
(including nonpublicly traded debt obligations), by entering into
repurchase agreements or through the lending of the Fund's portfolio
securities. Loans of portfolio securities may be made with respect to
up to 100% of the Fund's assets in the case of each Fund.
1
<PAGE> 47
(5) Issue any senior security (as that term is defined in the
Investment Company Act of 1940 (the "1940 Act")), if such issuance is
specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder. (The Funds have no intention of issuing senior
securities except as set forth in Restriction 1 above.)
(6) Invest 25% or more of the value of its total assets in
securities of issuers in any one industry. (Securities issued or
guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities are not considered to represent
industries.)
(7) Purchase or sell commodities or commodity contracts,
including futures contracts, except that the Disciplined Growth Fund
may purchase and sell futures contracts, options (including options on
commodities and commodity contracts) and other financial instruments
and may enter into foreign exchange transactions.
Restrictions (1) through (7) above are deemed to be "fundamental"
investment policies of the Funds.
In addition, is contrary to the present policy of each Fund to:
(a) (All Funds except the Growth Fund and the Micro Cap Fund)
Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
(b) (All Funds except the Growth Fund and the Micro Cap Fund)
Make short sales of securities or maintain a short position for the
Fund's account unless at all times when a short position is open the
Fund owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short. The Funds have no current intention in
the coming year of engaging in short sales or maintaining a short
position.
(c) (All Funds except the Growth Fund and the Micro Cap Fund)
Invest in securities of any issuer if officers and Trustees of the
Trust and officers and partners of David L. Babson and Company
Incorporated (the "Manager") who beneficially own more than 1/2 of 1%
of the securities of that issuer together beneficially own more than
5%.
(d) (All Funds except the Growth Fund and the Micro Cap Fund)
Invest in securities of other investment companies, except by purchase
in the open market involving only customary brokers' commissions, or in
connection with mergers, consolidations or reorganizations. For
purposes
2
<PAGE> 48
of this restriction, foreign banks or their agents or subsidiaries are
not considered investment companies.
(e) Invest in (a) securities which at the time of such
investment are not readily marketable, (b) securities the disposition
of which is restricted under federal securities laws, excluding
restricted securities that have been determined by the Trustees of the
Trust (or the person designated by them to make such determination) to
be readily marketable, and (c) repurchase agreements maturing in more
than seven days if, as a result, more than 15% of the Fund's net assets
(taken at current value) would then be invested in securities described
in (a), (b) and (c) above.
(f) (All Funds except the Growth Fund and the Micro Cap Fund)
Acquire more than 10% of the voting securities of any issuer.
(g) (All Funds except the Growth Fund and the Micro Cap Fund)
Invest in warrants or rights (other than warrants or rights acquired by
the Fund as a part of a unit or attached to securities at the time of
purchase), except that the Fund may invest in such warrants or rights
so long as the aggregate value thereof (taken at the lower of cost or
market) does not exceed 5% of the value of the Fund's total assets and
so long as no more than 2% of its total assets are invested in warrants
that are not listed on the New York Stock Exchange or the American
Stock Exchange.
(h) (All Funds except the Growth Fund and the Micro Cap Fund)
Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(i) (All Funds except the Growth Fund and the Micro Cap Fund)
Make investments for the purpose of gaining control of a company's
management.
Unlike Restriction's (1) through (7) above, Restrictions (a) through (i)
above are deemed to be "non-fundamental" investment polices of the Funds and
therefore may be changed by the Trust's Trustees without shareholder approval.
Except as otherwise indicated in Restriction 1 or Restriction (e)
above, all percentage limitations on investments set forth herein and in the
Prospectus will apply at the time of the making of an investment and shall not
be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to a Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of that Fund, or (2) 67% or more of the
shares of that Fund present at a meeting if more than 50% of the outstanding
shares are represented at the meeting in person or by proxy.
3
<PAGE> 49
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to so qualify and to qualify for the favorable tax treatment
accorded regulated investment companies and their shareholders, the Fund must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale of stock, securities and foreign currencies, or other income (including but
not limited to gains from options, futures or firm commitments) derived with
respect to its business of investing in such stock, securities or currencies;
(b) distribute at least 90% of its dividend, interest and certain other income
(including, in general, short-term capital gains) each year; and (c) diversify
its holdings so that at the end of each fiscal quarter (i) at least 50% of the
market value of the Fund's assets is represented by cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities, limited in respect of any one issuer to a value not greater than 5%
of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities (other than those of the U.S. Government or other
regulated investment companies) of any one issuer or of two or more issuers
which the Fund controls and which are engaged in the same, similar or related
trades or businesses. So long as a Fund qualifies for treatment as a regulated
investment company, the Fund will not be subject to federal income tax on income
paid to its shareholders in the form of dividends or capital gain distributions.
If a Fund failed to qualify as a regulated investment company in any taxable
year, the Fund would be subject to tax on its taxable income at corporate rates,
and all distributions from earnings and profits, including any distributions of
net tax-exempt income and net long-term capital gains, would be taxable to
shareholders as ordinary income. In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest and make
substantial distributions before requalifying for taxation as a regulated
investment company.
The tax status of each Fund and the distributions that it may make are
summarized in the Prospectus under the headings "Distributions" and "Taxes."
Each Fund intends to pay out substantially all of its ordinary income and net
short-term capital gains, and to distribute substantially all of its net capital
gain, if any, after giving effect to any available capital loss carry-over. Net
capital gain is the excess of net long-term capital gain over net short-term
capital loss. It is the policy of each Fund to make distributions sufficient to
avoid the imposition of a 4% excise tax on certain undistributed amounts. A
shareholder may be limited in its ability to recognize losses on the sale of
Fund shares if the shareholder subsequently invests in that Fund or another
Fund.
If a Fund engages in certain transactions, such as firm commitments and
hedging transactions, including hedging transactions in options, futures
contracts, and straddles, or other similar transactions, it will be subject to
special tax rules (including
4
<PAGE> 50
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income, defer losses, cause adjustments
in the holding periods of the Fund's securities and convert short-term capital
gains or losses into long-term capital gains or losses. Such transactions may
therefore affect the amount, timing and character of distributions to
shareholders.
A Fund's investment in securities issued at a discount and certain
other obligations will (and investments in securities purchased at a discount
may) require the Fund to accrue and distribute income not yet received. In such
cases, the Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
Investment by a Fund in certain "passive foreign investment companies"
could subject the Fund to a U.S. federal income tax or other charge on
distributions received from or the sale of its investment in such a company,
which tax could not be eliminated by making distributions to Fund shareholders.
To avoid this treatment, a Fund may elect to mark to market annually all of its
stock in a passive foreign investment company. Alternatively, if a Fund elects
to treat a passive foreign investment company as a "qualified electing fund,"
different rules would apply, although the Funds do not currently expect to be in
the position to make such elections.
In general, all dividends derived from ordinary income and short-term
capital gain are taxable to investors as ordinary income (subject to special
rules concerning the availability of the dividends-received deduction for
corporations) and distributions of long-term capital gains are taxable to
investors as such, regardless of how long a shareholder may have owned shares in
the relevant Fund or whether such distributions are received in shares or cash.
Tax exempt organizations or entities will generally not be subject to federal
income tax on dividends or distributions from a Fund, except certain
organizations or entities, including private foundations, social clubs, and
others, which may be subject to tax on dividends or capital gains. Each
organization or entity should review its own circumstances and the federal tax
treatment of its income.
Dividends and distributions on each Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when a Fund's net asset value also reflects unrealized losses.
Distributions are taxable to a shareholder of a Fund even if they are paid from
income or gains earned by the Fund prior to the shareholder's investment (and
thus were included in the price paid by the shareholder). A distribution paid to
shareholders in January generally is deemed to have been received by
shareholders on December 31 of
5
<PAGE> 51
the preceding year, if the distribution was declared and payable to shareholders
of record on a date in October, November or December of that preceding year.
The dividends-received deduction for corporations will generally apply
to a Fund's dividends paid from investment income to the extent derived from
dividends received by the Fund from domestic corporations that would be entitled
to such deduction in the hands of the Fund if it were a regular corporation. A
corporate shareholder will only be eligible to claim a dividends-received
deduction with respect to a dividend from the Fund if the shareholder held its
shares on the ex-dividend date and for at least 45 more days during the 90-day
period surrounding the ex-dividend date.
BACK-UP WITHHOLDING. The back-up withholding rules set forth below do
not apply to tax exempt entities or corporations that furnish the Trust with an
appropriate certification. For other shareholders, however, the Trust is
generally required to withhold and remit to the U.S. Treasury 31% of all
distributions, whether distributed in cash or reinvested in shares, and 31% of
the proceeds of any redemption paid or credited to the shareholder's account if
an incorrect or no taxpayer identification number has been provided, where
appropriate certification has not been provided for a foreign shareholder, or
where the Trust is notified that the shareholder has underreported income in the
past (or the shareholder fails to certify that he is not subject to such
withholding). The back-up withholding is not an additional tax and is creditable
against a shareholder's tax liability. Special withholding rules, described
below, may apply to foreign shareholders.
FOREIGN WITHHOLDING TAXES. Certain of the Funds that invest in foreign
securities may be subject to foreign withholding taxes on income and gains
derived from foreign investments. Such taxes would reduce the yield on the
Fund's investments, but, as discussed below, may be taken as either a deduction
or a credit by U.S. investors if the Fund makes the election described below.
If, at the end of the fiscal year, more than 50% of the total assets of
any Fund are comprised of stock or securities of foreign corporations, the Trust
intends to make an election with respect to the relevant Fund which allows
shareholders whose income from the Fund is subject to U.S. taxation at the
graduated rates applicable to U.S. citizens, residents or domestic corporations
to claim a foreign tax credit or deduction (but not both) on their U.S. income
tax return. In such case, the amount of qualified foreign income taxes paid by
the Fund would be treated as additional income to Fund shareholders from
non-U.S. sources and as foreign taxes paid by Fund shareholders. Investors
should consult their tax advisors for further information relating to the
foreign tax credit and deduction, which are subject to certain restrictions and
limitations (including with respect to a foreign tax credit, a holding period
requirement). Shareholders of any of the Funds whose income from the Fund is not
subject to U.S. taxation at the graduated rates applicable to U.S. citizens,
residents or domestic corporations may receive substantially different tax
treatment of distributions by the relevant Fund, and may be disadvantaged as a
result of the election described in
6
<PAGE> 52
this paragraph. Organizations that are exempt from U.S. taxation will not be
affected by the election described above.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS. Dividend
distributions (including in general distributions derived from short-term
capital gains, dividends and interest) are in general subject to a U.S.
withholding tax of 30% when paid to a non-resident alien individual, foreign
estate or trust, a foreign corporation, or a foreign partnership ("foreign
shareholder"). Persons who are residents in a country, such as the United
Kingdom, that has an income tax treaty with the United States may be eligible
for a reduced withholding rate (upon filing of appropriate forms), and are urged
to consult their tax advisors regarding the applicability and effect of such a
treaty. Distributions of net long-term capital gains to a foreign shareholder
and any gain realized upon the sale of Fund shares by such a shareholder will
ordinarily not be subject to U.S. taxation, unless the recipient or seller is a
nonresident alien individual who is present in the United States for more than
183 days during the taxable year, and certain other conditions apply. Foreign
shareholders with respect to whom income from a Fund is "effectively connected"
with a U.S. trade or business carried on by such shareholder, however, will in
general be subject to U.S. federal income tax on the income derived from the
Fund at the graduated rates applicable to U.S. citizens, residents or domestic
corporations, whether such income is received in cash or reinvested in shares,
and may also be subject to a branch profits tax. Again, foreign shareholders who
are residents in a country with an income tax treaty with the United States may
obtain different tax results and all foreign investors are urged to consult
their tax advisors.
NEW WITHHOLDING TAX RULES FOR PAYMENTS AFTER 1999. The Internal Revenue
Service recently revised its regulations affecting the application to foreign
investors of the back-up withholding and withholding tax rules described above.
The new regulations will generally be effective for payments made on or after
January 1, 2000 (although transition rules will apply). In some circumstances,
the new rules will increase the certification and filing requirements imposed on
foreign investors in order to qualify for exemption from the 31% back-up
withholding tax and for reduced withholding tax rates under income tax treaties.
Foreign investors in a Fund should consult their tax advisors with respect to
the potential application of these new regulations.
MANAGEMENT OF THE TRUST
Pursuant to the Trust's Agreement and Declaration of Trust, the Board
of Trustees supervises the affairs of the Trust as conducted by the Manager. The
Trustees and officers of the Trust and their principal occupations during the
past five years are as follows:
TRUSTEES
*JAMES W. MACALLEN, age 55, Chairman of the Trustees, has been
President, Chief Executive Officer, Chief Investment Officer and Director of the
Manager and Managing Director of
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Babson-Stewart Ivory International ("BSII") since April 1, 1998. From 1996 to
that date, he was Executive Vice President, Chief Investment Officer and
Director of the Manager. From 1994 to 1996, he was a Portfolio Manager for
Hagler, Mastrovita & Hewitt, an investment management company, and before that,
Chief Investment Officer at Wilmington Capital Management, Inc.
CHARLES E. HUGEL, age 70, serves as a Director of Pitney Bowes, Inc., a
manufacturer of business and office equipment, and Eldorado Bancshares, Inc. He
is also past Chairman of the Board of Trustees of Lafayette College. Mr. Hugel
is the former Chairman of Asea Brown Boveri Inc., which principally engages in
the manufacture of electrical equipment and the generation, transmission,
distribution and transportation of power, the former Chairman, President and
Chief Executive Officer of Combustion Engineering, Inc. and a former Executive
Vice President of American Telephone and Telegraph Company.
RICHARD A. NENNEMAN, age 69, is the former Editor-in-Chief of The
Christian Science Monitor and a former Senior Vice President of Girard Bank. He
currently serves as a member of the boards of various civic associations.
RICHARD J. PHELPS, age 70, is the Chief Executive Officer of Phelps
Industries, Inc., a manufacturer of rawhide dog treats. He currently serves as
Director of Superior Pet, U.K. and Superior Pet, Australia, both manufacturers
of rawhide dog treats; Bio-Comp, USA, a manufacturer of fertilizer; Stockton
Baseball Co., USA, which operates a minor league baseball team; and
Babson-Stewart Ivory International Fund, Inc., an open-end investment company.
*Deemed to be an "interested person" of the Trust and the Manager, as defined by
the 1940 Act.
OFFICERS
JAMES W. MACALLEN, President.
DEANNE B. DUPONT, age 45, Treasurer, is Senior Vice President of the
Manager.
FRANK L. TARANTINO, age 59, Vice President, is Executive Vice
President, Chief Operating Officer and Director of the Manager. Before joining
the Manager, Mr. Tarantino was President of Liberty Securities Corporation from
1994 to 1997, and was previously Executive Vice President of State Street
Research & Management Company.
JOHN E. DEITELBAUM, age 30, Clerk, is Vice President and General
Counsel of the Manager. Before joining the Manager, Mr. Deitelbaum was an
attorney with Massachusetts Mutual Life Insurance Company from 1996 to 1998, and
was previously an associate at the law firm of Day Berry & Howard.
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The mailing address of each of the officers and Trustees is c/o David
L. Babson and Company Incorporated, One Memorial Drive, Cambridge, Massachusetts
02142.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they may have held different positions with such
employers.
TRUSTEE COMPENSATION
The Trust pays each Trustee who is not an "interested person" of the
Trust a fee for his services. The Trustees periodically review their fees to
assure that such fees continue to be appropriate in light of their
responsibilities as well as in relation to fees paid to Trustees of other mutual
fund complexes. The fees paid to each Trustee by the Trust for the fiscal year
ended December 31, 1998, are shown below:
<TABLE>
<CAPTION>
Total Compensation from
Aggregate Compensation from Registrant and Fund Complex Paid
Name Of Trustee Registrant* to Trustees
- --------------- ----------- -----------
<S> <C> <C>
Charles E. Hugel $11,000 $11,000
Richard A. Nenneman $11,000 $11,000
Richard J. Phelps $11,000 $11,000
James W. MacAllen $0 $0
Peter C. Thompson** $0 $0
Ronald E. Gwozdz*** $0 $0
</TABLE>
- -----------------------
*Includes an annual retainer and an attendance fee for each meeting attended.
** Retired from service as a Trustee effective April 22, 1998.
*** Resigned as a Trustee effective August 31, 1998.
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<PAGE> 55
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACTS
The Manager, David L. Babson and Company Incorporated, One Memorial
Drive, Cambridge, Massachusetts 02142, is a wholly owned subsidiary of DLB
Acquisition Corp., a holding company that is a majority-owned subsidiary of
MassMutual Holding Trust I, which in turn is a holding company and wholly-owned
subsidiary of Mass Mutual Holding Company, a holding company and a wholly owned
subsidiary of Massachusetts Mutual Life Insurance Company, a mutual life
insurance company. Massachusetts Mutual Life Insurance Company also currently
owns more than 25% of the outstanding shares of each of the Funds and therefore
is deemed to "control" each such Fund within the meaning of the 1940 Act.
Under separate Management Contracts (each a "Management Contract")
between the Trust and the Manager, and subject to such policies as the Trustees
of the Trust may determine, the Manager will furnish continuously an investment
program for each Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. The
Manager has entered into a Sub-Advisory Agreement with BSII with respect to the
management of the international component of the Global Small Cap Fund's
portfolio. (BSII is referred to herein as the "Subadvisor.") The Manager pays
the Subadvisor a monthly fee at the annual rate of .50% of the Global Small Cap
Fund's average daily net assets. These payments will not affect the amounts
payable by the Global Small Cap Fund to the Manager or such Fund's expense
ratio. Subject to the control of the Trustees, the Manager also manages,
supervises and conducts the other affairs and business of the Trust, furnishes
office space and equipment, provides bookkeeping and certain clerical services
and pays all salaries, fees and expenses of officers and Trustees of the Trust
who are affiliated with the Manager. As indicated under "Portfolio
Transactions," the Trust's portfolio transactions may be placed with
broker-dealers which furnish the Manager, at no cost to the Manager, certain
research, statistical and quotation services of value to the Manager in advising
the Trust or its other clients.
As disclosed in the Prospectus, each of the Funds pays the Manager a
monthly fee at the annual rate of the relevant Fund's average daily net assets
set forth therein. In addition, the Manager has agreed to bear certain expenses
for the current fiscal year to the extent each of the Fund's annual expenses
(including the management fee, but excluding brokerage commissions, hedging
transaction fees and other investment related costs, extraordinary,
non-recurring and certain other unusual expenses such as litigation expenses and
other extraordinary legal expenses, securities lending fees and expenses and
transfer taxes) would exceed the percentage of the Fund's average daily net
assets set forth in the Prospectus. The chart set forth below shows: (1) the
total management fees earned by the Manager, (2) the total management fees
actually paid by the Funds to the Manager and (3) the management fees and other
expenses waived by the Manager during the periods indicated:
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<PAGE> 56
<TABLE>
<CAPTION>
OTHER TOTAL
FISCAL MANAGEMENT FEE EXPENSES EXPENSES
YEAR TOTAL PAID WAIVED WAIVED WAIVED
<S> <C> <C> <C> <C> <C> <C>
1. FIXED INCOME FUND
1996 47,593 23,616 23,977 108,125 132,102
1997 86,512 43,160 43,352 67,825 111,177
1998 131,644 80,513 51,131 32,137 83,268
2. VALUE FUND
1996 83,908 53,072 30,836 76,430 107,266
1997 207,027 131,383 75,644 2,994 78,638
1998 367,883 264,569 103,314 72 103,386
3. GROWTH FUND*
1998 156,119 106,038 50,081 202 50,283
4. DISCIPLINED GROWTH
FUND** 1996 33,808 24,714 9,094 32,462 41,556
1997 151,521 110,944 40,577 91,787 132,364
1998 223,157 177,404 45,753 26,270 72,023
5. MID CAP FUND
1996 75,235 37,317 37,918 71,830 109,748
1997 109,834 54,798 55,036 23,164 78,200
1998 173,748 105,283 68,465 7,012 75,477
6. MICRO CAP FUND***
1998 151,640 73,575 78,065 30,905 108,970
7. GLOBAL SMALL CAP
FUND**** 1996 120,522 95,914 24,608 79,509 104,117
1997 131,927 105,509 26,418 58,251 84,669
1998 143,177 120,477 22,700 49,551 72,251
</TABLE>
- -------------------
*The Growth Fund commenced operations on January 20, 1998.
**The Disciplined Growth Fund commenced operations on August 26, 1996.
***The Micro Cap Fund commenced operations on July 20, 1998.
****Under the Sub-Advisory Agreement, for the fiscal years 1996, 1997 and 1998,
(1) the Manager paid BSII subadvisory fees of $47,957, $52,754 and $60,238,
respectively, and (2) BSII waived a portion of its fees in an amount equal to
$12,304, $13,209 and $11,350, respectively.
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<PAGE> 57
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties. Each Management Contract also provides
that in the event the Manager ceases to be the manager of any Fund, the right of
the Fund or the Trust to use the identifying name "DLB" may be withdrawn.
Each Management Contract has an initial two-year term and will continue
in effect thereafter indefinitely so long as its continuance is approved at
least annually by (i) vote, cast in person at a meeting called for that purpose,
of a majority (or one, if there is only one) of those Trustees who are not
"interested persons" of the Manager or the Trust, and by (ii) the majority vote
of either the full Board of Trustees or the vote of a majority of the
outstanding shares of the relevant Fund. Each Management Contract automatically
terminates on assignment and is terminable on not more than 60 days' notice by
the Trust to the Manager. In addition, each Management Contract may be
terminated on not more than 60 days' written notice by the Manager to the Trust.
The Sub-Advisory Agreement contains provisions similar to those
contained in the Management Contracts.
CUSTODIAL ARRANGEMENTS
Investors Bank & Trust Company ("IBT") serves as the Trust's custodian
on behalf of the Funds. As such, IBT holds in safekeeping certificated
securities and cash belonging to a Fund and, in such capacity, is the registered
owner of securities in book-entry form belonging to a Fund. Upon instruction,
IBT receives and delivers cash and securities of a Fund in connection with Fund
transactions and collects all dividends and other distributions made with
respect to Fund portfolio securities. IBT also maintains certain accounts and
records of the Trust and calculates the total net asset value, total net income
and net asset value per share of each Fund on a daily basis.
TRANSFER AGENT
IBT also serves as the Trust's transfer agent and dividend disbursing
agent on behalf of the Funds.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP is the Trust's independent public accountant,
providing audit services and assistance and consultation in connection with tax
returns and the reviewing of various SEC filings.
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<PAGE> 58
ADDITIONAL INVESTMENT PRACTICES OF THE FUNDS
As noted in the Prospectus, each Fund may, in pursuing its investment
objective, engage in investment techniques and practices in addition to the
Fund's principal investment strategies. The following discussion provides more
detailed information about certain of these additional, non-principal investment
techniques and practices.
MONEY MARKET INSTRUMENTS. The following is a brief description of the
types of money market securities the Funds may invest in. Money market
securities are high-quality, short-term debt instruments that may be issued by
the U.S. Government, corporations, banks or other entities. They may have fixed,
variable or floating interest rates.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government
Securities. These include obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities. Payment of
principal and interest on U.S. Government obligations (i) may be backed
by the full faith and credit of the United States (as with U.S.
Treasury obligations and GNMA certificates) or (ii) may be backed
solely by the issuing or guaranteeing agency or instrumentality itself
(as with FNMA notes). In the latter case, the investor must look
principally to the agency or instrumentality issuing or guaranteeing
the obligation for ultimate repayment, which agency or instrumentality
may be privately owned. There can be no assurance that the U.S.
Government would provide financial support to its agencies or
instrumentalities where it is not obligated to do so. As a general
matter, the value of debt instruments, including U.S. Government
obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. Government
obligations are subject to fluctuations in yield or value due to their
structure or contract terms.
BANK OBLIGATIONS. Each Fund may invest in bank obligations. These
include certificates of deposit, time deposits and bankers'
acceptances. Time deposits, other than overnight deposits, may be
subject to withdrawal penalties and if so they are deemed "illiquid"
investments. Certificates of deposit are negotiable certificates
evidencing the obligation of a bank to repay funds deposited with it
for a specified period of time. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of
time at a stated interest rate. Time deposits that may be held by a
Fund will not benefit from insurance from the Bank Insurance Fund or
the Savings Association Insurance Fund administered by the Federal
Deposit Insurance Corporation. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. These instruments reflect the obligation both of the
bank and of the drawer to pay the face amount of the instrument upon
maturity.
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<PAGE> 59
COMMERCIAL PAPER. Each Fund may invest in commercial paper, which
consists of short-term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually sold on a discount
basis and has a maturity at the time of issuance not exceeding nine months.
Each Fund also may invest in non-convertible corporate debt securities (e.g.,
bonds and debentures) with not more than one year remaining to maturity at the
date of settlement.
PREFERRED STOCKS. Each Fund may buy preferred stock. Preferred stock,
unlike common stock, has a stated dividend rate payable from the corporation's
earnings. Preferred stock dividends may be cumulative or non-cumulative,
participating, or auction rate. "Cumulative" dividend provisions require all or
a portion of prior unpaid dividends to be paid. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, which can
be a negative feature when interest rates decline. Preferred stock also
generally has a preference over common stock on the distribution of a
corporation's assets in the event of liquidation of the corporation. Preferred
stock may be "participating" stock, which means that it may be entitled to a
dividend exceeding the stated dividend in certain cases. The rights of preferred
stock on distribution of a corporation's assets in the event of liquidation are
generally subordinate to the rights associated with a corporation's debt
securities.
CONVERTIBLE SECURITIES. Each Fund may purchase fixed-income convertible
securities, such as bonds or preferred stock, which may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock of the same or a different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but usually are
subordinated to non-convertible debt securities. While providing a fixed-income
stream (generally higher in yield than the income from a common stock but lower
than that afforded by a non-convertible debt security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the common stock into which it is
convertible. In general, the market value of a convertible security is the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., the value of the underlying shares of common stock
if the security is converted). As a fixed-income security, the market value of a
convertible security generally increases when interest rates decline and
generally decreases when interest rates rise. However, the price of a
convertible security also is influenced by the market value of the security's
underlying common stock. Thus, the price of a
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<PAGE> 60
convertible security generally increases as the market value of the underlying
stock increases, and generally decreases as the market value of the underlying
stock declines. Investments in convertible securities generally entail less risk
than investments in the common stock of the same issuer. While convertible
securities are a form of debt security in many cases, their conversion feature
(allowing conversion into equity securities) causes them to be regarded more as
"equity equivalents."
WHEN-ISSUED SECURITIES. Each Fund may purchase or sell securities on a
when-issued," delayed delivery or on a forward commitment basis ("forward
contracts"). When such transactions are negotiated, the price is fixed at the
time of commitment, but delivery and payment for the securities can take place a
month or more after the commitment date. The securities so purchased or sold are
subject to market fluctuations, and no interest accrues to the purchaser during
this period. At the time of delivery, the securities may be worth more or less
than the purchase or sale price. A Fund may use forward contracts to manage
interest rate exposure, as a temporary substitute for purchasing or selling
particular debt securities, or to take delivery of the underlying security
rather than closing out the forward contract.
RESTRICTED/ILLIQUID SECURITIES. Each Fund may hold up to, but not more
than, 15% of its net assets in "illiquid securities," which are securities that
are not readily marketable, including securities whose disposition is restricted
by contract or under federal securities laws. A Fund may not be able to dispose
of such securities in a timely fashion and for a fair price, which could result
in losses to the Fund. In addition, illiquid securities are generally more
difficult to value.
PORTFOLIO TURNOVER. Although portfolio turnover is not a limiting
factor with respect to investment decisions for the Funds, the Funds expect to
experience relatively modest portfolio turnover rates. It is anticipated that
under normal circumstances the annual portfolio turnover rate of any Fund will
not exceed 100%. However, in any particular year, market conditions may result
in greater turnover rates than the Manager currently anticipates. Portfolio
turnover may involve brokerage commissions and other transaction costs, which
the relevant Fund will bear directly, and could involve realization of capital
gains that would be taxable when distributed to shareholders. To the extent that
portfolio turnover results in realization of net short-term capital gains, such
gains ordinarily are taxed to shareholders at ordinary income tax rates.
Portfolio turnover rates for each Fund are shown in the "Financial Highlights"
section of the Prospectus. See the "Taxes" section of the Prospectus and
"Portfolio Transactions" in this Statement of Additional Information for
additional information.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements.
Under repurchase agreements, a Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed-upon price and date. The resale price exceeds the acquisition price and
reflects an agreed-upon market rate unrelated to the coupon rate on the
purchased security. Repurchase transactions afford an opportunity for a Fund to
earn a return on temporarily available
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<PAGE> 61
cash at no market risk, although there is a risk that the seller may default on
its obligation to pay the agreed-upon sum on the redelivery date. Default may
subject a Fund to expenses, delays and risks of loss. Repurchase agreements
entered into with foreign brokers, dealers and banks involve additional risks
similar to those of investing in foreign securities. For a discussion of these
risks, see the discussions of foreign issuer risk and foreign currency risk in
the "Description of Principal Investment Risks" section of the Prospectus.
LENDING OF PORTFOLIO SECURITIES. Each Fund may make secured loans of
portfolio securities on up to 33% of the Fund's total assets. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. However, a Fund may make loans
of portfolio securities only to parties that the Manager or Subadvisor believes
have relatively high credit standing. Securities loans are made pursuant to
agreements requiring that loans be continuously secured by collateral in cash or
U.S. Government securities at least equal at all times to the market value of
the securities lent. The borrower pays to the lending Fund an amount equal to
any dividends or interest received on the securities lent. The Fund may invest
the cash collateral received or may receive a fee from the borrower. All
investments of cash collateral by a Fund are for the account and risk of the
Fund. Although voting rights or rights to consent with respect to the loaned
securities pass to the borrower, the Fund retains the right to call the loans at
any time on reasonable notice. The Fund may also call such loans in order to
sell the securities involved. The Fund pays various fees in connection with such
loans, including shipping fees and reasonable custodian and placement fees.
DERIVATIVES. Certain of the instruments in which the Funds may invest,
such as mortgage-backed securities and indexed securities, are considered to be
"derivatives." Derivatives are financial instruments whose value depends upon,
or is derived from, the value of an underlying asset, such as a security or
currency. The use of such instruments may result in a higher amount of
short-term capital gains (taxed at ordinary income tax rates) than would result
if the Funds did not use such instruments.
WARRANTS AND RIGHTS. A warrant typically gives the holder the right to
purchase underlying stock at a specified price for a designated period of time.
Warrants may be a relatively volatile investment. The holder of a warrant takes
the risk that the market price of the underlying stock may never equal or exceed
the exercise price of the warrant. A warrant will expire without value if it is
not exercised or sold during its exercise period. Rights are similar to
warrants, but normally have a short duration and are distributed directly by the
issuer to its shareholders. Warrants and rights have no voting rights, receive
no dividends, and have no rights to the assets of the issuer.
Each Fund may invest in warrants or rights. However, each Fund (other
than the Growth Fund and the Micro Cap Fund) must limit its investment in
warrants or rights (excluding warrants or rights acquired by the Fund as a part
of a unit or attached to securities at the time of purchase) so that the
aggregate value thereof (taken at the
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<PAGE> 62
lower of cost or market) does not exceed 5% of the value of the Fund's total
assets and so that no more than 2% of its total assets are invested in warrants
that are not listed on the New York Stock Exchange or the American Stock
Exchange.
REAL ESTATE INVESTMENT TRUSTS. Real estate investment trusts ("REITS")
that may be purchased by a Fund include equity REITs, which own real estate
directly, mortgage REITs, which make construction, development or long-term
mortgage loans, and hybrid REITs, which share characteristics of equity REITs
and mortgage REITs. Equity REITs will be affected by, among other things,
changes in the value of the underlying property owned by the REITs, while
mortgage REITs will be affected by, among other things, the value of the
properties to which they have extended credit.
Factors affecting the performance of real estate may include excess supply
of real property in certain markets, changes in zoning laws, completion of
construction, changes in real estate value and property taxes, sufficient level
of occupancy, adequate rent to cover operating expenses, and local and regional
markets for competing assets. The performance of real estate may also be
affected by changes in interest rates, prudent management of insurance risks and
social and economic trends. Also REITs are dependent upon the skill of each
REIT's management.
A Fund could, under certain circumstances, own real estate directly as a
result of a default on debt securities it owns or from an in-kind distribution
of real estate from a REIT. Risks associated with such ownership could include
potential liabilites under environmental laws and the costs of other regulatory
compliance. If the Fund has rental income or income from the direct disposition
of real property, the receipt of such income may adversely affect its ability
to retain its tax status as a regulated investment company and thus its ability
to avoid taxation on its income and gains distributed to its shareholders.
REITs are also subject to substantial cash flow dependency, defaults by
borrowers, self-liquidation and the risk of failing to qualify for tax-free
pass-through of income under the Internal Revenue Code and/or to maintain
exempt status under the 1940 Act. If a Fund invest in REITs, investors would
bear not only a proportionate share of the expenses of the Fund, but also,
indirectly, expenses of the REITs.
FOREIGN EQUITY EXPOSURE. Although only the Global Small Cap Fund
invests in equity securities of foreign companies as part of its principal
investment strategy, each other Fund may also invest in equity securities
of non-U.S. issuers as discussed below.
AMERICAN DEPOSITARY RECEIPTS (ADRS). Each Fund's assets may be invested
in securities of foreign issuers that are represented by American
Depositary Receipts ("ADRs"). ADRs are receipts typically issued by a
United States bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation. Generally, ADRs
in registered form are designed for use in the United States securities
markets. Each Fund may invest in ADRs through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly
by the issuer of the underlying security and a depositary, whereas a
depositary may establish an unsponsored facility without participation
by the issuer of the deposited security. Holders of unsponsored
depositary receipts generally bear all the costs of such facilities and
the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through voting rights to
the holders of such receipts in respect of the deposited securities.
ADRs may not necessarily be denominated in the same currency as the
securities into which they may be converted.
FOREIGN EQUITY SECURITIES. Each Fund may invest, to a limited extent,
in equity securities issued by foreign companies (i.e., companies
organized under the laws of countries other than the United States)
that are not listed on a U.S. Securities exchange or traded in the U.S.
over-the-counter markets ("foreign equity securities"). To the extent a
Fund purchases foreign equity securities, it would be subject to
additional risks. For a discussion of these risks, see the discussion
of foreign issuer risk, foreign emerging market risk and foreign
currency risk in the "Description of Principal Investment Risks"
section of the Prospectus.
ADDITIONAL INVESTMENT PRACTICES OF
THE FIXED INCOME FUND
In addition to the investment practices described in detail in the
Prospectus, the Fixed Income Fund may also engage in the following investment
practices.
ADJUSTABLE RATE SECURITIES. The Fund may invest in adjustable rate
securities, which are securities that have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or market
interest rate. They may be U.S. Government securities or securities of other
issuers. Some adjustable rate securities are backed by pools of mortgage loans.
Although the rate adjustment feature may act as a buffer to reduce sharp changes
in the value of adjustable rate securities, these securities
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<PAGE> 63
are still subject to changes in value based on changes in market interest rates
or changes in the issuer's creditworthiness. Because the interest rate is reset
only periodically, changes in the interest rates on adjustable rate securities
may lag changes in prevailing market interest rates. Also, some adjustable rate
securities (or the underlying mortgages) are subject to caps or floors that
limit the maximum change in interest rate during a specified period or over the
life of the security. Because of the resetting of interest rates, adjustable
rate securities are less likely than non-adjustable rate securities of
comparable quality and maturity to increase significantly in value when market
interest rates fall.
INTEREST RATE SWAPS AND RELATED INSTRUMENTS. An interest rate swap
agreement involves the exchange by the Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. Interest rate and yield curve swaps may be used by the Fund as a
hedging technique to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against any increase in the price of
securities the Fund anticipates purchasing in the future. The Fund intends to
use these transactions as hedges and not as speculative investments. The Fund
usually will enter into such agreements on a net basis whereby the two payments
of interest are netted with only one party paying the net amount, if any, to the
other.
MUNICIPAL BONDS. The Fund may invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest of which is exempt from federal income tax
("municipal bonds"). Municipal bonds are issued to raise money for a variety of
public or private purposes, including financing state or local governments,
specific projects or public facilities.
The Fund can invest in municipal securities that are "general
obligations," secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. The basic security
behind general obligation bonds is the issuer's pledge of its full faith and
credit and taxing power, if any, for the repayment of principal and the payment
of interest. Issuers of general obligation bonds include states, counties,
cities, towns, and regional districts. The proceeds of these obligations are
used to fund a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems. The
rate of taxes that can be levied for the payment of debt service on these bonds
may be limited or unlimited. Additionally, there may be limits as to the rate or
amount of special assessments that can be levied to meet these obligations.
The Fund can also buy municipal bonds that are "revenue obligations,"
whose interest is payable only from the revenues derived from a particular
facility or class of facilities, or a specific excise tax or other revenue
source. The principal security for a revenue bond is generally the net revenues
derived from a particular facility, group of facilities, or, in some cases, the
proceeds of a special excise tax or other specific revenue source. Revenue bonds
are issued to finance a wide variety of capital projects. Examples include
electric, gas, water and sewer systems; highways, bridges, and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security for these types of bonds may vary from bond to bond, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a state's ability (without obligation)
to make up deficiencies in the debt service reserve fund.
The Fund may also buy industrial development bonds, which are
considered municipal bonds if the interest paid is exempt from federal income
tax. They are issued by or on behalf of public authorities to raise money to
finance various privately operated facilities for business and manufacturing,
housing, sports, and pollution control. These bonds may also be used to finance
public facilities such as airports, mass transit systems, ports, and parking.
The payment of the principal and interest on such bonds is dependent solely on
the ability of the facility's user to meet its financial obligations and the
pledge, if any, of real and personal property financed by the bond as security
for those payments.
The municipal bonds that may be purchased by the Fund may have fixed,
variable or floating rates of interest. In addition, some bonds may be
"callable," allowing the issuer to redeem them before their maturity date. When
interest rates decline, it is more likely that the issuer may call the bond. If
that occurs, the Fund might have to reinvest the proceeds of the called bond in
fixed income securities that pay a lower rate of return.
The Fund currently intends to invest less than 5% of its net assets in each of
the instruments described below in the coming year.
STRIPS AND RESIDUALS. The Fund may invest in stripped mortgage-backed
securities that are usually structured with two classes that receive different
portions of the interest and principal distributions on a pool of mortgage
loans. The Fund may invest in both the interest-only or "IO" class and the
principal-only or "PO" class. Prepayments could result in losses on such
stripped mortgage-backed securities. The yield to maturity on an IO class of
stripped mortgage-backed securities is extremely sensitive not only to changes
in prevailing interest rates but also to the rate of principal payments
(including prepayments) on the underlying assets. A rapid rate of principal
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prepayments may have a measurably adverse effect on the Fund's yield to maturity
to the extent it invests in IOs. If the assets underlying the IO experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities. Conversely, POs tend to
increase in value if prepayments are greater than anticipated and decline if
prepayments are slower than anticipated. Stripped mortgage-backed securities may
have limited liquidity. The Fund may also invest in IO or PO strips relating to
other types of fixed income securities, such as asset-backed securities.
Such investments would be subject to risks similar to those described above.
Collateralized mortgage obligations ("CMOs") also include securities
("Residuals") representing the interest in any excess cash flow and/or the value
of any collateral remaining after the issuer has applied cash flow from the
underlying mortgages or mortgage-backed securities to the payment of principal
of, and interest on, all other CMOs and the administrative expenses of the
issuer. Due to uncertainty as whether any excess cash flow or the underlying
collateral will be available, there can be no assurances that Residuals will
ultimately have value. Residuals also involve the additional risk of loss of the
entire value of the investment if the underlying securities are prepaid. In
addition, if a CMO bears interest at an adjustable rate, the cash flows on the
related Residual will also be extremely sensitive to the level of the index upon
which the rate adjustments are based.
ZERO COUPON SECURITIES. The Fund may invest in "zero coupon" fixed
income securities. The Fund is required to accrue interest income on these
securities at a fixed rate based on the initial purchase price and the length to
maturity, but these securities do not pay interest in cash on a current basis.
The Fund is required to distribute the income on these securities to its
shareholders as the income accrues, even though the Fund is not receiving the
income in cash on a current basis. Thus, the Fund may have to sell other
investments to obtain cash to make income distributions. The market value of
zero coupon securities is often more volatile than that of non-zero coupon,
fixed income securities of comparable quality and maturity.
INDEXED SECURITIES. The Fund may purchase securities, the redemption
values and/or the coupons of which are indexed to the prices of other
securities, securities indices, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of
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the security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Indexed securities may be more volatile than the
underlying instrument.
Indexed securities in which the Fund may invest include so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market interest rates increase
and increase as short-term market rates decline. Such securities have the effect
of providing a degree of investment leverage because they will generally
increase or decrease in value in response to changes in market interest rates at
a rate which is a multiple of the rate at which fixed-rate long-term securities
increase or decrease in response to such changes. As a result, the market values
of such securities will generally be more volatile than the market values of
fixed rate securities.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. The Fund may invest in direct
debt instruments which are interests in amounts owed by a corporate,
governmental, or other borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments are subject to the
Fund's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally recognized
rating agency. Loans that are fully secured offer the Fund more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the borrower's obligation, or that the
collateral can be liquidated. Indebtedness of borrowers whose creditworthiness
is poor involves substantially greater risks, and may be highly speculative.
Borrowers that are in bankruptcy or restructuring may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Direct
indebtedness of emerging countries will also involve a risk that the
governmental entities responsible for the repayment of the debt may be unable,
or unwilling, to pay interest and repay principal when due.
Investments in loans through direct assignment of a financial
institution's interest with respect to a loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the Fund could be held liable
as a co-lender. Direct debt instruments may also involve a risk of insolvency of
the lending bank or other intermediary.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. The Fund may have to rely on the agent to
collect and pass on to the Fund any payments received from the borrower and to
apply appropriate credit
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remedies against a borrower. When the Fund is required to rely upon a financial
institution to pass on to the Fund principal and interest, the Fund will
evaluate the creditworthiness of such financial institution as well as the
creditworthiness of the borrower.
Direct indebtedness purchased by the Fund may include letters of
credit, revolving credit facilities, or other standby financing commitments
obligating the Fund to pay additional cash on demand. These commitments may have
the effect of requiring the Fund to increase its investment in a borrower at a
time when it would not otherwise have done so. The Fund will set aside
appropriate liquid assets in a segregated custodial account to cover its
potential obligations under standby financing commitments.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL TRANSACTIONS. The Fund
may enter into reverse repurchase agreements and dollar roll agreements with
banks and brokers to enhance return.
Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. During the reverse repurchase agreement
period, the Fund continues to receive principal and interest payments on these
securities and also has the opportunity to earn a return on the collateral
furnished by the counterparties to secure their obligation to redeliver the
securities.
Dollar rolls are transactions in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
The Fund will establish segregated accounts with its custodian in which
it will maintain assets equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements involve
the risk that the market value of the securities retained by the Fund may
decline below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities. Reverse
repurchase agreements and dollar rolls are considered borrowings by the Fund for
purposes of the Fund's fundamental investment restriction with respect to
borrowings.
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ADDITIONAL INVESTMENT PRACTICES OF THE DISCIPLINED GROWTH FUND --
FUTURES AND OPTIONS
In addition to the investment practices described in detail in the
Prospectus, the Disciplined Growth Fund may also engage in transactions
involving futures and options. The following sections provide more detailed
information about these practices.
SUMMARY - FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may buy
and sell financial futures contracts on securities indices and fixed income
securities. A futures contract is a contract to buy or sell units of a
particular securities index, or a certain amount of a fixed income security, at
an agreed price on a specified future date. Depending on the change in value of
the index or security between the time when the Fund enters into and terminates
a futures contract, the Fund realizes a gain or loss. The Fund may purchase and
sell futures contracts for hedging purposes and to adjust the Fund's exposure
to relevant stock or bond markets. For example, when the Manager wants to
increase the Fund's exposure to equity securities, it may do so by taking long
positions in futures contracts on equity indices such as futures contracts on
the Standard & Poor's 500 Composite Stock Price Index. Similarly, when the
Manager wants to increase the Fund's exposure to fixed income securities, it may
do so by taking long positions in futures contracts relating to fixed income
securities such as futures contracts on U.S. Treasury bonds or notes. The Fund
may buy and sell call and put options on futures contracts or on stock indices
in addition to or as an alternative to purchasing or selling futures contracts.
The use of futures and options involves certain special risks. Certain
risks arise because of the possibility of imperfect correlations between
movements in the prices of financial futures and options and movements in the
prices of the underlying securities index or securities that are the subject of
the hedge. The successful use of futures and options further depends on the
Manager's ability to forecast market or interest rate movements correctly. Other
risks arise from the Fund's potential inability to close out its futures or
related options positions, and there can be no assurance that a liquid secondary
market will exist for any futures contract or option at a particular time. The
Fund's ability to terminate option positions established in the over-the-counter
market may be more limited than for exchange-traded options and may also involve
the risk that securities dealers participating in such transactions would fail
to meet their obligations to the Fund. The use of futures or options on futures
for purposes other than hedging may be regarded as speculative. Certain
regulatory
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requirements may also limit the Fund's ability to engage in futures and options
transactions.
SUMMARY - OPTIONS. The Fund may purchase and sell call and put options
on securities it owns or in which it may invest. The Fund receives a premium
from writing a call or put option, which increases the Fund's return if the
option expires unexercised or is closed out at a net profit. When the Fund
writes a call option, it gives up the opportunity to profit from any increase in
the price of a security above the exercise price of the option; when it writes a
put option, the Fund takes the risk that it will be required to purchase a
security from the option holder at a price above the current market price of the
security. The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Fund may also from
time to time buy and sell combinations of put and call options on the same
underlying security to earn additional income. The aggregate value of the
securities underlying the options written by the Fund may not exceed 25% of the
Fund's total assets. The Fund's use of these strategies may be limited by
applicable law.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will comply
with guidelines established by the Securities and Exchange Commission with
respect to coverage of options and futures strategies by mutual funds, and if
the guidelines so require will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or option strategy is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of the Fund's
assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
COMBINED POSITIONS. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
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Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instruments, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
FUTURES CONTRACTS. When the Fund purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future date.
When the Fund sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and sale
will take place is fixed when the Fund enters into the contract. Some currently
available futures contracts are based on specific securities, such as U.S.
Treasury bonds or notes, and some are based on indices of securities prices,
such as the Standard & Poor's Composite Index of 500 Stocks ("S&P 500"). Futures
can be held until their delivery dates, or can be closed out before then if a
liquid secondary market is available. The value of a futures contract tends to
increase and decrease in tandem with the value of its underlying instrument.
Therefore, purchasing futures contracts will tend to increase the Fund's
exposure to positive and negative price fluctuations in the underlying
instrument, much as if it had purchased the underlying instrument directly. When
the Fund sells a futures contract, by contrast, the value of its futures
position will tend to move in a direction contrary to the market. Selling
futures contracts, therefore, will tend to offset both positive and negative
market price changes, much as if the underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract
is not required to deliver or pay for the underlying instrument unless the
contract is held until the delivery date. However, both the purchaser and seller
are required to deposit "initial margin" with a futures broker, known as a
futures commission merchant ("FCM"), when the contract is entered into. Initial
margin deposits are typically equal to a percentage of the contract's value. If
the value of either party's position declines, that party will be required to
make additional "variation margin" payments to settle the change in value on a
daily basis. The party that has a gain may be entitled to receive all or a
portion of this amount. Initial and variation margin payments do not constitute
purchasing securities on margin for purposes of the Fund's investment
limitations. In the event of the bankruptcy of an FCM that holds margin on
behalf of the Fund, the
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Fund may be entitled to return of margin owed to it only in proportion to the
amount received by the FCM's other customers, potentially resulting in losses to
the Fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Fund has filed a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the Commodity Futures Trading Commission ("CFTC") and the
National Futures Association, which regulate trading in the futures markets. The
Funds intend to comply with Rule 4.5 under the Commodity Exchange Act. To the
extent the Fund does not engage in commodity futures or commodity options for
"bona fide" hedging purposes, the Rule requires the Fund to limit the initial
margin and premiums paid to establish such positions to 5% of net assets. The
amount by which a commodity option is "in the money" is excluded for these
purposes.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading volume
and liquidity if their strike prices are not close to the underlying
instrument's current price. In addition, exchanges may establish daily price
fluctuation limits for options and futures contracts, and may halt trading if a
contract's price moves upward or downward more than the limit in a given day. On
volatile trading days when the price fluctuation limit is reached or a trading
halt is imposed, it may be impossible for the Fund to enter into new positions
or close out existing positions. If the secondary market for a contract is not
liquid because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require the Fund to
continue to hold a position until delivery or expiration regardless of changes
in its value. As a result, the Fund's access to other assets held to cover its
options or futures positions could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter ("OTC") options (options not traded
on exchanges) generally are established through negotiation with the other party
to the option contract. While this type of arrangement allows the Fund greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indices
of securities prices, and futures contracts. The Fund may terminate its position
in a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also
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terminate a put option position by closing it out in the secondary market at its
current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS. When the Fund writes a put option, it
takes the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the Fund assumes the obligation to pay the
strike price for the option's underlying instrument if the other party to the
option chooses to exercise it. When writing an option on a futures contract, the
Fund will be required to make margin payments to an FCM as described above for
futures contracts. The Fund may seek to terminate its position in a put option
it writes before exercise by closing out the option in the secondary market at
its current price. If the secondary market is not liquid for a put option the
Fund has written, however, the Fund must continue to be prepared to pay the
strike price while the option is outstanding, regardless of price changes, and
must continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower price.
If security prices fall, the put writer would expect to suffer a loss. This loss
should be less than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should mitigate the
effects of the decline. Writing a call option obligates the Fund to sell or
deliver the option's underlying instrument, in return for the strike price, upon
exercise of the option. The characteristics of writing call options are similar
to those of writing put options, except that writing calls generally is a
profitable strategy if prices remain the same or fall. Through receipt of the
option premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
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ADDITIONAL INVESTMENT PRACTICES OF THE
GLOBAL SMALL CAP FUND
The Global Small Cap Fund normally expects to invest approximately 40%
to 60% of its assets outside the United States and the remaining 60% to 40% of
its assets inside the United States. The weighting of the Fund's portfolio
between foreign and domestic investments will depend upon prevailing conditions
in foreign and domestic markets. Under certain market conditions, the Fund may
invest more than 60% of its assets either outside or inside the United States.
In addition, the Fund will always invest at least 65% of its total assets in at
least three different countries, one of which will be the United States.
In order to gain exposure to certain foreign countries that prohibit or
impose restrictions on direct investment, the Global Small Cap Fund may (subject
to any applicable regulatory requirements) invest in foreign and domestic
investment companies and other pooled investment vehicles that invest primarily
or exclusively in such countries. The Fund's investment through such vehicles
will generally involve the payment of indirect expenses (including advisory
fees) which the Fund does not incur when investing directly.
The Manager believes that the securities markets of many nations move
relatively independently of one another because business cycles and other
economic or political events that influence one country's securities markets may
have little effect on securities markets in other countries. By investing in a
global portfolio, the Fund attempts to reduce the risks associated with
investing in the economy of only one country. Consistent with the above
policies, the Fund may at times invest more than 25% of its assets in the
securities of issuers located in a single country. At such times, the Fund's
performance will be directly affected by political, economic, market and
exchange rate conditions in such country. When the Fund invests a substantial
portion of its assets in a single country it is subject to greater risk of
adverse changes in any of these factors with respect to such country than a fund
which does not invest as heavily in the country.
In certain foreign countries, particularly newly industrializing
countries, the Fund's market capitalization guideline of $1.5 billion may
include companies which, when viewed on a relative basis, are not considered
"small cap" in the particular country.
PORTFOLIO TRANSACTIONS
INVESTMENT DECISIONS
Investment decisions for the Funds and for the other investment
advisory clients of the Manager and the Subadvisor and their affiliates are made
with a view to achieving their respective investment objectives. Investment
decisions are the product
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of many factors in addition to basic suitability for the particular client
involved. Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances, one
client may sell a particular security to another client. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such clients in a manner
which in the Manager's or the Subadvisor's opinion is equitable to each and in
accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges, commodities markets and futures
markets and other agency transactions involve the payment by a Fund of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. In the case of securities traded in
the over-the-counter markets, the price paid by a Fund usually includes an
undisclosed dealer commission or mark-up. In underwritten offerings, the price
paid by a Fund includes a disclosed, fixed commission or discount retained by
the underwriter or dealer. It is anticipated that most purchases and sales of
securities by the Fixed Income Fund will be with the issuer or with underwriters
of or dealers in those securities, acting as principal. Accordingly, the Fixed
Income Fund would not ordinarily pay significant brokerage commissions with
respect to securities transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, the Manager and the Subadvisor may receive brokerage and research
services and other similar services from many broker-dealers with which the
Manager and the Subadvisor place the Funds' portfolio transactions and from
third parties with which these broker-dealers have arrangements. These services
may include such matters as general economic and market reviews, industry and
company reviews, evaluations of investments, recommendations as to the purchase
and sale of investments, newspapers, magazines, pricing services, quotation
services, news services and personal computers utilized by the Manager's or
Subadvisor's investment professionals. Where the services referred to above are
not used exclusively by the Manager or the Subadvisor for research purposes, the
Manager or Subadvisor, based upon allocations of expected use, would
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bear that portion of the cost of these services which directly relates to their
non-research use. Some of these services may be of value to the Manager, the
Subadvisor or their affiliates in advising various of their clients (including
the Funds), although not all of these services would necessarily be useful and
of value in managing the Funds or any particular Fund. The management fee paid
by each Fund is not reduced because the Manager, the Subadvisor or their
affiliates may receive these services even though the Manager or the Subadvisor
might otherwise be required to purchase some of these services for cash.
The Manager and Subadvisor each place orders for the purchase and sale
of portfolio investments for the Funds and buy and sell investments for the
Funds through a substantial number of brokers and dealers. In so doing, the
Manager and the Subadvisor use their best efforts to obtain for the Funds the
most favorable price and execution available, except to the extent they may be
permitted to pay higher brokerage commissions as described below. In seeking the
most favorable price and execution, the Manager and the Subadvisor, having in
mind each Fund's best interests, consider all factors they deem relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security or other investment, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions.
As permitted by Section 28(e) of the 1934 Act, and by each Management
Contract or, as applicable, the Sub-Advisory Agreement, the Manager and the
Subadvisor may cause a Fund to pay a broker-dealer which provides "brokerage and
research services" (as defined in the 1934 Act) to the Manager or Subadvisor an
amount of disclosed commission for effecting securities transactions on stock
exchanges and other transactions for such Fund on an agency basis in excess of
the commission which another broker-dealer would have charged for effecting that
transaction. The Manager's or the Subadvisor's authority to cause the Funds to
pay any such greater commissions is also subject to such policies as the
Trustees may adopt from time to time. It is the position of the staff of the
Securities and Exchange Commission that Section 28(e) does not apply to the
payment of such greater commissions in "principal" transactions. Accordingly the
Manager and the Subadvisor will use their best effort to obtain the most
favorable price and execution available with respect to such transactions, as
described above.
The following tables show brokerage commissions on portfolio
transactions paid by each Fund during the fiscal periods indicated.
<TABLE>
<S> <C>
1. FIXED INCOME FUND
Fiscal Year ended December 31 Brokerage Commissions
----------------------------- ---------------------
1996 $0
1997 $0
</TABLE>
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<PAGE> 75
<TABLE>
<S> <C> <C>
1998 $0
2. VALUE FUND
Fiscal Year ended December 31 Brokerage Commissions
----------------------------- ---------------------
1996 $15,351
1997 $60,776
1998 $63,166
3. GROWTH FUND
Fiscal Year ended December 31 Brokerage Commissions
----------------------------- ---------------------
1998 (from January 20, 1998) $35,612
4. DISCIPLINED GROWTH FUND
Fiscal Year ended December 31 Brokerage Commissions
----------------------------- ---------------------
1996 (from August 26, 1996) $ 5,791
1997 $ 17,992
1998 $ 41,978
5. MID CAP FUND
Fiscal Year ended December 31 Brokerage Commissions
----------------------------- ---------------------
1996 $14,880
1997 $36,573
1998 $48,871
6. MICRO CAP FUND
Fiscal Year ended December 31 Brokerage Commissions
----------------------------- ---------------------
1998 (from July 20, 1998) $36,532
7. GLOBAL SMALL CAP FUND
Fiscal Year ended December 31 Brokerage Commissions
----------------------------- ---------------------
1996 $26,636
1997 $32,949
1998 $25,801
</TABLE>
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<PAGE> 76
The following tables show transactions placed by each Fund with brokers and
dealers during the fiscal year ended December 31, 1998 to recognize research,
statistical and quotation services.
<TABLE>
<CAPTION>
- ------------------------------------ -------------------------- ---------------------- -----------------------
DOLLAR VALUE OF THOSE PERCENT OF TOTAL AMOUNT OF COMMISSIONS
TRANSACTIONS TRANSACTIONS
- ------------------------------------ -------------------------- ---------------------- -----------------------
<S> <C> <C> <C>
FIXED INCOME FUND $0 0 % $0
- ------------------------------------ -------------------------- ---------------------- -----------------------
VALUE FUND $518,937,000 5.22% $31,136
- ------------------------------------ -------------------------- ---------------------- -----------------------
GROWTH FUND $334,600,000 54.55% $20,076
- ------------------------------------ -------------------------- ---------------------- -----------------------
DISCIPLINED GROWTH FUND $116,397,000 12.54% $6,983
- ------------------------------------ -------------------------- ---------------------- -----------------------
MID CAP FUND $60,200,000 6.89% $3,612
- ------------------------------------ -------------------------- ---------------------- -----------------------
MICRO CAP FUND $22,800,000 1.60% $1,368
- ------------------------------------ -------------------------- ---------------------- -----------------------
GLOBAL SMALL CAP FUND $11,700,000 5.14% $702
- ------------------------------------ -------------------------- ---------------------- -----------------------
</TABLE>
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust, an open-end, management investment company, is organized as
a Massachusetts business trust under the laws of Massachusetts by an Agreement
and Declaration of Trust ("Declaration of Trust") dated August 1, 1994, as
amended. A copy of the Declaration of Trust is on file with the Secretary of The
Commonwealth of Massachusetts. Each Fund is a non-diversified series of the
Trust. The fiscal year for each Fund ends on December 31.
Each share of each Fund represents an equal proportionate interest in
such Fund. Shares of the Trust do not have any preemptive rights. Shares are
freely transferable and are entitled to dividends as declared by the Trustees.
Upon liquidation of a Fund, shareholders of such Fund are entitled to share pro
rata in the net assets of the Fund available for distribution to shareholders.
The Trust has an unlimited number of authorized shares of beneficial
interest. The Declaration of Trust permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series of shares
with such dividend preferences and other rights as the Trustees may designate.
While the Trustees have no current intention to exercise this power, it is
intended to allow them to provide for an equitable allocation of the impact of
any future regulatory requirements that might
31
<PAGE> 77
affect various classes of shareholders differently. The Trustees may also,
without shareholder approval, establish one or more additional separate
portfolios for investments in the Trust or merge two or more existing
portfolios. Shareholders' investments in such a portfolio would be evidenced by
a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. The Declaration of Trust
further provides that the Trustees may also terminate the Trust, or any Fund
thereof, upon written notice to the shareholders.
VOTING RIGHTS
As summarized in the Prospectus, shareholders are entitled to one vote
for each full share held (with fractional votes for fractional shares held) and
will vote (to the extent provided herein) in the election of Trustees and the
termination of the Trust and on other matters submitted to the vote of
shareholders. Shareholders vote by individual Fund on all matters except (i)
when required by the 1940 Act, shares shall be voted in the aggregate and not by
individual Fund, and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Funds, then only shareholders of such
Funds shall be entitled to vote thereon. Shareholders of one Fund shall not be
entitled to vote on matters exclusively affecting another Fund, such matters
including, without limitation, the adoption of or change in the investment
objective, policies or restrictions of the other Fund and the approval of the
investment advisory contract of the other Fund.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders.
Upon written request by the holders of at least 10% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). In addition, shareholders of the Trust holding at
least 10% of the outstanding shares entitled to vote have the right to call a
meeting to elect or remove Trustees or to take other actions as provided in the
Declaration of Trust. Shareholders holding a majority of the outstanding shares
of the Trust may remove Trustees from office by votes cast in person or by proxy
at a meeting of shareholders or by written consent. Except as set forth above,
the Trustees shall continue to hold office and may appoint successor Trustees.
Voting rights are not cumulative.
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<PAGE> 78
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
the property of the relevant Fund for all loss and expense of any shareholder of
that Fund held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is considered remote because it is limited to circumstances in which
the disclaimer is inoperative and the Fund of which he is or was a shareholder
would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust's
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
At March 31, 1999, except as noted below, the officers and Trustees of
the Trust owned less than 1% as a group of the shares of any Fund, and, to the
knowledge of the Trust no person owned of record or beneficially 5% or more of
the shares of any Fund.
<TABLE>
<S> <C> <C>
1. FIXED INCOME FUND
Shareholder Name and Address Percentage Owned
Massachusetts Mutual Life 26.43%
Insurance Company
1295 State Street
Springfield, MA 01111
</TABLE>
33
<PAGE> 79
<TABLE>
<S> <C>
The Stackpole Hall Foundation 24.80%
44 South St. Marys Street
St. Marys, PA 15857
MassMutual Foundation for Hartford Inc. 11.55%
1295 State Street
Springfield, MA 01111
Haley & Aldrich Pension Trust 10.63%
465 Medford Street
Suite 2200
Boston, MA 02129
David L. Babson & Co. Pension Plan 8.37%
c/o David L. Babson and
Co., Inc.
One Memorial Drive
Cambridge, MA 02142
</TABLE>
2. VALUE FUND
<TABLE>
<S> <C>
Shareholder Name and Address Percentage Owned
Massachusetts Mutual Life 61.74%
Insurance Company
1295 State Street
Springfield, MA 01111
MassMutual Foundation for Hartford Inc. 9.13%
1295 State Street
Springfield, MA 01111
Norwest Bank Trustee FBO 7.25%
Universal Cooperatives
7801 Metro Parkway
P.O. Box 460
Minneapolis, MN 55440
National City PA, Trustee FBO 6.36%
Allegheny County Police Pension
P. O. Box 242
Bethel Park, PA 15102
US Bank National Association, 5.14%
as Custodian for
Evans & Sutherland 401(k) Plan
600 Komas Drive
Salt Lake City, UT 84058
</TABLE>
34
<PAGE> 80
<TABLE>
<S> <C>
3. GROWTH FUND
Shareholder Name and Address Percentage Owned
Massachusetts Mutual Life 96.96%
Insurance Company
1295 State Street
Springfield, MA 01111
4. DISCIPLINED GROWTH FUND
Shareholder Name and Address Percentage Owned
Massachusetts Mutual Life 87.61%
Insurance Company
1295 State Street
Springfield, MA 01111
David L. Babson & Co. Profit Sharing Plan 8.12%
c/o David L. Babson and Co. Inc.
One Memorial Drive
Cambridge, MA 02142
5. MID CAP FUND
Shareholder Name and Address Percentage Owned
Massachusetts Mutual Life 83.74%
Insurance Company
1295 State Street
Springfield, MA 01111
M&I Trust Company, as Trustee 12.17%
1000 N. Water Street, TR14
Milwaukee, WI 53202
6. MICRO CAP FUND
Shareholder Name and Address Percentage Owned
Massachusetts Mutual Life 67.72%
Insurance Company
1295 State Street
</TABLE>
35
<PAGE> 81
<TABLE>
<S> <C>
Springfield, MA 01111
Music Associates of Aspen 7.04%
2 Music School Road
Aspen, CO 81611
Anschutz Family Foundation 5.60%
555 17th Street
Denver, CO 80202
7. GLOBAL SMALL CAP FUND
Shareholder Name and Address Percentage Owned
Massachusetts Mutual Life 93.93%
Insurance Company
1295 State Street
Springfield, MA 01111
</TABLE>
INVESTMENT PERFORMANCE
STANDARD PERFORMANCE MEASURES
The yield of the Fixed Income Fund, may be provided in reports, sales
literature and advertisements. Yield is presented for a specified thirty-day
period (the "base period"). Yield is based on the amount determined by (i)
calculating the aggregate amount of dividends and interest earned by a Fund
during the base period less expenses for that period, and (ii) dividing that
amount by the product of (A) the average daily number of shares of the Fund
outstanding during the base period and entitled to receive dividends and (B) the
net asset value on the last day of the base period. The result is annualized on
a compounding basis to determine the yield. For this calculation, interest
earned on debt obligations held by a Fund is generally calculated using the
yield to maturity (or first expected call date) on such obligations based on
their market values (or, in the case of receivables-backed securities such as
securities issued by the Government National Mortgage Association, based on
cost). Dividends on equity securities are accrued daily at their stated dividend
rates. The yield for the Fixed Income Fund for the 30-day period ended December
31, 1998 was 5.01%.
Each Fund may also advertise its total return. Total Return
with respect to a Fund is a measure of the change in value of an investment in
such Fund over the period covered, which assumes any dividends or capital gains
distributions are reinvested immediately rather than paid to the investor in
cash. The formula for Total Return used herein includes four steps: (1) adding
to the total number of shares purchased by a hypothetical $1,000 investment in
the Fund all additional shares which would have been purchased if all dividends
and distributions paid or distributed during the period had been immediately
reinvested; (2) calculating the value of the hypothetical initial investment of
$1,000 as of the end of the period by multiplying the total number of shares
owned at the end of the period by the net asset value per share on the last
trading day of the period; (3) assuming redemption at the
36
<PAGE> 82
end of the period; and (4) dividing this account value for the hypothetical
investor by the initial $1,000 investment. Average Annual Total Return is the
annual compounded percentage change in the value of the amount invested in the
Fund from the beginning until the end of the stated period.
All data is based on a Fund's past investment results and does not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of a Fund's
portfolio, and a Fund's operating expenses. Investment performance also often
reflects the risks associated with a Fund's investment objective and policies.
These factors should be considered when comparing a Fund's investment results to
those of other mutual funds and other investment vehicles.
The inception dates for the Funds are as follows: Fixed Income Fund,
July 25, 1995;Value Fund, July 25, 1995; Growth Fund, January 20, 1998;
Disciplined Growth Fund, August 26, 1996; Mid Cap Fund, July 25, 1995; Micro Cap
Fund, July 20, 1998; and Global Small Cap Fund, July 19, 1995.
PERFORMANCE COMPARISONS
From time-to-time and only to the extent the comparison is appropriate
for the Funds, the Trust may quote the performance of the Funds in advertising
and other types of literature and may compare the performance of the Funds to
the performance of various indices and investments for which reliable
performance data is available. The performance of the Funds may be compared in
advertising and other literature to averages, performance rankings and other
information prepared by recognized mutual fund statistical services.
Performance information for the Funds may be compared, in reports and
promotional literature, to the S&P 500 Index, the Russell 2500 Index, the
Russell 2000 Index, the Russell 1000 Growth Index, the Russell 1000 Value Index,
the Lehman Brothers 5-7 Year Treasury Index, the Lehman Brothers Government Bond
Index, the Lehman Brothers Treasury Bond Index, the Lehman Brothers Aggregate
Bond Index, the Lehman Brothers Intermediate Treasury Index, the 91-Day Treasury
Bill Average, the Morgan Stanley Capital International Index for Europe,
Australia and the Far East ("MSCI EAFE Index"), the S&P Barra Large Cap Value
Index, the Solomon Brothers Extended Market Index, Ex-US (EMI), or other
appropriate managed or unmanaged indices of the performance of various types of
investments, so that investors may compare a Fund's results with those of
indices widely regarded by investors as representative of the security markets
in general. Unmanaged indices may assume the reinvestment of dividends, but
generally do not reflect deductions for administrative and management costs and
expenses. Managed indices generally do reflect such deductions.
The Trust also may use the following information in advertisements and
other types of literature, but only to the extent the information is appropriate
for the Funds:
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<PAGE> 83
(1) the Consumer Price Index may be used to assess the real rate of return from
an investment in a Fund; (2) other government statistics, including, but not
limited to, The Survey of Current Business, may be used to illustrate investment
attributes of a Fund or the general economic, business, investment, or financial
environment in which the Fund operates; (3) the effect of tax-deferred
compounding on the investment returns of a Fund, or on returns in general, may
be illustrated by graphs, charts, etc., where such graphs or charts would
compare, at various points in time, the return from an investment in the Fund
(or returns in general) on a tax-deferred basis (assuming reinvestment of
capital gains and dividends and assuming one or more tax rates) with the return
on a taxable basis; and (4) the sectors or industries in which a Fund invests
may be compared to relevant indices of stocks or surveys (e.g., S&P Industry
Surveys) to evaluate the Fund's historical performance or current or potential
value with respect to the particular industry or sector.
Each Fund's performance also may be compared to those of other mutual
funds having similar objectives. This comparative performance could be expressed
as a ranking prepared by Lipper Analytical Services, Inc., (including the Lipper
General Bond Fund Average, the Lipper Intermediate Investment Grade Debt Fund
Average, the Lipper Bond Fund Average, the Lipper Growth Fund Average, the
Lipper Flexible Fund Average), or Morningstar, Inc. (including, the Morningstar
Large Cap Value Fund Average), independent services which monitor the
performance of mutual funds. Any such comparisons may be useful to investors who
wish to compare a Fund's past performance with that of its competitors. Of
course, past performance cannot be a guarantee of future results. OTHER
ADVERTISING ITEMS
The Trust may discuss in advertising and other types of literature that
a Fund has been assigned a rating by an NRSRO, such as S&P. Such rating would
assess the creditworthiness of the investments held by such Fund. The assigned
rating would not be a recommendation to purchase, sell or hold the Fund's shares
since the rating would not comment on the market price of the Fund's shares or
the suitability of the Fund for a particular investor. In addition, the assigned
rating would be subject to change, suspension or withdrawal as a result of
changes in, or unavailability of, information relating to the Fund or its
investments. The Trust may compare a Fund's performance with other investments
that are assigned ratings by NRSROs. Any such comparisons may be useful to
investors who wish to compare a Fund's past performance with other rated
investments. Of course past performance cannot be a guarantee of future results.
General mutual fund statistics provided by the Investment Company Institute may
also be used.
DETERMINATION OF NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund share
is determined at 4:15 p.m., Eastern time, on each day on which the New York
Stock Exchange is open for trading. The Trust expects that the days, other than
weekend
38
<PAGE> 84
================================================================================
days, that the New York Stock Exchange will not be open are New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
EXPERTS
The financial statements of the Funds for the fiscal year ended
December 31, 1998 incorporated by reference into this Statement of Additional
Information have been audited by Deloitte & Touche LLP, 125 Summer Street,
Boston, Massachusetts 02110, the Trust's independent auditors, as set forth in
each of their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended
December 31, 1998 included in the Trust's Annual Reports filed with the
Securities and Exchange Commission on March 4, 1999 pursuant to Section 30(d) of
the 1940 Act, as amended, and the rules promulgated thereunder, are hereby
incorporated into this Statement of Additional Information by reference.
39
<PAGE> 85
APPENDIX
DESCRIPTION OF STOCK RATINGS
STANDARD & POOR'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS (S&P)
Growth and stability of earnings and dividends are deemed key elements
in establishing Standard & Poor's earnings and dividend rankings for common
stocks. Basic scores are computed for earnings and dividends, then adjusted by a
set of predetermined modifiers for growth, stability within long-term trend, and
cyclically. Adjusted scores for earnings and dividends are then combined to
yield a final score. The final score is measured against a scoring matrix
determined by an analysis of the scores of a large and representative sample of
stocks. The rankings are:
A+ Highest
A High
A- Above Average
B+ Average
B Below Average
B- Lower
C Lowest
D In Reorganization
VALUE LINE RATINGS OF FINANCIAL STRENGTH
The financial strength of each of the companies reviewed by Value Line
is rated relative to all the others. The ratings are:
A++ The very highest relative financial strength.
A+ Excellent financial position relative to other companies.
A High grade relative financial strength.
B++ Superior financial health on a relative basis.
B+ Very good relative financial structure.
B Good overall relative financial structure.
C++ Satisfactory finances relative to other companies.
C+ Below-average relative financial position.
C Poorest financial strength relative to other
major companies.
40
<PAGE> 86
INVESTMENT MANAGER
David L. Babson and Company Incorporated
One Memorial Drive
Cambridge, MA 02142
INVESTMENT SUBADVISOR
Babson Stewart Ivory International
One Memorial Drive
Cambridge, MA 02142
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
CUSTODIAN
Investors Bank & Trust Company
John Hancock Tower
200 Clarendon Street, 16th Floor
Boston, MA 02116
TRANSFER AGENT
Investors Bank & Trust Company
John Hancock Tower
200 Clarendon Street, 5th Floor
Boston, MA 02116
