Filed pursuant to Rule 497(c)
Registration No. 33-82366
THE DLB FUND GROUP
DLB FIXED INCOME FUND
DLB VALUE FUND
DLB GROWTH FUND
DLB DISCIPLINED GROWTH FUND
DLB ENTERPRISE III FUND
DLB MICRO CAPITALIZATION FUND
DLB GLOBAL SMALL CAPITALIZATION FUND
DLB STEWART IVORY INTERNATIONAL FUND
DLB STEWART IVORY EMERGING MARKETS FUND
STATEMENT OF ADDITIONAL INFORMATION
October 29, 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
October 29, 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 Enterprise III Fund, the DLB Micro
Capitalization Fund, the DLB Global Small Capitalization Fund, the DLB Stewart
Ivory International Fund and the DLB Stewart Ivory Emerging Markets 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 and The DLB Fund Group's
unaudited financial statements for the six-month period ended June 30, 1999
included in the Funds' Semiannual Reports are hereby incorporated into this
Statement of Additional Information by reference. A copy of the Prospectus and
each Fund's most recent Annual and Semiannual Report may be obtained free of
charge by writing The DLB Fund Group, c/o David L. Babson and Company
Incorporated, Marketing Department, Attention: The DLB Fund Group Coordinator,
One Memorial Drive, Cambridge, Massachusetts 02142, or by telephoning
1-888-722-2766.
<PAGE>
TABLE OF CONTENTS
CAPTION PAGE
- ------- ----
INVESTMENT OBJECTIVES AND POLICIES AND ASSOCIATED RISKS 3
INVESTMENT RESTRICTIONS 3
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS 6
MANAGEMENT OF THE TRUST 10
INVESTMENT ADVISORY AND OTHER SERVICES 12
ADDITIONAL INVESTMENT PRACTICES OF THE FUNDS 16
ADDITIONAL INVESTMENT PRACTICES OF THE FIXED INCOME FUND 23
ADDITIONAL INVESTMENT PRACTICES OF THE DISCIPLINED GROWTH
FUND -- FUTURES AND OPTIONS 28
ADDITIONAL INVESTMENT PRACTICES OF THE GLOBAL SMALL
CAP FUND 33
ADDITIONAL INVESTMENT PRACTICES OF THE GLOBAL SMALL CAP
FUND, THE INTERNATIONAL FUND AND THE EMERGING MARKETS FUND 34
PORTFOLIO TRANSACTIONS 35
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES 39
INVESTMENT PERFORMANCE 44
DETERMINATION OF NET ASSET VALUE 47
EXPERTS 47
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS 47
APPENDIX - DESCRIPTION OF STOCK RATINGS A-1
2
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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 Enterprise III Fund, which was formerly known as the DLB Mid
Capitalization Fund (the "Enterprise III Fund"), the DLB Micro Capitalization
Fund (the "Micro Cap Fund"), the DLB Global Small Capitalization Fund (the
"Global Small Cap Fund"), the DLB Stewart Ivory International Fund (the
"International Fund") and the DLB Stewart Ivory Emerging Markets Fund (the
"Emerging Markets 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 Fund, Micro Cap Fund, International Fund and Emerging Markets
Fund) 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
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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.
(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.
In addition, it is contrary to the present policy of each Fund to:
(a) Invest in (i) securities which at the time of such
investment are not readily marketable, (ii) 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 (iii) 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 (i), (ii) and (iii) above.
It is also contrary to the present policy of the Fixed Income Fund, the
Value Fund, the Disciplined Growth Fund and the Global Small Cap Fund
to:
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(b) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and sales of
securities.
(c) 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.
(d) 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 of this restriction, foreign banks or
their agents or subsidiaries are not considered investment companies.
(e) Acquire more than 10% of the voting securities of any
issuer.
(f) 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.
(g) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(h) Make investments for the purpose of gaining control of a
company's management.
Unlike Restrictions (1) through (7) above, Restrictions (a) through (h)
above are deemed to be "non-fundamental" investment policies of the applicable
Funds and therefore may be changed by the Trust's Trustees without shareholder
approval.
Except as otherwise indicated in Restriction 1 or Restriction (a)
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.
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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.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
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.
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 so to 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.
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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 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.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of each Fund's "required distribution" over its actual distribution in any
calendar year. Generally, the "required distribution" is 98% of the Fund's
ordinary income for the calendar year plus 98% of its capital gain net income
recognized during the one-year period ending on October 31 (or December 31,if
the Fund so elects) plus undistributed amounts from prior years. Each Fund
intends to make distributions sufficient to avoid imposition of the excise tax.
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 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 and gains not yet
received. In such cases, the
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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.
Each Fund's transactions, if any, in foreign currencies are likely to
result in a difference between the Fund's book income and taxable income. This
difference may cause a portion of the Fund's income distributions to constitute
a return of capital for tax purposes or require the Fund to make distributions
exceeding book income to avoid excise tax liability and to qualify as a
regulated investment company.
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.
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. The dividends-received deduction is not
available to Subchapter S corporations.
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.
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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 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
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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
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CHARLES E. HUGEL, age 71, serves as a Director 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 70, 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 71, 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.
OFFICERS
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FRANK L. TARANTINO, age 55, 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.
DEANNE B. DUPONT, age 45, Treasurer, is Senior Vice President of the
Manager.
LANCE F. JAMES, age 44, Vice President, is an Executive Vice President
and Director of the Manager.
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MARY WILSON KIBBE, age 44, Vice President, is an Executive Vice
President of the Manager and an Executive Director of Massachusetts Mutual Life
Insurance Company ("MassMutual"). Ms Kibbe is a dual employee of MassMutual,
with which she has been associated since 1982, and the Manager, an indirect
subsidiary of MassMutual, since October 21, 1999.
WALTER T. MCCORMICK, age 53, Vice President, is an Executive Vice
President and Director of the Manager. Prior to joining the Manager in June,
1998, Mr. McCormick managed equity portfolios for Keystone Investments, Inc.
JOHN E. DEITELBAUM, age 31, 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.
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
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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 Registrant and Fund
Name Of Trustee from Registrant* Complex Paid 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>
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- -----------------------
* Includes an annual retainer and an attendance fee for each meeting attended.
** Resigned from service as a Trustee effective october 7, 1999.
*** Retired from service as a Trustee effective April 22, 1998.
**** Resigned as a Trustee effective August 13, 1998.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACTS
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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 MassMutual 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 (other than
the International Fund) 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 separate Sub-Advisory Agreements with Babson-Stewart
Ivory International ("BSII") with respect to the management of the international
component of the Global Small Cap Fund's portfolio and the investment portfolios
of the International Fund and the Emerging Markets Fund. (BSII is referred to
herein as the "Subadvisor.") The Manager pays the Subadvisor a monthly fee at
the annual rate of (a) .50% of the Global Small Cap Fund's average daily net
assets, (b) .375% of the International Fund's average daily net assets, and (c)
.875% of the Emerging Markets Fund's average daily net assets. These payments
will not affect the amounts payable by the Global Small Cap Fund, the
International Fund or the Emerging Markets 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
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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
through the fiscal year ending October 31, 2000 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 for each Fund (other than the International Fund and the Emerging Markets
Fund, which are newly organized): (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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<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER TOTAL
FISCAL ----------------------------------- 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. ENTERPRISE III 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 Global Small Cap Fund, 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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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 for the International Fund and the Emerging Markets Fund
also provides that in the event the Subadviser ceases to be the subadviser of
the Fund, the right of the Fund or the Trust to use the identifying name
"Stewart Ivory" 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 Agreements contain 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 / ADMINISTRATOR
------------------------------
In addition to serving as the Trust's custodian, IBT serves as
the Trust's transfer agent and dividend disbursing agent on behalf of the Funds.
IBT, under the terms of an administration agreement with the Trust, also
provides certain services to the Trust, including among others, assisting the
Trust in the following respects: (a) monitoring portfolio compliance, (b)
performing quarterly testing to establish each Fund's qualification as a
regulated investment company for tax purposes, and (c) maintaining effective
Blue Sky notification filings for states in which the Trust intends to solicit
sales of Fund shares.
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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.
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
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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.
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>
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; provided, that in circumstances
where fluctuations in value result in the Fund's investment in illiquid
securities constituting more than 15% of the current value of its net assets,
the Fund will take reasonable steps to reduce its investments in illiquid
securities until such investments constitute no more than 15% of the Fund's net
assets. 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
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<PAGE>
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 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 "Descriptions 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.
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<PAGE>
Each Fund may invest in warrants or rights. However, each Fund (other
than the Growth Fund, the Micro Cap Fund, the International Fund and the
Emerging Markets 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 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. In addition, 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 liabilities 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 invests in REITs, investors would bear not only a
proportionate share of the expenses of the Fund, but also, indirectly, expenses
of the REITs.
FOREIGN SECURITIES
------------------
The Global Small Cap Fund, the International Fund, the Emerging Markets
Fund, and, to a lesser extent, each of the other Funds are permitted to invest
in foreign securities. If a Fund's securities are held abroad, the countries in
which such securities may be held and the sub-custodian holding them must be
approved by the Board of Trustees or its delegate under applicable rules adopted
by the SEC.
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Foreign securities include debt, equity and hybrid instruments,
obligations and securities of foreign issuers, including governments of
countries other than the United States and companies organized under the laws of
countries other than the United States, companies that have their primary
business carried on outside the United States and companies that have their
principal securities trading market outside the United States. Foreign
securities also include securities of foreign issuers (i) represented by
American Depositary Receipts ("ADR's") or (ii) sponsored or unsponsored Global
Depositary Receipts ("GDRs") and European Depositary Receipts ("EDRs") to the
extent they come available.
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. The Funds will treat the underlying securities
of an ADR as the investment for purposes of its investment policies and
restrictions.
GDRs and EDRs are typically issued by foreign depositaries and evidence
ownership interests in a security or pool of securities issued by either a
foreign or a U.S. corporation. Holders of unsponsored GDRs and EDRs generally
bear all the costs associated with establishing them. The depositary of an
unsponsored GDR or EDR is under no obligation to distribute shareholder
communications received from the underlying issuer or to pass through to the GDR
or EDR holders any voting rights with respect to the securities or pools of
securities represented by the GDR or EDR. GDRs and EDRs also may be denominated
in a currency different from the currency in which the underlying securities are
denominated. Registered GDRs and EDRs are generally designed for use in U.S.
securities markets, while bearer form GDRs and EDRs are generally designed for
non-U.S. securities markets. The Funds will treat the underlying securities of a
GDR or EDR as the investment for purposes of its investment policies and
restrictions.
Investments in foreign securities involve special risks and
considerations. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may be
less publicly available information about a foreign company than about a
domestic company. For example, foreign markets have different clearance and
settlement procedures. Delays in settlement could result in temporary periods
when assets of a Fund are uninvested. The inability of a Fund to make intended
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<PAGE>
security purchases due to settlement problems could cause it to miss certain
investment opportunities. They may also entail certain other risks, such as the
possibility of one or more of the following: imposition of dividend or interest
withholding or confiscatory taxes, higher brokerage costs, thinner trading
markets, currency blockages or transfer restrictions, expropriation,
nationalization, military coups or other adverse political or economic
developments; less government supervision and regulation of securities
exchanges, brokers and listed companies; and the difficulty of enforcing
obligations in other countries. Purchases of foreign securities are usually made
in foreign currencies and, as a result, a Fund may incur currency conversion
costs and may be affected favorably or unfavorably by changes in the value of
foreign currencies against the U.S. dollar. Further, it may be more difficult
for a Fund's agents to keep currently informed about corporate actions that may
affect the prices of portfolio securities. Communications between the United
States and foreign countries may be less reliable than within the United States;
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Certain markets may require
payment for securities before delivery. A Fund's ability and decisions to
purchase and sell portfolio securities may be affected by laws or regulations
relating to the convertibility of currencies and repatriation of assets.
A number of current significant political, demographic and economic
developments may affect investments in foreign securities and in securities of
companies with operations overseas. Such developments include dramatic political
changes in government and economic policies in several Eastern European
countries and the republics composing the former Soviet Union, as well as the
unification of the European Economic Community. The course of any one or more of
these events and the effect on trade barriers, competition and markets for
consumer goods and services are uncertain. Similar considerations are of concern
with respect to developing countries. For example, the possibility of revolution
and the dependence on foreign economic assistance may be greater in these
countries than in developed countries. Management seeks to mitigate the risks
associated with these considerations through active professional management.
In addition to the general risks of investing in foreign securities,
investments in emerging markets involve special risks. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets may have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of a
Fund is uninvested and no return is earned thereon. The inability of a Fund to
make intended security purchases due to settlement problems could cause a Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to a Fund due to
subsequent declines in values of the portfolio securities, decrease in the level
of liquidity in a Fund's portfolio, or, if a Fund has entered into a contract to
sell the security, possible liability to the purchaser. Certain markets may
require payment for securities before
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<PAGE>
delivery, and in such markets a Fund bears the risk that the securities will not
be delivered and that the Fund's payments will not be returned. Securities
prices in emerging markets can be significantly more volatile than in the more
developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the risk
of nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries with emerging
markets may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. Local securities markets
may trade a small number of securities and may be unable to respond effectively
to increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to that Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of a Fund.
ADDITIONAL INVESTMENT PRACTICES OF
THE FIXED INCOME FUND
In addition to the investment practices described 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 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
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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 rates 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 on 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
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<PAGE>
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
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.
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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 to 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 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,
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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 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
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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.
ADDITIONAL INVESTMENT PRACTICES OF THE DISCIPLINED GROWTH
FUND -- FUTURES AND OPTIONS
In addition to the investment practices described 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
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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 that 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 ("S&P 500"). 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 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
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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 options 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.
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
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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 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 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
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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 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
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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.
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.
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.
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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.
ADDITIONAL INVESTMENT PRACTICES OF THE
GLOBAL SMALL CAP FUND, THE INTERNATIONAL FUND
AND THE EMERGING MARKET FUND
POOLED INVESTMENT VEHICLES. In order to gain exposure to certain
foreign countries that prohibit or impose restrictions on direct investment, the
Global Small Cap Fund, the International Fund and the Emerging Markets 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. A 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.
FOREIGN CURRENCY TRANSACTIONS. Since the stocks of foreign companies
are frequently denominated in foreign currencies, and since a Fund may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
Fund will be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, and may incur costs in connection with
conversions between various currencies.
Each Fund's general approach is to leave currency exposure unhedged.
The investment policies of each Fund, however, permit the Fund to purchase
foreign securities or enter into forward foreign currency exchange contracts in
order to expedite settlement of portfolio transactions. In exceptional
circumstances, a Fund may use forward foreign currency exchange contracts or
other currency transactions, such as exchange listed currency futures, exchange
listed and OTC options on currencies, and currency swaps, to protect a position
if fundamental technical analysis suggests that it is necessary.
A Fund will ordinarily conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through the use of forward contracts to
purchase or sell foreign currencies. A forward foreign currency exchange
contract will involve an obligation by a Fund to purchase or sell a specific
amount of currency at a future date, which may be any fixed number of days, from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirements, and
no commissions are charged at any stage for trades. Neither type of foreign
currency
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transaction will eliminate fluctuations in the prices of a Fund's portfolio
securities or prevent loss if the prices of such securities should decline.
Currency transactions are subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, government
exchange controls, blockages, and manipulations or exchange restrictions imposed
by governments can negatively affect purchases and sales of currency and related
instruments. These can result in losses to a Fund if it is unable to deliver or
receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market that may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
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 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
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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 trade execution services, 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 brokergae or research purposes, the Manager or Subadvisor,
based upon allocations of expected use, would bear that portion of the cost of
these services which directly relates to their non-brokerage or 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
36
<PAGE>
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, each 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 efforts 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 (other than the International Fund and the
Emerging Markets Fund, which are newly organized) during the fiscal periods
indicated.
1. FIXED INCOME FUND
-----------------
Fiscal Year ended December 31 Brokerage Commissions
----------------------------- ---------------------
1996 $0
1997 $0
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
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<PAGE>
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. ENTERPRISE III 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
The following tables show transactions placed by each Fund (other than the
International Fund and the Emerging Markets Fund, which are newly organized)
with brokers and dealers during the fiscal year ended December 31, 1998 to
recognize research, statistical and quotation services.
38
<PAGE>
- ------------------------ ------------------- ----------------- -----------
DOLLAR VALUE OF PERCENT OF TOTAL AMOUNT OF
THOSE TRANSACTIONS TRANSACTIONS COMMISSIONS
- ------------------------ ------------------- ----------------- -----------
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
- ------------------------ ------------------- ----------------- -----------
ENTERPRISE III 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
- ------------------------ ------------------- ----------------- -----------
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, as amended, 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 October 31. Prior to
July 22, 1999, the fiscal year for each Fund ended 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 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.
39
<PAGE>
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
- -------------
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 that (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.
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.
40
<PAGE>
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 July 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.
1. FIXED INCOME FUND
-----------------
Shareholder Name and Address Percentage Owned
---------------------------- ----------------
Massachusetts Mutual Life 26.28%
Insurance Company
1295 State Street
Springfield, MA 01111
The Stackpole Hall Foundation 24.20%
44 South St. Marys Street
St. Marys, PA 15857
41
<PAGE>
MassMutual Foundation for Hartford Inc. 12.00%
1295 State Street
Springfield, MA 01111
Haley & Aldrich Pension Trust 11.94%
465 Medford Street
Suite 2200
Boston, MA 02129
David L. Babson & Co. Pension Plan 8.74%
c/o David L. Babson & Co. Inc.
One Memorial Drive
Cambridge, MA 02142
2. VALUE FUND
----------
Shareholder Name and Address Percentage Owned
---------------------------- ----------------
Massachusetts Mutual Life 62.87%
Insurance Company
1295 State Street
Springfield, MA 01111
MassMutual Foundation for Hartford Inc. 8.41%
1295 State Street
Springfield, MA 01111
Norwest Bank Trustee FBO 7.32%
Universal Cooperatives
7801 Metro Parkway
P.O. Box 460
Minneapolis, MN 55440
National City PA, Trustee FBO 6.42%
Allegheny County Police Pension
P. O. Box 242
Bethel Park, PA 15102
US Bank National Association, 5.31%
as Custodian for
Evans & Sutherland 401(k) Plan
600 Komas Drive
Salt Lake City, UT 84058
42
<PAGE>
3. GROWTH FUND
-----------
Shareholder Name and Address Percentage Owned
---------------------------- ----------------
Massachusetts Mutual Life 97.42%
Insurance Company
1295 State Street
Springfield, MA 01111
4. DISCIPLINED GROWTH FUND
-----------------------
Shareholder Name and Address Percentage Owned
---------------------------- ----------------
Massachusetts Mutual Life 88.50%
Insurance Company
1295 State Street
Springfield, MA 01111
David L. Babson & Co. Profit Sharing Plan 6.07%
c/o David L. Babson & Co. Inc.
One Memorial Drive
Cambridge, MA 02142
5. ENTERPRISE III FUND
-------------------
Shareholder Name and Address Percentage Owned
---------------------------- ----------------
Massachusetts Mutual Life 80.90%
Insurance Company
1295 State Street
Springfield, MA 01111
M&I Trust Company, as Trustee 14.62%
1000 N. Water Street -TR14
Milwaukee, WI 53202
6. MICRO CAP FUND
--------------
Shareholder Name and Address Percentage Owned
---------------------------- ----------------
Massachusetts Mutual Life 61.00%
Insurance Company
1295 State Street
Springfield, MA 01111
43
<PAGE>
Music Associates of Aspen 6.34%
2 Music School Road
Aspen, CO 81611
Temple Hoyne Buell Foundation 5.74%
2700 East Hampden Avenue
Englewood, CO 80110
Anschutz Family Foundation 5.05%
555 17th Street
Denver, CO 80202
7. GLOBAL SMALL CAP FUND
---------------------
Shareholder Name and Address Percentage Owned
---------------------------- ----------------
Massachusetts Mutual Life 94.20%
Insurance Company
1295 State Street
Springfield, MA 01111
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
44
<PAGE>
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 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; Enterprise III Fund, July 25, 1995;
Micro Cap Fund, July 20, 1998; Global Small Cap Fund, July 19, 1995;
International Fund, November 1, 1999 (anticipated inception date); and Emerging
Markets Fund, November 1, 1999 (anticipated inception date).
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,
Australasia and the Far East, the Morgan Stanley Emerging Markets Free Index,
the S&P Barra Large Cap Value Index, the Salomon Brothers Extended Market Index,
ex-US, or other appropriate managed or unmanaged indices of the performance of
various types of
45
<PAGE>
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: (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 a nationally recognized statistical rating
organization ("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
46
<PAGE>
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 days, that the New York Stock Exchange will not be open are New Year's
Day, Martin Luther King, Jr. Day, Washington's Birthday, 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 (1) 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 ("SEC") on March 4, 1999 pursuant to Section
30(d) of the 1940 Act and the rules promulgated thereunder and (2) unaudited
financial statements for the six-month period ended June 30, 1999 included in
the Trust's Semiannual Reports filed with the SEC on September 2, 1999 pursuant
to Section 30(d) of the 1940 Act and the rules promulgated thereunder, are
hereby incorporated into this Statement of Additional Information by reference.
47
<PAGE>
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.
A-1
<PAGE>
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<PAGE>
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
200 Berkeley Street
Boston, MA 02116
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
