STATEMENT OF ADDITIONAL INFORMATION
IMG MUTUAL FUNDS, INC.
IMG Financial Services, Inc.
2203 Grand Avenue
Des Moines, IA 50312-5338
Telephone: 1-515-244-5426
Toll-Free: 1-800-798-1819
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of IMG Mutual Funds, Inc., (the "Funds"),
dated May 24, 1995. Requests for copies of the Prospectus should be made by
writing to IMG Mutual Funds, Inc., 2203 Grand Avenue, Des Moines, IA 50312-5338;
or by calling one of the numbers listed above.
This Statement of Additional Information is dated May 24, 1995.
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IMG MUTUAL FUNDS, INC.
TABLE OF CONTENTS
Page No.
INVESTMENT POLICIES AND TECHNIQUES................................ 3
Fixed Income Securities.................................... 3
Illiquid Securities........................................ 5
Delayed Delivery Transactions.............................. 5
Stripped Mortgage-Backed Securities........................ 6
Reverse Repurchase Agreements.............................. 6
Securities Lending......................................... 7
Loan Participations and Other Direct Indebtedness.......... 7
Futures Contracts.......................................... 8
Federal Tax Treatment of Futures Contracts................. 12
Stock Index Options........................................ 12
Options on Futures......................................... 14
Covered Call and Put Options............................... 15
Over-The-Counter Options................................... 18
Spread Transactions........................................ 19
Federal Tax Treatment of Options........................... 19
Certain Considerations Regarding Options................... 19
Asset Coverage for Futures and Options Positions........... 20
Low-Rated and Comparable Unrated Fixed Income Securities... 20
INVESTMENT RESTRICTIONS........................................... 22
DIRECTORS AND OFFICERS ........................................... 25
PRINCIPAL SHAREHOLDERS............................................ 26
MANAGEMENT OF THE FUNDS........................................... 26
FUND TRANSACTIONS AND BROKERAGE................................... 31
TAXES ......................................................... 33
DETERMINATION OF NET ASSET VALUE.................................. 33
SHAREHOLDER SERVICES.............................................. 34
Systematic Withdrawal Plan................................. 34
Automatic Investment Plan.................................. 34
General Procedures for Shareholder Accounts................ 35
Telephone Exchange Privilege and Automatic Exchange Plan... 35
SHAREHOLDER MEETINGS.............................................. 36
VALUATION OF FUND SECURITIES...................................... 37
PERFORMANCE INFORMATION........................................... 37
GENERAL INFORMATION............................................... 40
INDEPENDENT AUDITORS.............................................. 40
APPENDIX A........................................................ 41
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated May 24, 1995, and if given or made, such
information or representations may not be relied upon as having been authorized
by the Funds.
This Statement of Additional Information does not constitute an offer to sell
securities.
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INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Funds' investment
objectives, policies, and techniques that are described in detail in the
Prospectus under the captions "INVESTMENT OBJECTIVES AND POLICIES" and
"IMPLEMENTATION OF POLICIES AND RISKS".
Fixed Income Securities
The IMG Bond Fund is invested primarily in Fixed Income Securities. In addition
to its investments in Equity Securities, the IMG Core Stock Fund may also
invest, when a more conservative approach is warranted, in Fixed Income
Securities. These include, without limitation, the following:
1. U.S. government securities, including bills, notes, bonds, and other
debt securities differing as to maturity and rates of interest, which
are either issued or guaranteed by the U.S. Treasury or are issued or
guaranteed by U.S. government agencies or instrumentalities. U.S.
government agency securities include securities issued by (a) the
Federal Housing Administration, Farmers Home Administration, Export-
Import Bank of the United States, Small Business Administration, and
the Government National Mortgage Association, whose securities are
supported by the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right
of the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation,
whose securities are supported by the discretionary authority of the
U.S. government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, the
Interamerican Development Bank, and the International Bank for
Reconstruction and Development, whose securities are supported only by
the credit of such agencies. While the U.S. government provides
financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it always will do so
since it is not obligated by law. The U.S. government, its agencies and
instrumentalities do not guarantee the market value of their securities,
and consequently, the value of such securities may fluctuate.
2. Certificates of deposit issued against funds deposited in a bank or
savings and loan association. Such certificates are for a definite period
of time, earn a specified rate of return, and are normally negotiable. If
such certificates of deposit are nonnegotiable, they will be considered
illiquid securities and be subject to each Fund's 10 percent restriction
on investments in illiquid securities. Pursuant to the certificate of
deposit, the issuer agrees to pay the amount deposited plus interest to
the bearer of the certificate on the date specified thereon. Under
current FDIC regulations, the maximum insurance payable as to any one
certificate of deposit is $100,000; therefore, certificates of deposit
purchased by a Fund will not generally be fully insured.
3. Bankers' acceptances which are short-term credit instruments used to
finance commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated amount
of funds to pay for specific merchandise. The draft is then "accepted" by
a bank that, in effect, unconditionally guarantees to pay the face value
of the instrument on its maturity date. The acceptance may then be held
by the accepting bank as an asset or it may be sold in the secondary
market at the going rate of interest for a specific maturity.
4. Repurchase agreements which involve purchases of debt securities. In
such a transaction, at the time a Fund purchases the security, it
simultaneously agrees to resell and redeliver the security to the seller,
who also simultaneously agrees to buy back the security at a fixed price
and time. This assures a predetermined yield for the Fund during its
holding period since the resale price is always greater than the purchase
price and reflects an agreed-upon market rate. Such transactions
afford an opportunity for a Fund to invest temporarily available cash.
A Fund may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers' acceptances in which the Fund may
invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Fund is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement
provides that the Fund is entitled to sell the underlying collateral. If
the value of the collateral declines after the agreement is entered into,
however, and if the seller defaults under a repurchase agreement when
the value of the underlying collateral is less than the repurchase
price, the Fund could incur a loss of both principal and interest. The
value of the collateral is monitored at the time the transaction is
consummated and at all times during the term of the repurchase agreement
to insure that the value of the collateral always equals or exceeds the
agreed-upon repurchase price to be paid to the Fund. If the seller were
to become subject to a federal bankruptcy proceeding, the ability of
the Fund to liquidate the collateral could be delayed or impaired because
of certain provisions of the bankruptcy laws.
5. Bank time deposits, which are monies kept on deposit with banks or
savings and loan associations for a stated period of time at a fixed rate
of interest. There may be penalties for the early withdrawal of such time
deposits, in which case the yields of these investments will be reduced.
6. Commercial paper consists of short-term unsecured promissory notes,
including variable rate and master demand notes issued by corporations to
finance their current operations. Master demand notes are direct lending
arrangements between a Fund and the corporation. There is no secondary
market for the notes. However, they are redeemable by the Fund at any
time. In purchasing commercial paper, the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity ratios)
will be evaluated and will continuously be monitored because a Fund's
liquidity might be impaired if the corporation were unable to pay
principal and interest on demand. Investments in commercial paper
will be limited to commercial paper rated in the two highest categories
of a nationally recognized statistical rating organization ("NRSRO") or
unrated commercial paper which is of comparable quality.
Illiquid Securities
Each Fund may invest in illiquid securities, which include restricted securities
(privately placed securities) and other securities without readily available
market quotations. However, a Fund will not acquire such securities and other
illiquid securities or securities without readily available market quotations,
such as repurchase agreements maturing in more than seven days, options traded
in the over-the-counter market, and private issuer interest-only and
principal-only stripped mortgage-backed securities, if as a result they would
comprise more than 10 percent of the value of the Fund's net assets.
The Board of Directors has the ultimate authority to determine, to the extent
permissible under the federal securities laws, which securities are liquid or
illiquid for purposes of the 10 percent limitation. Certain securities exempt
from registration or issued in transactions exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), may be considered
liquid. The Board of Directors has delegated to the Advisor the day-to-day
determination of the liquidity of a security, although it has retained oversight
and ultimate responsibility for such determinations. Although no definitive
liquidity criteria are used, the Board of Directors has directed the Advisor to
look to such factors as (i) the nature of the market for a security (including
the institutional private resale market), (ii) the terms of certain securities
or other instruments allowing for the disposition to a third party or the issuer
thereof (e.g., certain repurchase obligations and demand instruments), (iii) the
availability of market quotations, and (iv) other permissible relevant factors.
Certain securities, such as repurchase obligations maturing in more than seven
days and other securities that are not readily marketable, are currently
considered illiquid.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act. Where registration is required, a Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in good faith
by the Board of Directors. If through the appreciation of illiquid securities or
the depreciation of liquid securities, a Fund should be in a position where more
than 10 percent of the value of its net assets are invested in illiquid assets,
including restricted securities which are not readily marketable, the Fund will
take steps as deemed advisable, if any, to protect liquidity.
Delayed Delivery Transactions
The Funds may buy and sell securities on a delayed delivery or when-issued
basis. (See "IMPLEMENTATION OF POLICIES AND RISKS -Delayed Delivery Securities
in the Prospectus.) These transactions involve a commitment by the Funds to
purchase or sell specific securities at a predetermined price and/or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered. The Funds may
receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed delivery basis, a Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for the securities until
the delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed delivery
purchases may result in a form of leverage. When delayed delivery purchases are
outstanding, the Fund will set aside liquid assets; i.e., readily marketable
debt securities, U.S. government securities and/or cash, in a segregated
custodial account to cover its purchase obligations. When a Fund has sold a
security on a delayed delivery basis, the Fund does not participate in further
gains or losses with respect to the security. If the other party to a delayed
delivery transaction fails to deliver or pay for the securities, the Fund could
miss a favorable price or yield opportunity, or could suffer a loss.
A Fund may dispose of or renegotiate delayed delivery transactions after they
are entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
Stripped Mortgage-Backed Securities
As described in the Prospectus, the Funds may invest a portion of their assets
in stripped mortgage-backed securities ("SMBS") which are derivative multiclass
mortgage securities issued by agencies or instrumentalities of the U.S.
government, or by private originators, or investors in mortgage loans, including
savings and loan institutions, mortgage banks, commercial banks and investment
banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest while the other class will
receive all of the principal. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities. The market value of the class
consisting primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates.
Reverse Repurchase Agreements
In a reverse repurchase agreement, a Fund sells a security to another party,
such as a bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, the Fund will maintain cash
and appropriate liquid assets; i.e., readily marketable debt securities and U.S.
government securities, in a segregated custodial account to cover its obligation
under the agreement. The Funds will enter into reverse repurchase agreements
only with parties whose creditworthiness is deemed satisfactory by the Funds'
Advisor, Investors Management Group ("IMG").
Securities Lending
Each of the Funds may seek to increase its income by lending Fund securities.
Such loans will usually be made only to member banks of the Federal Reserve
System and to member firms (and subsidiaries thereof) of the New York Stock
Exchange ("NYSE") and would be required to be secured continuously by collateral
in cash, cash equivalents, or U.S. government securities maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
Investment of the collateral underlying the Funds' securities lending activities
will be limited to short-term, liquid debt securities. A Fund would have the
right to call a loan and obtain the securities loaned at any time on customary
industry settlement notice (which will usually not exceed five days). During the
existence of a loan, a Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and would also
receive compensation based on investment of the collateral. A Fund would not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of their consent on a material matter affecting the investment. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower fail financially. However, the
loans would be made only to firms deemed to be of good standing, and when the
consideration which could be earned currently from securities loans of this type
justifies the attendant risk. The value of the securities loaned will not exceed
30 percent of the value of a Fund's total assets.
Loan Participations and Other Direct Indebtedness
Each of the Funds may purchase loan participations and other direct claims
against a borrower. In purchasing a loan participation, a Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. 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
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their rights against the borrower.
Alternately, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. A Fund may also purchase trade claims or other claims
against companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loan participations acquired by a Fund may involve revolving
credit facilities or other standby financing commitments which obligate the Fund
to pay additional cash on a certain date or on demand. These commitments may
have the effect of requiring the Fund to increase its investment in a company at
a time when the Fund might not otherwise decide to do so (including at a time
when the company's financial condition makes it unlikely that such amounts will
be repaid). To the extent that the Fund is committed to advance additional
funds, it will at all times hold and maintain in a segregated account cash or
other high grade debt obligations in an amount sufficient to meet such
commitments.
A Fund's ability to receive payment of principal, interest and other amounts due
in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
investments which the Funds will purchase, the Advisor will rely upon their own
credit analysis of the borrower (and not that of the original lending
institution). As a Fund may be required to rely upon another lending institution
to collect and pass on to the Fund amounts payable with respect to the loan and
to enforce the Fund's rights under the loan, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund from
receiving such amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the borrower and
the lending institution as an "issuer" of the loan participation for purposes of
certain investment restrictions pertaining to the diversification of the Fund's
investments. The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions.
Investments in such loans may involve additional risk 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. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies on the Advisor's research in an attempt to
avoid situations where fraud and misrepresentation could adversely affect the
Fund. In addition, loan participations and other direct investments may not be
in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Fund may be unable to sell such investments at an opportune time or may have
to resell them at less than fair market value. To the extent that the Advisor
determines that any such investments are illiquid, the Fund will include them in
the investment limitations on Illiquid Securities described above.
Futures Contracts
Each Fund may enter into interest rate futures contracts (hereinafter referred
to as "Futures" or "Futures Contracts"), as a hedge against changes in
prevailing levels of interest rates in order to establish more definitely the
effective return on securities held or intended to be acquired by the Fund. A
Fund's hedging may include sales of Futures as an offset against the effect of
expected increases in interest rates or decline in the market value of its
securities and purchases of Futures as an offset against the effect of expected
declines in interest rates.
A Fund will not enter into Futures Contracts for speculation and will, to the
extent required by regulatory authorities, enter only into Futures Contracts
which are traded on national futures exchanges and are standardized as to
maturity date and, if applicable, underlying financial instruments. The
principal futures exchanges in the United States are the Board of Trade of the
City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (the "CFTC.")
Although techniques other than sales and purchases of Futures Contracts could be
used to reduce a Fund's exposure to interest rate fluctuations, the Fund may be
able to hedge its exposure more effectively, and perhaps at a lower cost,
through using Futures Contracts, since Futures Contracts involve fewer
transaction costs than options on securities transactions.
A Fund will not enter into a Futures Contract if, as a result thereof, (i) more
than 30 percent of the Fund's net assets would be represented by Futures
Contracts (including the then current aggregate Futures market prices of
financial instruments required to be delivered under open Futures Contract sales
plus the then current aggregate purchase prices of financial instruments
required to be purchased under open Futures Contract purchases) or (ii) more
than 5 percent of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to initial margin deposits on
such Futures Contracts and options on Futures Contracts.
An interest rate Futures Contract provides for the future sale by one party and
purchase by another party of a specified amount of a specified instrument (debt
security) for a specified price at a designated date, time, and place.
Transactions costs are incurred when a Futures Contract is bought or sold and
margin deposits must be maintained. A Futures Contract may be satisfied by
delivery or purchase, as the case may be, of the instrument. More commonly,
Futures Contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching Futures Contract. If the offsetting
purchase price is less than the original sale price, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the Fund realizes a gain; if it
is less, the Fund realizes a loss. The transaction cost must also be included in
these calculations. There can be no assurance, however, that a Fund will be able
to enter into an offsetting transaction with respect to a particular Futures
Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract.
As an example of an offsetting transaction in which the underlying financial
instrument is not delivered pursuant to an interest rate Futures Contract, the
contractual obligations arising from the sale of one Futures Contract of
September Treasury Bills on an exchange may be fulfilled at any time before
delivery is required (i.e., on a specified date in September, the "delivery
month") by the purchase of one Futures Contract of September Treasury Bills on
the same exchange. In such instance, the difference between the price at which
the Futures Contract was sold and the price paid for the offsetting purchase,
after allowance for transaction costs, represents the profit or loss to the
Fund.
Persons who trade in Futures Contracts may be broadly classified as "hedgers"
and "speculators". Hedgers, such as the Funds, whose business activity involves
investment or other commitments in securities or other obligations, use the
Futures markets primarily to offset unfavorable changes in value that may occur
because of fluctuations in the value of the securities or obligations held or
expected to be acquired by them. Debtors and other obligors may also hedge the
interest cost of their obligations. The speculator, like the hedger, generally
expects neither to deliver nor to receive the financial instrument underlying
the Futures Contract, but, unlike the hedger, hopes to profit from fluctuations
in prevailing interest rates or financial markets.
A public market exists in interest rate Futures Contracts covering primarily the
following financial instruments: U.S. Treasury bonds; U.S. Treasury notes;
Government National Mortgage Association ("GNMA") modified pass-through
mortgage-backed securities; three-month U.S. Treasury bills; 90-day commercial
paper; bank certificates of deposit; and Eurodollar certificates of deposit. It
is expected that Futures Contracts trading in additional financial instruments
will be authorized. The standard contract size is generally $100,000 for Futures
Contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA pass-through
securities and $1,000,000 for the other designated Futures Contracts.
Each Fund's Futures transactions will be entered into for traditional hedging
purposes; that is, Futures Contracts will be sold to protect against a decline
in the price of securities that the Fund owns, or Futures Contracts will be
purchased to protect the Fund against an increase in the price of securities it
intends to purchase. As evidence of this hedging intent, the Fund expects that
approximately 75 percent of such Futures Contract purchases will be "completed";
that is, upon the sale of these long Futures Contracts, equivalent amounts of
related securities will have been or are then being purchased by the Fund in the
cash market.
Margin is the amount of funds that must be deposited by a Fund with its
custodian in a segregated account in the name of the futures commission merchant
in order to initiate Futures trading and to maintain the Fund's open positions
in Futures Contracts. A margin deposit is intended to ensure the Fund's
performance of the Futures Contract. The margin required for a particular
Futures Contract is set by the exchange on which the Futures Contract is traded,
and may be significantly modified from time to time by the exchange during the
term of the Futures Contract. Futures Contracts are customarily purchased and
sold on margins that may range upward from less than 5 percent of the value of
the Futures Contract being traded.
If the price of an open Futures Contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the Futures
Contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the Futures
Contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Fund. In computing daily net asset value, the Fund will
mark to market the current value of its open Futures Contracts. The Funds expect
to earn interest income on margin deposits.
The prices of Futures Contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and fluctuations in
the general level of stock prices, which in turn are affected by fiscal and
monetary policies and national and international political and economic events.
At best, the correlation between changes in prices of the Futures Contracts and
of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances such as: variation in
speculative market demand for Futures and for debt securities, including
technical influences in Futures trading and differences between the financial
instruments being hedged and the instruments underlying the standard Futures
Contracts available for trading. For example, in the case of interest rate
Futures Contracts, the interest rate levels, maturities and creditworthiness of
the issues underlying the Futures Contract may differ from the financial
instruments held in the Fund. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, interest rate or market
trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10
percent of the value of the Futures Contract is deposited as margin, a
subsequent 10 percent decrease in the value of the Futures Contract would result
in a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15 percent decrease would result
in a loss equal to 150 percent of the original margin deposit, if the Futures
Contract were closed out. Thus, a purchase or sale of a Futures Contract may
result in losses in excess of the amount initially invested in the Futures
Contract. However, a Fund would presumably have sustained comparable losses if,
instead of the Futures Contract, it had invested in the underlying financial
instrument and sold it after the decline.
Most United States Futures exchanges limit the amount of fluctuation permitted
in Futures Contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
Futures Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures Contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of Futures positions
and subjecting some Futures traders to substantial losses.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a Futures or Futures option position. The Fund would continue
to be required to meet margin requirements until the position is closed. In
addition, many of the contracts discussed above are relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist.
Federal Tax Treatment of Futures Contracts
For federal income tax purposes, each Fund is required to recognize at the end
of each taxable year its net unrealized gains and losses on Futures Contracts as
of the end of the year as well as those actually realized during the year.
Except for transactions in Futures Contracts which the taxpayer elects to
classify as part of a "mixed straddle", any gain or loss recognized with respect
to a Futures Contract is considered to be 60 percent long-term capital gain or
loss and 40 percent short-term capital gain or loss, without regard to the
holding period of the Futures Contract. In the case of a Futures transaction
classified as a "mixed straddle", the recognition of losses may be deferred to a
later taxable year.
Sales of Futures Contracts which are intended to hedge against a change in the
value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for each Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90 percent of its gross income for a
taxable year must be derived from qualifying income (i.e., dividends, interest,
income derived from loans of securities and gains from the sale of securities,
and other income (including gains on options and Futures Contracts)) derived
with respect to the Fund's business of investing in securities. In addition,
gains realized on the sale or other disposition of securities on Futures
Contracts held for less than three months must be limited to less than 30
percent of the Fund's annual gross income. It is anticipated that any net gain
realized from the closing out of Futures Contracts will be considered gain from
the sale of securities and therefore be qualifying income for purposes of the 90
percent requirement. For purposes of applying these tests any increase in value
on a position that is part of a designated hedge will be offset by any decrease
in value (whether or not realized) on any other position that is part of such
hedge. It is anticipated that unrealized gains on Futures Contracts, which have
been open for less than three months as of the end of a Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on
securities held less than three months for purposes of the 30 percent test.
Each Fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes (including unrealized gains
at the end of the Fund's fiscal year) on Futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments.
Stock Index Options
The IMG Core Stock Fund may (i) purchase stock index options for any purpose,
(ii) sell stock index options in order to close out existing positions, and/or
(iii) write covered options on stock indexes for hedging purposes. Stock index
options are put options and call options on various stock indexes. In most
respects, they are identical to listed options on common stocks. The primary
difference between stock options and index options occurs when index options are
exercised. In the case of stock options, the underlying security, common stock,
is delivered. However, upon the exercise of an index option, settlement does not
occur by delivery of the securities comprising the index. The option holder who
exercises the index option receives an amount of cash if the closing level of
the stock index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to the difference between the closing price of the stock
index and the exercise price of the option expressed in dollars times a
specified multiple.
A stock index fluctuates with changes in the market values of the stocks
included in the index. For example, some stock index options are based on a
broad market index, such as the Standard & Poor's 500 or the Value Line
Composite Index or a narrower market index, such as the Standard & Poor's 100.
Indexes may also be based on an industry or market segment, such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are currently traded on the following exchanges: the Chicago Board
Options Exchange, the NYSE, the American Stock Exchange, the Pacific Stock
Exchange and the Philadelphia Stock Exchange.
The IMG Core Stock Fund may purchase call and put options in an attempt to
either hedge against the risk of unfavorable price movements adversely affecting
the value of the Fund's securities, or securities the Fund intends to buy, or
otherwise in furtherance of the Fund's investment objective. The Fund will sell
(write) stock index options for hedging purposes or in order to close out
positions in stock index options which the Fund has purchased. The IMG Core
Stock Fund may only write "covered" options. The Fund may cover a call option on
a stock index it writes by, for example, having a portfolio of securities which
approximately correlates with the stock index.
Put options may be purchased in order to hedge against an anticipated decline in
stock market prices that might adversely affect the value of the Fund's
securities or in an attempt to capitalize on an anticipated decline in stock
market prices. If the Fund purchases a put option on a stock index, the amount
of the payment it receives upon exercising the option depends on the extent of
any decline in the level of the stock index below the exercise price. Such
payments would tend to offset a decline in the value of the Fund securities. If,
however, the level of the stock index increases and remains above the exercise
price while the put option is outstanding, the Fund will not be able to
profitably exercise the option and will lose the amount of the premium and any
transaction costs. Such loss may be offset by an increase in the value of the
Fund securities.
Call options on stock indexes may be purchased in order to participate in an
anticipated increase in stock market prices or to hedge against higher prices
for securities that the Fund intends to buy in the future. If the Fund purchases
a call option on a stock index, the amount of the payment it receives upon
exercising the option depends on the extent of any increase in the level of the
stock index above the exercise price. Such payments would in effect allow the
Fund to benefit from stock market appreciation even though it may not have had
sufficient cash to purchase the underlying stocks. Such payments may also offset
increases in the price of stocks that the Fund intends to purchase. If, however,
the level of the stock index declines and remains below the exercise price while
the call option is outstanding, the Fund will not be able to exercise the option
profitably and will lose the amount of the premium and transaction costs. Such
loss may be offset by a reduction in the price the Fund pays to buy additional
securities.
The use of stock index options by the IMG Core Stock Fund is subject to certain
risks. Successful use by the Fund of options on stock indexes will be subject to
the ability to correctly predict movements in the directions of the stock
market. This requires different skills and techniques than predicting changes in
the prices of individual securities. In addition, the Fund's ability to
effectively hedge all or a portion of the securities in its portfolio, in
anticipation of or during a market decline through transactions in put options
on stock indexes, depends on the degree to which price movements in the
underlying index correlate with the price movements in the Fund's securities.
Inasmuch as the Fund's securities will not duplicate the components of an index,
the correlation will not be perfect. Consequently, the Fund will bear the risk
that the prices of its securities being hedged will not move in the same amount
as the prices of the Fund put options on the stock indexes. It is also possible
that there may be a negative correlation between the index and the securities
which would result in a loss on both such Fund securities and the options on
stock indexes acquired by the Fund.
All index options purchased by the Fund will be listed and traded on a national
securities exchange. However, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options no secondary market may exist. If the Fund is unable
to effect a closing sale transaction with respect to options that it has
purchased, it would have to exercise the options in order to realize any profit.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying markets that cannot be reflected in
the options markets. The purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary Fund securities transactions. The purchase of stock index options
involves the risk that the premium and transaction costs paid by each Fund in
purchasing an option will be lost as a result of unanticipated movements in
prices of the securities comprising the stock index on which the option is
based.
In the case of transactions involving "non-equity options", each Fund will treat
any gain or loss arising from the lapse, closing out or exercise of such
positions as 60 percent long-term and 40 percent short-term gain or loss as
required by Section 1256 of the Internal Revenue Code (the "Code"). In addition,
such positions must be marked-to-market as of the last business day of the year
and gain or loss recognized for federal income tax purposes in accordance with
the 60/40 rule discussed above even though the position has not been terminated.
A "non-equity option" includes an option with respect to any group of stocks or
a stock index if there is in effect a designation by the Commodity Futures
Trading Commission of a contract market for a contract based on such group of
stocks or indexes. For example, transactions involving broad-based stock indexes
such as the Standard & Poor's 500 and 100 Indexes would be "non-equity options"
within the meaning of Code Section 1256.
Options on Futures
Each Fund may also purchase put and write call options on Futures Contracts and
enter into closing transactions with respect to such options to terminate an
existing position. A futures option gives the holder the right, in return for
the premium paid, to assume a long position (call) or short position (put) in a
Futures Contract at a specified exercise price prior to the expiration of the
option. Upon exercise of a call option, the holder acquires a long position in
the Futures Contract and the writer is assigned the opposite short position. In
the case of a put option, the opposite is true. Prior to exercise or expiration,
a futures option may be closed out by an offsetting purchase or sale of a
futures option of the same series.
Each Fund may use its options on Futures Contracts in connection with hedging
strategies. Generally, these strategies would be employed under the same market
and market sector conditions in which the Fund uses put and call options on
securities. (See "Covered Call and Put Options" below.) The purchase of put
options on Futures Contracts is analogous to the purchase of puts on securities
so as to hedge the Fund's securities against the risk of declining market
prices. The writing of a call option on a Futures Contract constitutes a partial
hedge against declining prices of the securities being hedged. If the futures
price at expiration of a written call option is below the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any decline that may have occurred in the Fund's holdings of
securities. If the futures price when the option is exercised is above the
exercise price, however, the Fund will incur a loss, which may be offset, in
whole or in part, by the increase in the value of the securities that were being
hedged.
As with investments in Futures Contracts, each Fund is also required to deposit
and maintain margin with respect to options on Futures Contracts written by it.
Such margin deposits will vary depending on the nature of the underlying Futures
Contracts (and the related initial margin requirements), the current market
value of the option and other futures positions held by each Fund.
The risks associated with the use of options on Futures Contracts include the
risk that a Fund may close out its position as a writer of an option only if a
liquid secondary market exists for such options, which cannot be assured. The
Fund's successful use of options on Futures Contracts also depends on the
ability to correctly predict the movement in prices of Futures Contracts and the
underlying instruments, which may prove to be incorrect. In addition, there may
be imperfect correlation between the instruments being hedged and the Futures
Contract subject to the option. (See "Futures Contracts".)
Neither Fund will purchase or write options on Futures Contracts if, as a result
(i) the aggregate market value of all Fund securities covering the Fund's
options (including options on Futures Contracts and Fund securities) exceeds 25
percent of the Fund's net assets; (ii) the value of all options (including
options on Futures Contracts and Fund securities) exceeds 5 percent of the
Fund's total assets; (iii) the aggregate premiums paid for all options
(including options on Futures Contracts and Fund securities) held exceeds 5
percent of the Fund's net assets; or (iv) more than 5 percent of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to initial margin and premiums paid on Futures Contracts and
options on Futures Contracts.
Covered Call and Put Options
Each Fund may write (sell) covered call options and purchase options to close
out options previously written by the Fund. The purpose of writing covered call
options is to reduce the effect of price fluctuations of the securities owned by
the Fund (and involved in the options) on the Fund's net asset value per share.
Although premiums may be generated through the use of covered call options, the
Advisor does not consider such premiums as the primary reason for writing
covered call options.
A call option gives the holder (buyer) the right to purchase a security at a
specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, such writer may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring the writer to deliver the
underlying security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by repurchasing the option the
writer previously sold. To secure the writer's obligation to deliver the
underlying security in the case of a call option, the writer is required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the clearing corporations and of the exchanges. A put option gives the
holder (buyer) the right to sell a security at a specified price (the exercise
price) at any time until a certain date (the expiration date). A Fund will only
write covered call options and purchase covered put options. This means that the
Fund will only write a call option or purchase a put option on a security that
the Fund already owns. The Fund will not write call options on when-issued
securities. The Fund will write covered call options and purchase covered put
options in standard contracts, which may be quoted on NASDAQ or on national
securities exchanges, or write covered call options with and purchase covered
put options directly from investment dealers meeting the creditworthiness
criteria of the Advisor. In order to comply with the requirements of the
securities laws in several states, a Fund will not write a covered call option
or purchase a put option on Fund securities if, as a result, (i) the aggregate
market value of all Fund securities covering the Fund's options (including
options on Futures Contracts and Fund securities) exceeds 25 percent of the
Fund's net assets; (ii) the value of all options (including options on Futures
Contracts and Fund securities) exceeds 5 percent of the Fund's total assets; or
(iii) the aggregate premiums paid for all options (including options on Futures
Contracts and Fund securities) held exceeds 5 percent of the Fund's net assets.
Securities on which put options will be purchased and call options may be
written will be purchased solely on the basis of investment considerations
consistent with each Fund's investment objective. The writing of covered call
options is a conservative investment technique believed to involve relatively
little risk (in contrast to the writing of naked or uncovered options, which the
Funds will not do), but capable of enhancing each Fund's total return. When
writing a covered call option, the Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price of
the security decline. If a call option which the Fund has written expires, the
Fund will realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security. Each Fund will purchase put
options involving Fund securities only when a temporary defensive position is
desirable in light of market conditions and the Fund will hold the Fund
security. As a result, the purchase of put options will be utilized to protect a
Fund's holdings in an underlying security against a substantial decline in
market value. Such protection is, of course, only provided during the life of
the put option when a Fund, as the holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. By using put options in this manner, the
Funds will reduce any profit they might otherwise have realized in their
underlying security by the premium paid for the put option and by transaction
costs. The securities covering the call option will be maintained in a
segregated account of the Custodian. The Funds do not consider a security
covered by a call option or put option to be "pledged" as that term is used in
each Fund's policy limiting the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium a Fund will
receive from writing a call option will reflect, among other things, the current
market price of the underlying security, the relationship of the exercise price
to such market price, the historical price volatility of the underlying
security, the length of the option period, the general supply of and demand for
credit and the general interest rate environment. The premium received by the
Fund for writing covered call options will be recorded as a liability in the
Fund's Statement of Assets and Liabilities. This liability will be adjusted
daily to the option's current market value, which will be the latest sale price
at the time at which the net asset value per share of the Fund is computed
(close of the New York Stock Exchange), or, in the absence of such sale, the
latest asked price. The liability will be extinguished upon expiration of the
option, the purchase of an identical option in a closing transaction or delivery
of the underlying security upon the exercise of the option.
The premium paid by each Fund when purchasing a put option will be recorded as
an asset in the Fund's Statement of Assets and Liabilities. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest bid price. The asset will be extinguished upon expiration of
the option, the selling (writing) of an identical option in a closing
transaction or the delivery of the underlying security upon the exercise of the
option.
Each Fund will only purchase a call option to close out a covered call option it
has written. A Fund will only write a put option to close out a put option it
has purchased. Such closing transactions will be effected in order to realize a
profit on an outstanding call or put option, to prevent an underlying security
from being called or put, or to permit the sale of the underlying security.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option or purchased a
put option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no assurance
that the Fund will be able to effect such closing transactions at a favorable
price. If the Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case it would
continue to be at market risk on the security. This could result in higher
transaction costs, including brokerage commissions. The Fund will pay brokerage
commissions in connection with the writing or purchase of options to close out
previously written options. Such brokerage commissions are normally higher than
the transaction costs applicable to purchases and sales of Fund securities.
Call options written by each Fund will normally have expiration dates between
three and nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, the Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it rather than delivering such security from
its portfolio. In such cases additional transaction costs will be incurred.
A Fund will realize a profit or loss from a closing purchase transaction if the
cost of the transaction is less or more than the premium received from the
writing of the call option; however, any loss so incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different call or put option. Also, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
Over-The-Counter Options
Subject to restrictions on investments in Illiquid Securities, and its own
investment limitations, each Fund may invest in over-the-counter options. Unlike
transactions entered into by the Funds in Futures Contracts or exchange-traded
options, over-the-counter options on securities are not traded on contract
markets regulated by the CFTC or the United States Securities and Exchange
Commission ("SEC"). To the contrary, such instruments are traded through
financial institutions acting as market-makers. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer could lose amounts substantially in excess
of their initial investments, due to the margin and collateral requirements
associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and a Fund could be required to retain options
purchased or written, until exercise, expiration or maturity. This in turn could
limit the Fund's ability to profit from open positions or to reduce losses
experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and a Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency, metal or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. A
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Advisor.
Spread Transactions
Each Fund may purchase from securities dealers covered spread options. Such
covered spread options are not presently exchange listed or traded. The purchase
of a spread option gives the Fund the right to put or sell a security that it
owns at a fixed dollar spread or fixed yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. The risk
to the Fund in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect the Fund against adverse changes in prevailing
credit quality spreads (i.e., the yield spread between high-quality and
lower-quality securities). Such protection is only provided during the life of
the spread option. The security covering the spread option will be maintained in
a segregated account by the Fund's custodian. The Funds do not consider a
security covered by a spread option to be "pledged" as that term is used in each
Fund's policy limiting the pledging or mortgaging of its assets.
Federal Tax Treatment of Options
Certain option transactions have special tax results. Expiration of a call
option written by a Fund will result in a short-term capital gain. If the call
option is exercised, the Fund will realize a gain or loss from the sale of the
security covering the call option, and in determining such gain or loss the
premium will be included in the proceeds of the sale.
If a Fund writes options other than "qualified covered call options", as defined
in the Code or purchases puts, any losses on such options transactions, to the
extent they do not exceed the unrealized gains on the securities covering the
options, may be subject to deferral until the securities covering the options
have been sold.
In the case of transactions involving "non-equity options" and options on
Futures Contracts, a Fund will treat any gain or loss arising from the lapse,
closing out or exercise of such positions as 60 percent long-term and 40 percent
short-term gain or loss as required by Section 1256 of the Code. In addition,
such positions must be marked-to-market as of the last business day of the year
and gain or loss recognized for federal income tax purposes in accordance with
the 60/40 rule discussed above even though the position has not been terminated.
Certain Considerations Regarding Options
There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or elsewhere may exist. The writing and
purchasing of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Fund
securities transactions. Imperfect correlation between the options and
securities markets may detract from the effectiveness of attempted hedging.
Options transactions may result in significantly higher transaction costs and
portfolio turnover for a Fund.
Asset Coverage for Futures and Options Positions
Each Fund will comply with regulatory requirements of the SEC and the CFTC with
respect to coverage of options and futures positions by registered investment
companies. The Funds will set aside cash, and other liquid, high grade debt
securities in a segregated custodial account to cover their obligations under
options and futures transactions. Securities held in a segregated account cannot
be sold while the futures or options position is outstanding, unless replaced
with other permissible assets. As a result, there is a possibility that the
segregation of a large percentage of the Fund's assets may force the Fund to
close out futures and options positions and/or liquidate other Fund securities,
any of which may occur at disadvantageous prices, in order for the Fund to meet
redemption requests or other current obligations.
Low-Rated and Comparable Unrated Fixed Income Securities
The IMG Bond Fund may invest up to 25 percent of its total assets in
non-Investment-Grade Debt Securities. Non-Investment-Grade Debt Securities
(hereinafter referred to as "junk bonds" or "low-rated and comparable unrated
securities") include (i) bonds rated as low as "Ba" by Moody's Investors
Service, Inc. ("Moody's"), or "BB" by Standard & Poor's Corporation ("S&P"),
Fitch Investors Services, Inc. ("Fitch") or Duff & Phelps, Inc. ("D&P") or of
similar quality by another NRSRO; and (ii) unrated debt securities of comparable
quality.
Low-rated and comparable unrated securities, while generally offering higher
yields than investment-grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with such
investments are discussed below. Refer to Appendix B of this Statement of
Additional Information for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated and
comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
low-rated and comparable unrated securities tend to reflect individual corporate
development to a greater extent than do higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Low-rated and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risk than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of low-rated and comparable unrated securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations may also be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by an issuer of low-rated and
comparable unrated securities is significantly greater than that of issuers of
higher-rated securities because such securities are generally unsecured and are
often subordinated to other creditors. Further, if the issuer of a low-rated and
comparable unrated security defaulted, the Fund might incur additional expenses
to seek recovery. Periods of economic uncertainty and changes would also
generally result in increased volatility in the market prices of low-rated and
comparable unrated securities and thus in the Fund's net asset value.
As previously stated, the value of such a security will decrease in a rising
interest rate market and accordingly, so will the Fund's net asset value. If the
Fund experiences unexpected net redemptions in such a market, it may be forced
to liquidate a portion of its Fund securities without regard to their investment
merits. Due to the limited liquidity of high-yield securities (discussed below)
the Fund may be forced to liquidate these securities at a substantial discount.
Any such liquidation would reduce the Fund's asset base over which expenses
could be allocated and could result in a reduced rate of return for the Fund.
Payment Expectations. Low-rated and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at their discretion,
redeem the securities. During periods of falling interest rates, issuers of
high-yield securities are likely to redeem or prepay the securities and
refinance them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, the Fund
may have to replace the securities with a lower-yielding security, which would
result in a lower return for the Fund.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of low-rated and comparable
unrated securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit-rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in low-rated and comparable unrated securities will be more
dependent on the credit analysis than would be the case with investments in
investment-grade debt securities. The Advisor employs its own credit research
and analysis, which includes a study of existing debt, capital structure,
ability to service debt and to pay dividends, the issuer's sensitivity to
economic conditions, its operating history, and the current trend of earnings.
The Advisor continually monitors the investments owned by the Funds and
carefully evaluates whether to dispose of or to retain low-rated and comparable
unrated securities whose credit ratings or credit quality may have changed.
Liquidity and Valuation. The Fund may have difficulty disposing of
certain low-rated and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
low-rated and comparable unrated securities, there is no established retail
secondary market for many of these securities. The Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. As a result,
the Fund's asset value and the Fund's ability to dispose of particular
securities, when necessary to meet the Fund's liquidity needs or in response to
a specific economic event, may be impacted. The lack of a liquid secondary
market for certain securities may also make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing the Fund's securities.
Market quotations are generally available on many low-rated and comparable
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. During periods
of thin trading, the spread between bid and asked prices is likely to increase
significantly. In addition, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
low-rated and comparable unrated securities, especially in a thinly-traded
market.
New and Proposed Legislation. Legislation has been adopted and, from
time to time, proposals have been discussed regarding new legislation designed
to limit the use of certain low-rated and comparable unrated securities by
certain issuers. An example of legislation is a recent law which requires
federally insured savings and loan associations to divest their investment in
these securities over time. New legislation could further reduce the market
because such securities, generally, could negatively affect the financial
condition of the issuers of high-yield securities, and could adversely affect
the market in general. It is not currently possible to determine the impact of
the recent legislation on this market. However, it is anticipated that if
additional legislation is enacted or proposed, it could have a material effect
on the value of low-rated and comparable unrated securities and the existence of
a secondary trading market for the securities.
INVESTMENT RESTRICTIONS
The Prospectus sets forth the investment objectives and policies applicable to
each Fund under the caption "INVESTMENT OBJECTIVES AND POLICIES". The following
is a list of investment restrictions applicable to each Fund. If a percentage
limitation is adhered to at the time of an investment by a Fund, a later
increase or decrease in percentage resulting from any change in value or net
assets will not result in a violation of the restriction.
Neither Fund's "fundamental" investment restrictions may be changed by that Fund
without the approval of a majority of its shareholders, which means the vote at
any shareholder meeting of the Fund, of (i) 67 percent or more of the shares
present or represented by proxy at the meeting (if holders of more than 50
percent of the outstanding shares are present or represented by proxy) or (ii)
more than 50 percent of the outstanding shares, whichever is less. However,
except for the fundamental investment limitations set forth below, the
investment policies and limitations described in this Statement of Additional
Information are not fundamental, and may be changed without shareholder
approval.
Except as otherwise stated, the following fundamental restrictions apply to both
Funds. The Funds may not individually:
1. Purchase the securities of any issuer if such purchase would cause more
than 5 percent of the value of 75 percent of the Fund's total assets to
be invested in securities of any one issuer (except securities of the
U.S. government or any instrumentality thereof), or purchase more than 10
percent of the outstanding voting securities of any one issuer, or more
than 10 percent of the outstanding securities of any class.
2. Borrow money except for temporary or emergency purposes (but not for the
purpose of purchasing investments) and then, only in an amount not to
exceed 25 percent of the value of a Fund's net assets at the time the
borrowing is incurred; provided, however, that a Fund may enter into
transactions in options, futures and options on futures. A Fund will not
purchase securities when borrowings exceed 5 percent of its total assets.
If a Fund borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. To this extent, purchasing
securities when borrowings are outstanding may involve an element of
leverage.
3. Invest in commodities or physical commodity contracts. However, the
Funds may purchase and sell financial futures contracts and options on
such contracts.
4. Make loans, except that the Funds may (i) purchase and hold debt
obligations in accordance with their investment objectives and policies,
(ii) enter into repurchase agreements, and (iii) lend Fund securities
against collateral (consisting of cash or securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities) equal at all
times to not less than 100 percent of the value of the securities loaned
provided no such loan may be made if as a result the aggregate of such
loans of a Fund's securities exceeds 30 percent of the value of the
Fund's total assets.
5. Invest in real estate, although they may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.
6. Issue senior securities, bonds or debentures.
7. Underwrite securities of other issuers, except to the extent a Fund may
be deemed to be an underwriter in connection with the sale of securities
held by it.
8. Invest in the securities of a company for the purpose of exercising
control or management.
9. Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any securities
on margin, except that it may obtain such short-term credits as are
necessary for the clearance of transactions. The deposit or payment of
margin in connection with transactions in options and financial futures
contracts is not considered the purchase of securities on margin.
10. Concentrate investments in any industry. However, a Fund may invest
up to 25 percent of the value of its total assets in any one industry.
The following limitations are not fundamental and may be changed without
shareholder approval. The Funds do not currently intend to:
A. Purchase securities of any company having less than three years of
continuous operation (including the operations of any predecessors) if
the purchase would cause the value of a Fund's investments in all such
companies to exceed 5 percent of the value of its net assets.
B. Enter into a Futures Contract or an option thereon unless if, as a result
thereof, (i) the then current aggregate futures market prices of
instruments required to be delivered under open Futures Contract sales
plus the then current aggregate purchase prices of instruments required
to be purchased under open Futures Contract purchases would not exceed 30
percent of a Fund's net assets (taken at market value at the time of
entering into the contract) and (ii) not more than 5 percent of a Fund's
total assets (taken at market value at the time of entering into the
contract) would be committed to initial margin and premiums paid on
Futures Contracts or options on Futures Contracts. Transactions in
Futures Contracts or options thereon may be entered into only for hedging
purposes.
C. Engage in the purchase and sale of put, spread or call options on
specific securities or Futures Contracts, or engage in writing such
options, except that a Fund may, subject to the provisions of Items B and
D, (i) purchase warrants where the grantor of the warrants is the issuer
of the underlying securities, provided that not more than 5 percent of a
Fund's net assets may be invested in such warrants; (ii) purchase covered
spread options, provided that the value of such options at any time does
not exceed 5 percent of a Fund's net assets; (iii) write covered call
options, and purchase covered put options with respect to all of its Fund
securities and enter into closing transactions with respect to such
options; and (iv) write call options and purchase put options on Futures
Contracts and enter into closing transactions with respect to such
options.
D. Purchase or write options on specific securities, Futures Contracts and
indexes if as a result thereof, (i) the aggregate market value of all
Fund securities covering such options (including options on Futures
Contracts and Fund securities) exceeds 25 percent of a Fund's net assets;
(ii) the value of all such options (including options on Futures
Contracts and Fund securities) exceeds 5 percent of a Fund's total
assets; (iii) the aggregate premiums paid for all such options (including
options on Futures Contracts and Fund securities) held exceeds 5 percent
of a Fund's net assets; or (iv) more than 5 percent of the Fund's total
assets (taken at market value at the time of entering into the contract)
would be committed to initial margin and premiums paid on Futures
Contracts and options on Futures Contracts.
E. Invest more than 10 percent of any Fund's total assets in securities of
other open-end investment companies, invest more than 5 percent of total
assets in the securities of any one investment company, or acquire more
than 3 percent of the outstanding voting securities of any one investment
company except in connection with a merger, consolidation or plan of
reorganization.
F. Borrow money, except (a) from a bank or (b) by engaging in reverse
repurchase agreements with any party (reverse repurchase agreements are
treated as borrowings for purposes of fundamental investment limitation
(2)). A Fund may not purchase any security while borrowings representing
more than 5 percent of its total assets are outstanding.
G. Purchase or retain securities issued by an issuer, any of whose officers
or directors or security holders is an Officer or Director of the Fund or
its Advisor if, or so long as, the Officers and Directors of the Fund and
of the Advisor together own beneficially more than 5 percent of any class
of securities of the issuer.
H. Invest in oil, gas or other mineral exploration or development programs,
although the Funds may invest in securities of issuers which invest in or
sponsor such programs.
For further discussion of the limitations of each Fund's investments which are
not fundamental and may be changed without shareholder approval, see "INVESTMENT
POLICIES AND TECHNIQUES" above.
DIRECTORS AND OFFICERS
Directors and Officers, together with information as to their principal business
occupations during the last five years, and other information are shown below.
Each Director who is deemed an "interested person", as defined in the Investment
Company Act, is indicated by an asterisk.
*David W. Miles, Chairman of the Board and Director.
President, Treasurer and Senior Managing Director, Investors Management
Group, and IMG Financial Services, Inc.
*Mark A. McClurg, President and Director.
Vice President, Secretary and Senior Managing Director, Investors
Management Group, and IMG Financial Services, Inc.
*James W. Paulsen, Vice President, Treasurer and Director.
Senior Managing Director, Investors Management Group, and IMG Financial
Services, Inc.
*Richard A. Westcott, Director.
Chairman, Investors Management Group, and IMG Financial Services, Inc.
David Lundquist, Director.
Vice Chairman and CFO, New Heritage Association 1991-1995; Executive Vice
President, Heritage Communications 1980-1990.
Johnny Danos, Director.
President, Danos, Inc., a personal investment company, 1994-1995; Audit
Partner, KPMG Peat Marwick, 1963-1994.
Debra Johnson, Director.
CFO and Treasurer, Business Publications Corporation/Iowa Title Company,
1990-1995; CFO, Chart Services, Ltd., an industrial hygiene consulting
firm, 1989-1990.
Robert A. Dee, Director.
Vice Chairman, HMA, Inc., an insurance agency, 1960-1995.
Edward J. Stanek, Director.
CEO, Iowa Lottery, 1985-1995.
Ruth L. Prochaska, Secretary.
Controller / Compliance Officer, Investors Management Group, and IMG
Financial Services, Inc.
The address for Messrs. Miles, McClurg, Westcott and Paulsen, and Ms. Prochaska
is 2203 Grand Avenue, Des Moines, Iowa 50312-5338.
As of the date hereof, Officers and Director beneficially owned no shares of
common stock of the Fund.
Directors and Officers of the Fund who are officers, directors, employees, or
stockholders of the Advisor do not receive any remuneration from the Fund for
serving as Directors or Officers. Those Directors of the Funds who are not so
affiliated with the Advisor receive $250 for each Board of Directors meeting
attended, plus reimbursement for out-of-pocket expenses in attending meetings.
PRINCIPAL SHAREHOLDERS
As of the date hereof, no persons owned of record or are known to own of record
more than 5 percent of any Fund's shares other than the Advisor, Investors
Management Group, which is the only shareholder.
MANAGEMENT OF THE FUNDS
The Advisor
The Funds' advisor is Investors Management Group ("IMG" or the "Advisor"), a
registered investment advisor incorporated in the state of Iowa A brief
description of the Funds' investment advisory agreement is set forth in the
Prospectus under "MANAGEMENT".
The Advisory Agreement, (the "Advisory Agreement"), was approved by the initial
shareholder on November 17, 1994. The Advisory Agreement is required to be
approved annually by the Board of Directors of the Funds or by a vote of a
majority of the Funds' outstanding voting securities (as defined in the
Investment Company Act). In either case, each annual renewal must be approved by
the vote of a majority of the Funds' Directors who are not parties to the
Advisory Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement is terminable, without penalty, on 60 days' written notice by the
Board of Directors of the Funds, by vote of a majority of the Funds' outstanding
voting securities, or by IMG. In addition, the Advisory Agreement will terminate
automatically in the event of its assignment.
Under the terms of the Advisory Agreement, IMG is responsible for all day-to-day
management of the Funds, subject to the supervision of the Funds' Board of
Directors.
The IMG Core Stock Fund is co-managed by James W. Paulsen, Ph.D. and James T.
Richards. The IMG Bond Fund is co-managed by James W. Paulsen, Ph.D., Jeffrey
D. Lorenzen, CFA, and Kathryn D. Beyer, CFA. The following is certain
biographical information concerning the co-managers:
James W. Paulsen, Ph.D., Senior Managing Director. Dr. Paulsen is the
firm's chief portfolio strategist and chairs IMG's Investment Policy
Committee. Prior to joining IMG in 1991, Dr. Paulsen served as
president of a Cedar Rapids, Iowa investment firm managing over $700
million from 1983 to 1991. Dr. Paulsen received his Bachelor of
Science degree in economics and his Doctorate in economics from Iowa
State University.
James T. Richards, Managing Director. Mr. Richards is IMG's chief
equity strategist, and is a member of IMG's Investment Policy
Committee. Prior to joining IMG in 1991, he served as vice
president and managing director--equities, for a Cedar Rapids, Iowa
investment firm from 1985 to 1991. Mr. Richards received his Master of
Business Administration from the University of Iowa and his Bachelor of
Arts degree in economics from Coe College.
Jeffrey D. Lorenzen, CFA, Managing Director. Mr. Lorenzen is a fixed
income strategist and is a member of IMG's Investment Policy Committee.
Prior to joining IMG in 1992, his experience includes serving as a
securities analyst and corporate fixed income analyst for The Statesman
Group from 1989 to 1992. He received his Master of Business
Administration from Drake University and his Bachelor of Business
Administration degree from the University of Iowa.
Kathryn D. Beyer, CFA, Managing Director. Ms. Beyer is a fixed
income strategist and is a member of IMG's Investment Policy
Committee. Prior to joining IMG in 1993, her experience includes
serving as a securities analyst and director of mortgage-backed
securities for Central Life Assurance Company from 1988 to 1993. Ms.
Beyer received her Master of Business Administration from Drake
University and her Bachelor of Science degree in agricultural
engineering from Iowa State University.
IMG is responsible for investment decisions and supplies investment research and
Fund management. At its expense, IMG provides office space and all necessary
office facilities, equipment, and personnel for servicing the investments of the
Funds.
Except for the expenses expressly assumed by IMG as set forth above or as
described below with respect to the distribution of the Funds' shares, the Funds
are responsible for all their other expenses, including, without limitation,
governmental fees, interest charges, taxes, membership dues in the Investment
Company Institute allocable to the Funds, brokerage commissions, and other
expenses connected with the execution, recording and settlement of Fund security
transactions; expenses of repurchasing and redeeming shares and servicing
shareholder accounts; expenses of registering or qualifying shares for sale;
expenses for preparing, printing and distributing periodic reports, notices and
proxy statements to shareholders and to governmental officers and commissions;
insurance premiums; fees and expenses of the Funds' custodian including
safekeeping of funds and securities and maintaining required books and
accounting; expenses of calculating the net asset value of shares of the Funds;
fees and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Funds; compensation and
expenses of Directors who are not "interested persons" of the Advisor; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Funds and the preparation,
printing and mailing of prospectuses are borne by the Funds except that the
Funds' Distribution Agreement with IMG Financial Services, Inc. requires IMG
Financial Services, Inc. to pay for prospectuses that are to be used for sales
purposes.
As compensation for its services, the Funds pay to the Advisor a monthly
management fee at an annual rate of 0.50 percent and 0.30 percent of average net
assets of the IMG Core Stock Fund and the IMG Bond Fund respectively. (See
"ADDITIONAL INVESTMENT INFORMATION -- Calculation of Net Asset Value" in the
Prospectus.) From time to time, IMG may voluntarily waive all or a portion of
their management fees for one or more of the Funds. The organizational expenses
of the Funds were borne by IMG and will not be reimbursed by the Funds.
The Advisory Agreement requires IMG to reimburse the Funds in the event that the
expenses and charges payable by the Funds in any fiscal year, including the
advisory fee but excluding taxes, interest, brokerage commissions, and similar
fees, exceed that percentage of the average net asset value of the Funds for
such year, which is the most restrictive percentage provided by the state laws
of the various states in which the Funds' common stock is qualified for sale.
Such excess is determined by valuations made as of the close of each business
day of the year. No percentage limitation is currently applicable to the Funds.
Reimbursement of expenses in excess of the applicable limitation will be made on
a monthly basis and will be paid to the Funds by reduction of the Advisor's fee,
subject to later adjustment, month by month, for the remainder of the Funds'
fiscal year. IMG may from time to time voluntarily absorb expenses for the Funds
in addition to the reimbursement of expenses in excess of applicable
limitations.
The Distributor
The Directors of the Funds have adopted a Distribution Plan (the "Distribution
Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder,
after having concluded that there was a reasonable likelihood that the
Distribution Plan would benefit the Funds and the shareholders of the Funds. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Funds. Such an increase may reduce the expense ratio to the extent
the Funds' fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Funds required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Funds will increase or that the
other benefits referred to above will be realized.
The Distribution Plan provides that the Funds shall pay IMG Financial Services,
Inc. ("IFS"), as the Funds' distributor, a daily distribution fee payable
monthly and equal on an annual basis to 0.40 percent of the average daily net
assets of Investor Shares of the IMG Core Stock Fund, 0.25 percent of Investor
Shares of the IMG Bond Fund, and 0.15 percent of Select Shares of each Fund. The
purpose of such payments is to compensate IFS for its distribution services to
the Funds. IFS pays the cost of fees to broker-dealers, and for expenses of
printing prospectuses and reports used for sales purposes, expenses of the
preparation and printing of sales literature and other distribution-related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, of personnel, travel, office expenses and
equipment.
In accordance with Rule 12b-1, all agreements relating to the Distribution Plan
entered into between either the Funds or IFS and other organizations must be
approved by the Funds' Board of Directors, including a majority of the Directors
who are not "interested persons" of the Funds (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to such Plan ("Qualified
Directors"). The Distribution Plan further provides that the selection and
nomination of Qualified Directors shall be committed to the discretion of the
non-interested Directors then in office.
The Distribution Plan requires that the Funds shall provide to the Directors,
and the Directors shall review, at least quarterly, a written report of the
amounts expended (and purposes therefor) under the Distribution Plan. The
Distribution Plan may be terminated at any time by vote of a majority of the
Qualified Directors or by vote of the holders of a majority of the shares of the
Funds (as defined in "Investment Restrictions" above). The Distribution Plan may
not be amended to increase materially the amount of permitted distribution
expenses without the approval of shareholders and may not be materially amended
in any case without a vote of the majority of both the Directors and the
Qualified Directors.
As the distributor of the Funds, IFS acts as agent in selling shares of the
Funds to dealers. From time to time, IFS, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to dealers
which sell shares of the Funds. Such concessions provided by IFS may include
financial assistance to dealers in connection with preapproved conferences or
seminars, sales or training programs for invited registered representatives,
payment for travel expenses, including lodging, incurred by registered
representatives and members of their families to various locations for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds and/or other dealer-sponsored events. In
some instances, these concessions may be offered to dealers or only to certain
dealers who have sold or may sell, during specified periods, certain minimum
amounts of shares of the Funds. No other concessions will be offered to the
extent prohibited by the laws of any state or any self-regulatory agency, such
as the National Association of Securities Dealers, Inc. Neither IFS nor dealers
are permitted to delay placing orders to benefit themselves by a price change.
The Funds have entered into a Distribution Agreement (the "Distribution
Agreement"), with IFS in accordance with the provisions of the Distribution
Plan. Under the Agreement IFS will serve as distributor for the continuous
offering of shares of the Funds. The public offering price of shares of each
Fund is their net asset value next computed after the sale (see "HOW TO INVEST"
in the Prospectus). The Distribution Agreement will continue in effect only if
such continuance is specifically approved at least annually by vote of both a
majority of the Directors and a majority of the Qualified Directors of the
Funds. The Distribution Agreement will be terminated automatically if assigned,
and may be terminated at any time by a majority of the Qualified Directors or by
vote of the holders of a majority of the shares of the Funds.
Administrative Services Agreement
IMG provides information and administrative services for shareholders of the
Funds pursuant to a Shareholder Services Plan and Administrative Services
Agreement (the "Administrative Services Agreement"). IMG may enter into related
arrangements with various financial services firms, such as broker-dealer firms
or banks ("firms"), that provide services and facilities for their customers or
clients who are shareholders of the Funds. Such administrative services and
assistance may include, but are not limited to, establishing and maintaining
shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Funds and their special
features and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. IMG bears all its expenses
of providing services pursuant to the Administrative Services Agreement,
including the payment of any services fees. For services under the
Administrative Services Agreement, the Funds pay IMG a fee, payable monthly, at
the annual rate of up to 0.25 percent of average daily net assets of Investor
Shares of each Fund, 0.25 percent of Select Shares of the IMG Core Stock Fund,
0.15 percent of Select Shares of the IMG Bond Fund, 0.15 percent of
Institutional Shares of the IMG Core Stock Fund, and 0.10 percent of
Institutional Shares of the IMG Bond Fund. IMG may then pay each firm a service
fee at an annual rate up to the amount received by IMG for net assets of those
accounts in the Funds that the Firm maintains and services. A firm becomes
eligible for the service fee based on assets in the accounts in the month
following the month of purchase and the fee continues until terminated by IMG or
the Funds. The fees are calculated monthly and paid quarterly.
Shareholder Services Plan
Pursuant to the "Shareholder Services Plan", adopted by the Board of Directors
and reviewed at least annually, IMG may enter into related arrangements with
various financial services firms that provide services and facilities for their
customers or clients who are shareholders of the Funds. Such administrative
services and assistance may include, but are not limited to, establishing and
maintaining shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Funds and their special
features and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. As long as the
Administrative Services Agreement or any Amendment thereto shall remain in
effect, it is understood that IMG shall be paid fees as set forth in the
Administrative Services Agreement. Unless otherwise specifically approved by the
Board of Directors, IMG shall be solely responsible for all costs and expenses
incurred by it in delivery of such services and its sole compensation shall be
the receipt of its fees.
IMG also may provide some of the above services and may retain any portion of
the fee under the Administrative Services Agreement not paid to firms to
compensate itself for administrative functions performed for the Funds.
Shareholder Servicing, Transfer and Dividend Disbursing Agent
IMG provides shareholder servicing, transfer agency and dividend disbursing
services pursuant to a Transfer Agent, Dividend Disbursing Agent, and
Shareholder Servicing Agent Agreement with the Funds (the "Agency Agreement").
IMG's responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of the shares of each Fund. For these
services, IMG receives a fee, computed and paid monthly, at the annual rate of
.05 percent of average daily net assets of the Funds.
Fund Accounting Services
IMG provides fund accounting services under a Fund Accounting Agreement.
Pursuant to this Agreement, IMG is responsible for maintaining all usual,
customary and required books, journals and ledgers of accounts and providing
pricing and reporting all computational services. Under the Agreement, IMG will
be paid a fee computed and paid monthly, at the annual rate of 0.10 percent of
average daily net assets of each Fund.
Custodian
Norwest Bank Minnesota, N.A., Sixth and Marquette, Minneapolis, Minnesota 55479
(the "Custodian") is the custodian of the Funds' assets. The Custodian's
responsibilities include safekeeping and controlling each Fund's cash and
securities, handling the receipt and delivery of securities, determining income
and collecting interest and dividends on each Fund's investments, maintaining
books of original entry for portfolio and fund accounting and other required
books and accounts, and calculating the daily net asset value and public
offering price of shares of each Fund. The Custodian does not determine the
investment policies of any Fund or decide which securities a Fund will buy or
sell. Any Fund may, however, invest in securities of the Custodian and may deal
with the Custodian as principal in securities transactions.
FUND TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities for each
Fund and for the placement of its business and the negotiation of the
commissions to be paid on such transactions. It is the policy of the Advisor to
seek the best execution at the best security price available with respect to
each transaction, in light of the overall quality of brokerage and research
services provided to the Advisor or the Funds. In over-the-counter transactions,
orders are placed directly with a principal market maker unless it is believed
that a better price and execution can be achieved by using a broker. Normally,
the IMG Bond Fund will pay no brokerage commissions on purchases and sales of
Fund securities since most of their purchases and sales will be principal
transactions. In selecting broker-dealers and in negotiating commissions, the
Advisor considers the firm's reliability, the quality of its execution services
on a continuing basis, and its financial condition.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment advisor, under certain circumstances, to cause an account to pay a
broker or dealer who supplies brokerage and research services a commission for
effecting a transaction in excess of the amount of commission another broker or
dealer would have charged for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value of securities, the
advisability of investing, purchasing, or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, strategy, and the performance of accounts; and (c)
effecting securities transactions and performing functions incidental thereto
(such as clearance, settlement and custody).
In carrying out the provisions of the Advisory Agreement, the Advisor may cause
the Funds to pay a broker which provides brokerage and research services to the
Advisor a commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting the transaction. The
Advisor is of the opinion that the continued receipt of supplemental investment
research services from broker-dealers is essential to its provision of
high-quality management services to the Funds. The Advisory Agreement provides
that such higher commissions will not be paid by the Funds unless (a) the
Advisor determines in good faith that the amount is reasonable in relation to
the services in terms of the particular transaction or in terms of the Advisor's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion; (b) such payment is made in compliance with the
provisions of Section 28(e), other applicable state and federal laws, and the
Advisory Agreement; and (c) in the opinion of the Advisor, the total commissions
paid by the Funds will be reasonable in relation to the benefits to the Funds
over the long term. The investment advisory fee paid by the Funds under the
Advisory Agreement is not reduced as a result of the Advisor's receipt of
research services.
The Advisor is authorized to use research services provided by and to place
transactions with brokerage firms that have provided assistance in the
distribution of shares of the Funds or shares of other funds managed by the
Advisor to the extent permitted by law.
The Advisor places portfolio transactions for other advisory accounts, including
other mutual funds managed by the Advisor. Research services furnished by firms
through which the Funds effect their securities transactions may be used by the
Advisor in servicing all of its accounts; not all of such services may be used
by the Advisor in connection with the Funds. In the opinion of the Advisor, it
is not possible to separately measure the benefits from research services to
each of the accounts (including the Funds) managed by the Advisor. Because the
volume and nature of the trading activities of the accounts are not uniform, the
amount of commissions in excess of those charged by another broker paid by each
account for brokerage and research services will vary. However, in the opinion
of the Advisor, such costs to the Funds will not be disproportionate to the
benefits received by the Funds on a continuing basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Funds and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Funds. In
making such allocations between the Funds and other advisory accounts, the main
factors considered by the Advisor are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for recommending the
investment.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Board of Directors of the Funds may
determine, IMG may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' securities transactions.
TAXES
As indicated under "DISTRIBUTIONS AND TAXES" in the Prospectus, it is the Funds'
intent to qualify each of the Funds as a "regulated investment company" under
the Code. This qualification does not involve governmental supervision of the
Funds' management practices or policies.
A dividend or capital gains distribution received shortly after the purchase of
shares reduces the net asset value of the shares by the amount of the dividend
or distribution and, although in effect a return of capital, will be subject to
income taxes. Net gain on sales of securities when realized and distributed,
actually or constructively, is taxable as capital gain. If the net asset value
of shares were reduced below a shareholder's cost by distribution of gains
realized on sales of securities, such distribution would be a return of
investments although taxable as stated above.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "ADDITIONAL INVESTMENT
INFORMATION -- Calculation of Net Asset Value," the net asset value of each Fund
will be determined as of the close of trading on each day the NYSE is open for
trading. The NYSE is open for trading Monday through Friday except New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Additionally,
if any of the aforementioned holidays falls on a Saturday, the NYSE will not be
open for trading on the preceding Friday, and when any such holiday falls on a
Sunday, the NYSE will not be open for trading on the succeeding Monday unless
unusual business conditions exist, such as the ending of a monthly or the yearly
accounting period.
The Funds have sought an order from the Securities and Exchange Commission
pursuant to Section 6(c) of the 1940 Act for exemption from the provisions of
Sections 18(f), 18(g), and 18(i) of the 1940 Act. The conditional order when
granted will permit the Funds (a) to issue three classes of shares, ("Investor"
Shares, "Select" Shares and "Institutional" Shares), representing interests in
the same portfolio of securities; and (b) to allow conversions between the
classes of shares. See the Prospectus for a complete description of the
Investor, Select and Institutional Shares.
SHAREHOLDER SERVICES
As described under "SHAREHOLDER SERVICES -- Automatic Dividend Reinvestment" in
the Prospectus, all income dividends and capital gain distributions will be
invested automatically in additional shares of the Fund paying the distribution
unless the Funds are otherwise notified in writing.
Systematic Withdrawal Plan
You can set up automatic withdrawals from your account at monthly, quarterly or
annual intervals. To begin distributions, you must have an initial balance of
$24,000 in the Fund account, and a maximum of 10 percent per year may be
withdrawn pursuant to the Systematic Withdrawal Plan. To establish the
Systematic Withdrawal Plan, call 1-800-798-1819 and request an application. To
establish the Systematic Withdrawal Plan, you appoint the Funds as your agent to
effect redemptions of Fund shares held in your account for the purpose of making
monthly, quarterly or annual withdrawal payments of a fixed amount to you out of
your account. One request will be honored in any 12 month period
The minimum periodic withdrawal payment is $200. Redemptions will be made on the
fifth business day preceding the last day of each month or, if that day is a
holiday, on the next preceding business day. The shareholder may wish to
consider reinvesting dividends in additional Fund shares at net asset value. You
may deposit additional Fund shares in your account at any time.
The right is reserved to amend the Systematic Withdrawal Plan on 30 days'
notice. The Plan may be terminated at any time by the shareholder or the Funds.
Withdrawal payments cannot be considered to be yield or income on the
shareholder's investment since portions of each payment will normally consist of
a return of capital. Depending on the size or the frequency of the disbursements
requested and the fluctuation in the value of a Fund's securities, redemptions
for the purpose of making such disbursements may reduce or even exhaust your
account.
You may vary the amount or frequency of withdrawal payments, temporarily
discontinue them, or change the designated payee or payee's address by notifying
the Funds.
Automatic Investment Plan
An Automatic Investment Plan may be established at any time. By participating in
the Automatic Investment Plan, you may automatically make purchases of shares of
any Fund on a regular, convenient basis. You may choose to make contributions on
the fifth and/or twentieth day of each month in an amount of $50 or more.
Under the Automatic Investment Plan, your bank or other financial institution
debits preauthorized amounts drawn on your account each month and applies such
amounts to the purchase of shares of the Funds. The Automatic Investment Plan
can be implemented with any financial institution that is a member of the
Automated Clearinghouse. You may obtain an application to establish the
Automatic Investment Plan from the Funds. No service fee is charged by the Funds
for participating in the Automatic Investment Plan.
General Procedures for Shareholder Accounts
As set forth under "CAPITAL STOCK" in the Prospectus, certificates for Fund
shares will not be issued.
Either an investor or the Funds, by written notice to the other, may terminate
the investor's participation in the plans, programs, privileges, or other
services described under "SHAREHOLDER SERVICES" in the Prospectus without
penalty at any time, except as discussed in the Prospectus.
Your account may be terminated by the Funds on not less than 30 days' notice if,
at the time of any transfer or redemption of shares in the account, the value of
the remaining shares in the account at the current net asset value falls below
$1,000 ($250 for UF/TMA and IRA accounts). Upon any such termination, the shares
will be redeemed at the then current net asset value and a check for the
proceeds of redemption sent within seven days of such redemption.
Telephone Exchange Privilege and Automatic Exchange Plan
A discussion of the Telephone Exchange Privilege and Automatic Exchange Plan is
set forth in the Prospectus under the captions "SHAREHOLDER SERVICES --
Telephone Exchange and Redemption Privilege" and -- "Automatic Exchange Plan".
Shares of each Fund may be exchanged for each other at relative net asset
values. Exchanges will be effected by redemption of shares of the Fund held and
purchase of shares of the Fund for which Fund shares are being exchanged (the
"New Fund"). Investments in the New Fund will be made into the lowest fee class
of shares for which the shareholder is eligible in the New Fund. For federal
income tax purposes, any such exchange constitutes a sale upon which a capital
gain or loss will be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis. Upon
a telephone exchange, the transfer agent establishes a new account in the New
Fund with the same registration and dividend and capital gains options as the
redeemed account, unless otherwise specified, and confirms the purchase to you.
In order to establish a Systematic Withdrawal Plan for the new account, however,
an exchanging shareholder must file a specific written request.
The Telephone Exchange Privilege and Automatic Exchange Plan are available only
in states where shares of the New Fund may be sold, and the privilege may be
modified or discontinued at any time. Additional information concerning these
exchange privileges is contained in the Funds' Prospectus.
SHAREHOLDER MEETINGS
The Maryland Corporation Law permits registered investment companies, such as
the Funds, to operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the Investment Company Act
of 1940. The Company has adopted the appropriate Bylaw provisions and may not
hold an annual meeting in any year in which the election of Directors is not
required to be acted on by shareholders under the 1940 Act.
The Bylaws also contain procedures for the removal of Directors by shareholders.
At any meeting of shareholders, duly called and at which a quorum is present,
the shareholders may, by the affirmative vote of the holders of a majority of
the votes entitled to be cast thereon, remove any Director or Directors from
office and may elect a successor or successors to fill any resulting vacancies
for the unexpired terms of removed Directors.
Upon the written request of the holders of shares entitled to not less than 10
percent of all the votes entitled to be cast at such meeting, the Secretary of
the Funds shall promptly call a special meeting of shareholders for the purpose
of voting upon the question of removal of any Director. Whenever 10 or more
shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either shares having a net
asset value of at least $25,000 or at least 1 percent of the total outstanding
shares, whichever is less, shall apply to the Secretary in writing, stating that
they wish to communicate with other shareholders with a view to obtaining
signatures to a request for a meeting as described above and accompanied by a
form of communication and request which they wish to transmit, the Secretary
shall within five business days after such application either: (1) afford to
such applicants access to a list of the names and addresses of all shareholders
of record; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of the last
sentence of the preceding paragraph, the Secretary, upon the written request of
such applicants, accompanied by a tender of the material to be mailed and of the
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all shareholders of record at their addresses as recorded on the
books unless within five business days after such tender the Secretary shall
mail to such applicants and file with the SEC, together with a copy of the
material to be mailed, a written statement signed by at least a majority of the
Board of Directors to the effect that in their opinion either such material
contains untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the written
statement so filed, the SEC may, and if demanded by the Board of Directors or by
such applicants shall, enter an order either sustaining one or more of such
objections or refusing to sustain any of them. If the SEC shall enter an order
refusing to sustain any of such objections, or if, after the entry of an order
sustaining one or more of such objections, the SEC shall find, after notice and
opportunity for hearing, that all objections so sustained have been met, and
shall enter an order so declaring, the Secretary shall mail copies of such
material to all shareholders with reasonable promptness after the entry of such
order and the renewal of such tender.
VALUATION OF FUND SECURITIES
Each Fund's net asset value per share is determined by the Custodian, under
procedures established by the Board of Directors. Fund securities are valued
primarily on the basis of valuations furnished by a pricing service which uses
both dealer-supplied valuations and electronic data processing techniques that
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, with exclusive reliance
upon quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities. Use
of the pricing service has been approved by the Board of Directors. There are a
number of pricing services available, and the Directors, or Officers acting on
behalf of the Directors, on the basis of ongoing evaluation of these services,
may use other pricing services or discontinue the use of any pricing service in
whole or in part.
Securities not valued by the pricing service and for which quotations are
readily available are valued at market values determined on the basis of their
latest available bid prices as furnished by recognized dealers in such
securities. Futures contracts and options are valued on the basis of market
quotations, if available. Securities and other assets for which quotations or
pricing service valuations are not readily available are valued at their fair
value as determined in good faith under consistently applied procedures under
the general supervision of the Board of Directors.
PERFORMANCE INFORMATION
As described in the "PERFORMANCE INFORMATION" section of the Funds' Prospectus,
the historical performance or return of each Fund may be shown in the form of
"yield", "average annual total return", "total return", and "cumulative total
return".
Each class of shares' average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the SEC. The
average annual total return for a specific period is found by first taking a
hypothetical $10,000 investment ("initial investment") in the Fund's respective
shares on the first day of the period and computing the "redeemable value" of
that investment at the end of the period. The redeemable value is then divided
by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period.
Calculation of a Fund's total return is subject to a standardized format. Total
return performance for a specific period is calculated by first taking an
investment (assumed below to be $10,000) ("initial investment") in the shares on
the first day of the period and computing the "ending value" of that investment
at the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The calculation assumes that all income and capital gains dividends paid by the
Fund have been reinvested at net asset value on the reinvestment dates during
the period. Total return may also be shown as the increased dollar value of the
hypothetical investment over the period.
Cumulative total return represents the simple change in value of your investment
over a stated period and may be quoted as a percentage or as a dollar amount.
Total returns may be broken down into their components of income and capital
(including capital gains and changes in share price) in order to illustrate the
relationship between these factors and their contributions to total return.
Yield for the shares of the IMG Bond Fund is computed in accordance with a
standardized method prescribed by rules of the SEC. Under that method, the
current yield quotation for each Fund is based on a one month or 30-day period.
Yield is computed by dividing the net investment income per share earned during
the 30-day or one month period by the maximum offering price per share on the
last day of the period, according to the following formula:
a-b
---------------------
YIELD = 2[(-------- + 1)6 - 1]
cd
Where a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends. d = the maximum
offering price per share on the last day of the period.
In computing yield, the Fund follows certain standardized accounting practices
specified by SEC rules. These practices are not necessarily consistent with
those that the Fund uses to prepare annual and interim financial statements in
conformity with generally accepted accounting principles. Therefore, the quoted
yields as calculated above may differ from the actual dividends paid.
Performance figures are based upon historical results and are not necessarily
representative of future performance. Returns and net asset value will fluctuate
and shares are redeemable at the then current net asset value, which may be more
or less than original cost. Factors affecting performance include general market
conditions, operating expenses and investment management. Any additional fees
charged by a dealer or other financial services firm would reduce the returns
described in this section.
Each Fund may compare its share performance to that of U.S. Treasury bonds,
bills or notes because such instruments represent alternative income producing
products. Treasury obligations are issued in selected denominations. Rates of
Treasury obligations are fixed at the time of issuance and payment of principal
and interest is backed by the full faith and credit of the United States
Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities.
From time to time, in marketing and other Fund literature, performance may be
compared to the performance of other mutual funds in general or to the
performance of particular types of mutual funds, with similar investment goals,
as tracked by independent organizations. Among these organizations, Lipper
Analytical Services, Inc. ("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance, investment objectives, and
assets, may be cited. Lipper performance figures are based on changes in net
asset value, with all income and capital gain dividends reinvested. Such
calculations do not include the effect of any sales charges. Shares of each Fund
will be compared to Lipper's appropriate fund category; that is, by Fund
objective and holdings. Lipper also issues a monthly yield analysis for Fixed
Income Securities and the Funds may, from time to time, advertise those
rankings.
Performance may also be compared to the performance of other mutual funds by
Morningstar, Inc. which rates funds on the basis of historical risk and total
return. Morningstar's ratings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the historical risk level and
total return of a fund as a weighted average for three, five, and ten year
periods. Ratings are not absolute or necessarily predictive of future
performance.
Evaluations of performance made by independent sources may also be used in
advertisements concerning the Funds, including reprints of, or selections from,
editorials or articles about the Funds, especially those with similar
objectives. Sources for the performance information and articles about the Funds
may include publications such as Money, Forbes, Kiplinger's, Financial World,
Business Week, U.S. News and World Report, The Wall Street Journal, Barron's and
a variety of investment newsletters. The Funds may compare Fund performance to a
wide variety of indices including, but not limited to the following:
IMG Core Stock Fund
Standard & Poor's
NASDAQ Over-the-Counter Composite Index
Russell 1000 Index
Russell 2000 Small Stock Index
Russell 2500 Index
Russell 3000 Index
Wilshire 5000 Equity Index
IMG Bond Fund
Lehman Brothers Government Corporate Index
Lehman Brothers Intermediate Bond Index
Merrill Lynch Government Corporate Master Index
Lehman Brothers All Government Bond Index
Lehman Brothers One to Three Years Government Bond Index
Merrill Lynch Government Master Index
Merrill Lynch Short-Term U.S. Treasury Index
Merrill Lynch Intermediate-Term U.S. Treasury Index
Merrill Lynch All Mortgages Index
Merrill Lynch All GNMAs
IBC/Donoghue Money Fund Index
There are differences and similarities between the investments which each Fund
may purchase and the investments measured by the indices which are noted herein.
The market prices and yields of bonds will fluctuate. There are important
differences among the various investments included in the indices that should be
considered in reviewing this information.
Investors may want to compare each Fund's performance to that of certificates of
deposit offered by banks and other depository institutions. Certificates of
deposit represent an alternative (taxable) income producing product.
Certificates of deposit may offer fixed or variable interest rates and principal
is guaranteed and may be insured. Withdrawal of the deposits prior to maturity
normally will be subject to a penalty. Rates offered by banks and other
depository institutions are subject to change at any time specified by the
issuing institution. The bonds held by the IMG Bond Fund are generally of longer
term than most certificates of deposit and may reflect longer term market rate
fluctuations.
Investors may also want to compare performance of the Funds to that of money
market funds. Money market fund yields will fluctuate and shares are not
insured, but share values usually remain stable.
GENERAL INFORMATION
The Advisor believes that actively managing each Fund's investments is the best
way to achieve each Fund's objective. This policy is based on a fundamental
belief that economic and financial conditions create favorable and unfavorable
investment periods and sectors, and that these different periods require
different investment approaches.
Financial goals vary from person to person. Investors may choose one or more of
the Funds to help them reach their financial goals. To help you better
understand each of the Funds and determine which Fund or combination of Funds
best meets your personal investment objectives, study the Prospectus carefully
before you invest.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, P.O. Box 772, Des Moines, Iowa, 50309, have been selected
as the independent accountants for the Funds.
<PAGE>
APPENDIX A
BOND RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's corporate rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
"AAA" Bonds have the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
"AA" Bonds have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only in small degrees.
"A" Bonds have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
"BBB" Bonds are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for bonds in this
category than in higher rated categories.
"BB", "B", "CCC", "CC" and "C" Bonds are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the least degree of
speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. A "C" rating
is typically applied to debt subordinated to senior debt which is assigned an
actual or implied "CCC" rating. It may also be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
Moody's Bond Ratings
"Aaa" Bonds are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edged". Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
"Aa" Bonds are judged to be of high quality by all standards. Together with the
"Aaa" group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protection elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A" Bonds possess many favorable investment attributes and are to be considered
as upper-medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
"Baa" Bonds are considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
Bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba" Bonds are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes Bonds in
this class.
"B" Bonds generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
"Caa" Bonds are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
"Ca" Bonds represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
"C" Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Fitch Investors Services, Inc. Bond Ratings
The Fitch Bond Rating provides a guide to investors in determining the
investment risk associated with a particular security. The rating represents its
assessment of the issuer's ability to meet the obligations of a specific debt
issue. Fitch bond ratings are not recommendations to buy, sell or hold
securities since they incorporate no information on market price or yield
relative to other debt instruments.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the record of the issuer and of
any guarantor, as well as the political and economic environment that might
affect the future financial strength and credit quality of the issuer.
Bonds which have the same rating are of similar but not necessarily identical
investment quality since the limited number of rating categories cannot fully
reflect small differences in the degree of risk. Moreover, the character of the
risk factor varies from industry to industry and between corporate, health care
and municipal obligations.
In assessing credit risk, Fitch Investors Services relies on current information
furnished by the issuer and/or guarantor and other sources which it considers
reliable. Fitch does not perform an audit of the financial statements used in
assigning a rating.
Ratings may be changed, withdrawn or suspended at any time to reflect changes in
the financial condition of the issuer, the status of the issue relative to other
debt of the issuer, or any other circumstances that Fitch considers to have a
material effect on the credit of the obligor.
"AAA" rated Bonds are considered to be investment grade and of the highest
credit quality. The obligor has an extraordinary ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" rated Bonds are considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for "AAA" rated securities or more subject to
possible change over the term of the issue.
"A" rated Bonds are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" rated Bonds are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to weaken this ability than bonds with
higher ratings.
"BB" rated bonds are considered speculative and of low investment grade. The
obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
"B" rated Bonds are considered highly speculative. Bonds in this class are
highly protected as to the obligor's ability to pay interest over the life of
the issue and repay principal when due.
"CCC" rated Bonds may have certain identifiable characteristics which, if not
remedied, could lead to the possibility of default in either principal or
interest payments.
"CC" rated Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
"C" rated Bonds are in actual or imminent default in payment of interest or
principal.
Duff & Phelps, Inc. Long-Term Ratings
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination. Each rating also
takes into account the legal form of the security, (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent of rating dispersion among
the various classes of securities is determined by several factors, including
relative weightings of the different security classes in the capital structure,
the overall credit strength of the issuer, and the nature of covenant
protection. Review of indenture restrictions is important to the analysis of a
company's operating and financial constraints. The Credit Rating Committee
formally reviews all ratings once per quarter (more frequently, if necessary).
Rating
Scale Definition
_______________________________________________________________________________
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
_______________________________________________________________________________
AA+ High credit quality. Protection factors are strong. Risk is modest,
AA but may vary slightly from time to time because of economic
AA- conditions.
_______________________________________________________________________________
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic stress.
A-
_______________________________________________________________________________
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable variability in risk
BBB- during economic cycles.
_______________________________________________________________________________
BB+ Below investment grade but deemed likely to meet obligations when
BB due Present or prospective financial protection factors fluctuate
BB- according to industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
_______________________________________________________________________________
B+ Below investment grade and possessing risk that obligations will
B not be met when due. Financial protection factors will fluctuate
B- widely according to economic cycles, industry conditions and/
or company fortunes. Potential exists for frequent changes in
the rating within this category or into a higher or lower rating
grade.
_______________________________________________________________________________
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
_______________________________________________________________________________
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
_______________________________________________________________________________
DP Preferred stock with dividend averages.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The categories are as follows:
"A" Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues within this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
"A-1" Designation indicates that the degree of safety regarding timely payment
is either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are designated "A-1+".
"A-2" Designation indicates that the capacity for timely payment is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
"A-3" Designation indicates a satisfactory capacity for timely payment. Issues
with this designation, however, are somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" Issues are regarded as having only an adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
"C" Issues have a doubtful capacity for payment.
"D" Issues are in payment default. The "D" rating category is used when interest
payments or principal payments are not made on the due date even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period.
Moody's Commercial Paper Ratings
Moody's rates commercial paper as either Prime, which contains three categories,
or Not Prime. The commercial paper ratings are as follows:
"P-1" Issuers (or related supporting institutions) have a superior capacity for
repayment of short-term promissory obligations, normally evidenced by the
following characteristics: (i) leading market positions in well established
industries, (ii) high rates of return on funds employed, (iii) conservative
capitalization structures with moderate reliance on debt and ample asset
protection, (iv) broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and (v) well established access to a range of
financial markets and assured sources of alternate liquidity.
"P-2" Issuers (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations, normally evidenced by many of
the characteristics of a "P-1" rating, but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
"P-3" Issuers (or related supporting institutions) have an acceptable capacity
for repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained. "Not Prime" Issuers (or related
supporting institutions) do not fall within any of the Prime rating categories.
Fitch Investors Services, Inc. Short-Term Ratings
Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
Fitch-1 (Very Strong Credit Quality) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
Fitch-1+.
Fitch-2 (Good Credit Quality) Issues carrying this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as great
as the two higher categories.
Fitch-3 (Fair Credit Quality) Issues carrying this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse change is likely to cause these securities to be rated below
investment grade.
Fitch-S (Weak Credit Quality) Issues carrying this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near term adverse changes in financial and economic conditions.
D (Default) Issues carrying this rating are in actual or imminent payment
default.
Duff & Phelps, Inc. Short-Term Ratings
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit and current maturities of long-term
debt.
Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds, including trade
credit, bank lines and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
A. Category 1: High Grade
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
B. Category 2: Good Grade
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
C. Category 3: Satisfactory Grade
Duff 2 Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D. Category 4: Non-investment Grade
Duff 4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
E. Category 5: Default
Duff 5 Issuer failed to meet scheduled principal and/or interest
payments.
Thomas Bankwatch (TBW) Short-Term Ratings
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less. The TBW Short-Term Ratings specifically assess the
likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
